Outsourcing Redux

As an earlier post argued, there is a growing populist backlash in American domestic politics directed against India’s economic rise, which in turn portends a new set of strains in U.S.-India relations.  Two events last week underscore this development.

The first event was the much-covered enactment of what is formally known as the 2010 Emergency Border Security Supplemental Appropriations Act, more popularly called the Border Security Bill.  Responding to increasing public anger about illegal immigration, the U.S. Congress voted unanimously – a rare occurrence in Washington these days – to pay for increased deployment of security resources along the border with Mexico by sharply raising application fees for H1-B and L-1 temporary visas for skilled foreign workers.  The majority of visa holders typically come from India, the largest recipient country.

The fee increase, about $2,000 per visa application, takes effect at the start of the U.S. government’s fiscal year on October 1 and will run for three years.  The Congressional Budget Office estimates that the measure will generate some $540 million in revenue over that period.  The increase is applicable to any company with more than 50 employees in the United States in which more than half of its workforce has skilled-worker visas. 

Large U.S. high-tech companies, like Microsoft, Cognizant and Intel, utilize the bulk of the skilled-worker visas that the federal government awards each year and have vocally lobbied for an increase in their availability.  But they will not be affected by the new law since the majority of their workforces are composed of American employees.  Instead, the burden will fall squarely on Indian technology-outsourcing companies that send thousands of workers to the United States each year.

Indeed, the new law’s chief sponsor, U.S. Senator Charles E. Schumer, a Democrat from New York, was not shy in singling out Indian firms.  He has long argued that these companies exploit U.S. visa programs by outsourcing “good, high-paying American technology jobs.”  The law, he claims, “will level the playing field for American workers so they don’t lose out on good jobs here in America because it’s cheaper to bring in a foreign worker.”  He also set off a wave of outrage in India by referring to Infosys, the icon of the country’s IT sector, as a “chop shop” – American slang for a criminal enterprise trafficking in stolen auto parts.  (He later clarified that he meant to use the term “body shop.”)

Senator Claire C. McCaskill, a Democrat from Missouri and a co-sponsor of the new law, likewise emphasized that the fee increase was directed at “a handful of foreign-controlled companies that operate in the United States, such as Wipro, Tata, Infosys and Satyam.”

(It also bears mention that Schumer, who is the third-ranking Democrat in the Senate, recently introduced related legislation that would impose a $0.25 tax on each customer service call that U.S. companies relay to foreign call centers, such as those that have proliferated in India.  He claims that his bill would keep thousands of existing jobs in the United States and provide important incentive for previously-outsourced jobs to return to the country.)

India’s Commerce Minister, Anand Sharma, strongly denounced the visa fee increase as “inexplicable” and “highly discriminatory.”  Claiming that it would have an “adverse impact on the competitiveness and commercial interests of Indian companies,” he estimated that the increase would cost Indian firms an extra $200 million a year.  The practical effect on company profitability is likely to be marginal, however.  Even the head of India’s National Association of Software & Services Companies acknowledged that “our objection is not so much on the costs, but on the principle.”  One might also point out that New Delhi’s stance runs the risk of hypocrisy, given that the Indian labor ministry late last year similarly tightened its visa standards for foreign workers.

The law’s effect on U.S. economic competitiveness might be more momentous than on India’s.  While critics of the skilled-worker visas claim they depress wages for American technology professionals or displace native workers, the bulk of the empirical evidence not only suggests the opposite but that immigrant technology workers actually catalyze native innovation (see here and here).  Indeed, no sooner was the law passed than the U.S. Chamber of Commerce issued a report arguing that the use of H-1B workers by American companies is driven by the need to gain access to specialized labor located in other countries and supports job creation in the United States.

A second outsourcing-related event last week received far less media coverage but is also indicative of the political resonance of the outsourcing issue.  Following action by the Senate, the U.S. House of Representatives gathered in special session to pass, almost entirely along party lines, a controversial $26 billion emergency aid package for financially-strapped state and local governments.  The measure, which President Barack Obama quickly signed, was partially funded by tightening tax penalties on U.S. companies engaged in outsourcing.

Obama has long advocated clamping down on corporate outsourcing.  The issue was a staple during his presidential campaign and shortly after taking office he vowed to rectify a tax system that “says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”  That impolitic comment touched off a furor in India, with the Times of India declaring that the president had an unfortunate tendency to use Bangalore as “a catch-all term to hang U.S. economic woes on.” 

Although the president’s rhetoric has since been more circumspect, he did not drop the issue.  As recently as August 2, at a Democratic Party fundraiser in Atlanta, he once again mentioned India in the context of American job losses.  He argued that his economic policies are geared toward ensuring “that the jobs and industries of the future aren’t all going to China and India, but are being created right here in the United States.”  And he reiterated his desire to withdraw “tax breaks to corporations that want to ship jobs overseas.”  A week later, he was able to make good on this pledge.

Another opportunity to gauge the strength of American economic populism vis-à-vis India will arrive on September 23, when the NBC television network premieres Outsourced, a new situation comedy about a U.S. company relocating its call center from Kansas City to Mumbai.  (View the trailer here.)  The show will focus on the humor arising from cultural differences, but it remains to be seen whether Americans in the midst of a prolonged recession will laugh at a business practice many blame for widespread job losses.  (In case you are wondering, the show is filmed in Hollywood, with an ethnically-mixed cast drawn from the United States, Canada, the United Kingdom and Australia.)