“Free trade” US turns software protectionist

The logic of a laissez-faire economy has come back to haunt the world’s number one proponent of free world trade, so much so that the United States is saying enough is enough. ‘Tis time to turn protectionist.

 

Several states in the US led by New Jersey are  attempting to legislate a ban on software outsourcing to leading destinations like India. The attempts are limited to outsourcing by government departments. The private sector is free. So, the impact  on the outsource destination is minimal. However what is causing concern is the beginning of a trend, a protectionist mindset which can spread to the private sector.

 

Missouri, Maryland, Wisconsin, Connecticut and Washington are tther states contemplating such a move.

 

Software experts: too many in the market

The US invasion of Iraq has dampened sentiments further.  Software leaders in India have been quoted as saying that the US was in confrontationist mode and that its ‘Big Brother’ attitude would hurt the global economy.  Trade barriers were likely to go up as a result of the war.

 

The bill to restrict software outsourcing to India was sponsored by New Jersey state senator Shirley K Turner. It was passed unanimously in the state senate on 16 December 2002. The proposal made it clear that government-related projects could not be sent offshore to India, even if the company handling it in the US was Indian-owned.  The project would have to be executed in the US. 

 

The bill was taken up for discussion by the Senate Committee in the first week of March  but could not be passed. It is now on hold and is likely to be discussed in the Senate again in May. It is likely to face renewed criticism from its main targets in the Indian IT sector.

 

Sunil Mehta, vice president of research at Nasscom, India’s nodal software association, said: “The New Jersey bill is unfortunate and contrary to the spirit of free trade between countries, which is one of the underlying tenets of WTO.”

 

Leading Indian software company Infosys told Aljazeera: “The government sector constitutes a very small percentage of outsourced business to India and should not affect Indian businesses. Industry bodies like NASSCOM and CII are looking into this and will take the lead in interfacing with the US federal and state governments to see if any action is required from Indian businesses.”

 

Canadian proponent of free software and internet consultant Russell McOrmond said it would difficult for the US  to turn protectionist. He said, “The US has been promoting trade liberalisation for too long to try to turn around now.  They have become as dependent on the world economy as they have tried to make the world economy dependent on them”.

 

Cost effective

 

The restrictive bill comes in the context of a continuing recession in the United States’ IT sector.  From the time the software sector collapsed three years ago causing scores of dotcoms to fold and many other companies to streamline, it has not really recovered.

 

According to the US portal H1B.info which monitors the software industry: “The high-tech job market isn’t getting much better and there are no signs that it will recover any time soon. Unemployment is about eight  percent in Silicon Valley which means one in 12 people are unemployed, and the national unemployment rate is six percent. Some economists are even predicting a fourth down year”.

 

To make matters worse,  new projects that could have propped up the IT  economy in the United States have been outsourced, mainly to India.  Ireland and Israel are the other two key software destinations but not big enough to merit a ban.

 

The cost of executing a project at less than half of what it costs in the US in return for the same quality, or even better, has been too tempting for private companies to resist.  And they have queued up to outsource projects offshore to India.

 

According to an estimate by a senior personnel of leading consulting firm McKinsey,  $1.2 billion of the top 25 deals worth $10 billion are moving to India for outsourcing operations. Among these are top Fortune 500 companies such as General Electrics, American Express, British Airways, HSBC and Citibank.

 

The reason is pretty simple. Nasscom figures indicate that the cost of an Indian IT employee is a mere $5880 per year. The Philippines follows with $6800.  Others including Israel, Canada and South Africa are more expensive.

 

Outsourcing: concerns over restrictions

 In other words, the wheel has turned full circle.  Right through the IT age in the early 1980’s through the boom in the ‘90s until 1998,  thousands of vacancies opened up in the US providing tremendous opportunities for software personnel.  There were not enough qualified people to man the jobs, so companies looked abroad.  This triggered an exodus from countries like India, mainly to the USA.  Immigration laws were loosened and the number of Indians allowed entry on six-year work permit visas rocketed from 65,000 to 195,000 per year.

 

When the recession hit in the latter half of 1999, and intensified in 2000, thousands lost their jobs in the US. In the last six months, companies have come up with work for the IT sector, much of this has been outsourced. The New Jersey Bill, in this context, is a reflection of widespread frustration among IT personnel out of jobs and facing an unsure future.

 

Critics of the Bill say that software outsourcing is the logical outcome of free trade policies. Can it be put in abeyance just because free trade is inconvenient to US interests in this case? NASSCOM had already begun interacting with key legislators and policy makers to remind them of the benefits accruing to the US economy from outsourcing to India.

 

In a climate of recession, where companies tend to cut corners and keep budgets tight,  top managements see outsourcing as the only way forward.  In the final analysis, the bill may not have any significant impact on India since currently, the total business coming to India from government outsourcing is minimal and less than 0.5 percent. “But, we are more concerned about the nature of the Bill as it is against the spirit of free trade,” reiterates Mehta.