The Outsourcing Issue Returns

A series of recent developments has underscored the growing resonance of the outsourcing issue in American domestic politics.  And with India the world’s top outsourcing destination, these events portend a new set of strains in U.S.-India relations.

The first event is the introduction of legislation by influential U.S. Senator Charles E. Schumer, a Democrat from New York, imposing a $0.25 tax on each customer service call that U.S. companies relay to foreign call centers.  He estimates that 1.6 billion such calls are made annually, which, if the legislation passes, would result in $400 million in new tax revenue.  The bill would mandate that companies inform customers that their calls are being transferred and to which country.  Firms would also be required to submit reports to the U.S. Federal Trade Commission certifying their compliance with these provisions. 

In a press release, Schumer 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.  Experts believe that the proposed tax would have a negligible effect on India’s booming outsourcing sector, which is growing at double-digit annual rates.  But the political message conveyed by the legislation is clear enough.

(It bears mention that Schumer, as chairman of the Senate immigration subcommittee, will play a leading role on the related issue of the H-1B temporary visa program for skilled foreign workers.  The bulk of these visas in recent years have been awarded to Indian citizens.  The Obama administration’s 2009 economic stimulus package placed slight restrictions on the program, and a move is currently underway in the U.S. Congress to add further limits, which if enacted would restrict how some Indian companies operate in the United States.  Needless to say, how this issue plays out could also have an impact on bilateral relations.)

The political resonance of the outsourcing issue was also demonstrated amid the just-concluded contest over the Democratic Party’s nomination for the Arkansas Senate seat held by Blanche Lincoln.  A business advocacy group made waves by running controversial television ads (view here and here) attacking Lincoln’s challenger, Lieutenant Governor Bill Halter, for profiting from a software company that supposedly outsourced American jobs to India.  (Halter denied the accusation.)  With Indian music playing in the background, one of the ads featured several Indians thanking Mr. Halter for sending jobs to Bangalore.  Although Ms. Lincoln condemned the ads as racially offensive, her campaign distributed mailers, emblazoned with pictures of the Taj Mahal, making the same charge.

The outsourcing issue has also emerged in the general election campaign that has just begun for the California Senate seat held by Barbara Boxer, a Democrat.  Ms. Boxer has criticized her Republican opponent, Carly Fiorina, a former chief executive of technology giant Hewlett Packard, for laying off tens of thousands of workers during the dot.com collapse a decade ago, with some of those jobs outsourced to India.

A fourth event occurred earlier this year when President Barack Obama, during his State of the Union address, proposed tightening tax penalties on corporate outsourcing.  The issue was a staple during his presidential campaign and shortly after taking office he vowed once again 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.”  The president’s remarks this year were more circumspect, promising only to “slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America.”

The threat of all these developments has registered in India.  Reading the writing on the wall, the National Association of Software and Services Companies, an influential Indian business group, has recommended that member firms jettison the terms “outsourcing” and “offshoring” from their vocabularies.  “Global sourcing” is one of the replacement phrases now being bandied about.

To be sure, the growing populist backlash against India is partly a function of the bad economic times in the United States.  But it’s also caused by fundamental changes in the global economy that will continue to march forward even when more prosperous times return.  India is not just a low-wage country offering labor cost advantages.  It is also an emerging technology and manufacturing power, whose growing middle class will over the next two decades make it one of the world’s top consumer markets.  Competing successfully in the Indian market will thus require establishing more American-owned R&D and manufacturing facilities in the country rather than relying solely on exports from the United States. 

Even as they retrench at home, for example, U.S. auto manufacturers are expanding production facilities in India, both to serve that country’s exploding auto market and to build it up as a global export hub.  Last year, the U.S. Department of Homeland Security warned that the loss of such manufacturing capacity to India could trigger outbreaks of radical extremism.  And it is a good bet that what is now happening in the auto sector will unfold in the aerospace industry over the next decade.  (For a recent report on India’s potential as a global hub for the aerospace sector, see here.)

India’s emergence as a global technology hub will also generate a populist counter-reaction.  The country is steadily enhancing its comparative advantage in sectors characterized by high-end technological development and skilled labor—areas that Americans reflexively regard as U.S. core competencies.  (See, for example, this assessment of India’s development as an “advanced technology state.”)  Unlike earlier backlashes against globalization, college graduates and even the holders of advanced degrees are worried about their futures and India will increasingly become a target of their fears.  The term “Bangalored” is now firmly ensconced in the lexicon of Silicon Valley to denote the outsourcing of high-tech jobs.

Ironically from President Obama’s perspective, his hard-fought-for health care legislation promises to sharpen the outsourcing debate even further, as U.S. insurance companies, pushed to cut administrative costs, send more IT work to India.  As the Financial Express, India’s oldest business daily, editorialized a few weeks ago, Obamacare “may turn out to be a very lucrative business proposition for the Indian business process outsourcing sector.”

In the years ahead, India’s rise will generate contradictory pressures on U.S. policymakers.  Those in Washington who warily eye the expansion of Chinese power in Asia will welcome the strategic counterweight of a stronger India.  But officials will also have to contend with a growing number of Americans who view the country as an economic rival, just as Japan was regarded in the 1980s and China is perceived today.  How Washington handles these cross-currents will be a fascinating balancing act.