Column : Why Obama is wrong - I

Written by Bibek Debroy | Updated: May 8 2009, 04:28am hrs
"If we had no iron here, then we should encourage the shipment from a foreign country, but not when we can make it as cheaply in our own country.... If I have any recommendation to make it will be that every man who is called upon to serve the people in a representative capacity should study the whole subject thoroughly, as I intend to do myself, looking to the varied interests of the common country, so that when the time for action arrives to advocate that Protection may be extended to the coal and iron of Pennsylvania, the corn of Illinois and the reapers of Chicago. This was President-elect Abraham Lincoln, delivering a speech in February 1861. The context was different and debating Lincolns views on protectionism doesnt get us anywhere. However, its a good quote, given the resurgence of protectionism in US. For India, relevant US action concerns H-1B visas and outsourcing and before his election, Barack Obama made speeches against both. H-1B visas involve actual movement of Indian professionals to US, not just for software. This is different from permanent migration and concerns temporary movement of skilled personnel, not only through H-1B, but also L-1 (intra-company transfers).

The US has a minimum annual H-1B commitment of 65,000 visas through Uruguay Round. This is a global commitment, though India is estimated to have obtained around 45% of such visas. Because of demands on the part of US IT companies, at its peak, H-1B visas issued touched 300,000. It has often been rightly argued, to the extent there is trade-off between H-1B and out-sourcing, H-1B is better for the US. Consumption expenditure occurs in the US. Social security taxes (though social security is often unclaimed) are paid there and other multiplier benefits also occur in that country. By the same token, outsourcing is better for India. There have always been arguments about abuse and fraud of L1 and H-1B and if those loopholes are addressed, thats not protectionism, though higher procedural costs can result. However, when the US economic stimulus was passed, legislation was proposed that companies receiving funds under Tarp (Troubled Asset Relief Programme) could not hire foreign professionals on H-1B. That should have been WTO-incompatible. But this proposal was watered down. As passed, a company that has more than 15% of workers on H-1B has been defined to as H-1B-dependent and will have to make a good faith effort to recruit American workers first, assuming it uses Tarp resources.

This is vague and isnt WTO-inconsistent, particularly if 65,000 H1B visas are adhered to. Its a different matter that most US IT companies are reluctant to hire now, and not just foreign workers. Pressures to liberalise H-1B come from US IT companies, threatened with a loss of competitive advantage. There is a broader point about immigration contributing to US advantages, especially in high technology sectors. There are an estimated 1 million Indians in the US with H-1B visas, and their dependents, sometimes waiting for permanent resident status. Since both H-1B and permanent residency have become more restrictive, reports have appeared about Indians (and Chinese) heading home. Thats good for India (and China) and bad for the US, something the US government will also eventually appreciate, goaded by US companies. That leaves out-sourcing, in the news now. Before elections, Barack Obama said tax breaks for companies that out-source would be eliminated. US companies are encouraged to repatriate profits from overseas. 85% deduction is allowed on dividends received from foreign subsidiaries and only 15% subject to tax. The proposal is this provision will be removed in a revision of the tax code that is part of a broader revenue-enhancing package.

For instance, if implemented, there will be additional revenue of $100 billion over the next decade. This sounds attractive, especially when spliced with the mindset that wealthy Americans evade taxes by using offshore accounts and wealthy American companies are no different. For large American companies, there are back-of-the-envelope figures that 60% of revenues come from abroad. This is significant and US corporate tax rate of 35% is not that low. Understandably, there is enormous resistance by American companies to the proposal and 200 companies and trade associations have protested. As with H-1B, there is some abuse of tax-break provisions too. But again, as with H-1B, there is a difference between clamping down on abuse and reducing competitiveness of American companies. After all, some of their competitors dont pay domestic taxes on foreign subsidiaries. Therefore, the level playing field argument will be raised. The Chinese realised two decades ago their trade policy battles would be fought by American companies with vested interests in China. India is realising that too. Finally, there is a small matter of a Buy American provision in the US fiscal package, reserving US government purchases to domestic providers. But this has now effectively been made WTO-compatible. Despite government intentions, the free market always finds a way.

The author is a noted economist