The H-1B’s not the only problem

President Donald Trump’s proposals to create new rules for H-1B visas extensively used by Indian IT firms has created concerns in Indian IT-enabled services (ITES) sector, and IT majors have seen a sharp decline in their share prices. However, this proposed tightening of rules for movement of temporary workers had been on the anvil for some time, and should not be described as a knee-jerk reaction of an ‘anti-immigrant’ president.

The Indian ITES industry, long used to relatively open markets, will have to learn to live with protectionism in key markets such as the US and the EU.

In order to understand the actual impact of such protectionism, it is important to understand the role of Indian ITES in the context of the US economy.

Indian ITES exports to the US stood at $14.1 billion in 2015. This made India by far the largest exporter of ITES and accounted for 38 per cent of total US imports. But the US is also a major exporter of such services (exports of $35.8 billion, just slightly lower than $36.4 billion of imports).

This overall US production network of ITES is, therefore, largely dependent on international skilled inputs that add to its competitiveness.

Another important facet of data is that of the overall US trade in ITES, 59 per cent is represented by trade between US-affiliated firms operating globally (for example, trade between the US headquarters of IBM and its captive service centre in India), again highlighting this production network effect. It is, therefore, not surprising that global US-based IT majors have been in the forefront of lobbying against such visa restrictions. Their ability to freely access talent globally drives their competitiveness.

But it is also important to understand that not all of this activity (and the numbers of cross-border trade reported above) is about the temporary movement of workers into the US. ITES trade has always been a combination of onsite and offshore delivery.

But the need for ‘onsite’ workers is decreasing rapidly due to technology, and as managerial and cultural and acceptance of remotely delivered services increases.

Given this context of supply and use of ITES, what are the options available to policymakers in the US (and other markets) to regulate or create barriers to this hitherto liberal market access regime?

The most obvious ones are the type of barriers that have been in the news lately, that is, regulating visas by restricting their number or putting a high ‘salary-floor’ pre-requisite that would require a foreign worker to be paid a high minimum salary to be eligible for a visa.

Assuming that that this minimum salary requirement is put at $130,000 per annum, rough estimates using Bureau of Labor Statistics (BLS) data show that only 8 per cent of the current domestically employed US IT workforce of about 4.1 million earns a salary equivalent to or higher than that amount.

Essentially, this restricts visas to the most skilled category of IT workers, those who are least likely to be technicians or database managers doing onsite work.

In other words, this would be a body blow to the current IT outsourcing model that combines offshore delivery (called Mode 1 in trade parlance) with onsite delivery by foreign workers (called Mode 4).

The other form of restriction could come in the form of curtailing the role of offshore and foreign worker supported ITES used by governments.

The US federal and state governments are the biggest customers of ITES, representing almost 30 per cent of this overall US ITES demand going by input-output tables. Another barrier that could arise in the future is in the form of a special cess or tax on foreign workers.

Again, there is not much protection available in current trade agreements to prevent this. But such obvious trade policy restrictions represent the tip of the iceberg. What Indian businesses and trade policy makers need to be more careful about are more sophisticated forms of barriers to cross-border or Mode 1 delivery of ITES.

Pervasive data localisation and restrictions on cross-border data flows on grounds of information security and data protection could add significant transaction costs or even seriously disrupt cross-border offshore IT work.

This represents a non-tariff technical barrier to ITES trade.

Nothing currently prevents governments in terms of trade obligations and treaties to impose monetary costs on offshoring of services.

The US government would be within its rights to impose a special tax on all IT supplies sourced from abroad and force companies to declare them. This could apply even to supplies made by a company’s offshore office (for example, supplies of Microsoft India to Microsoft USA). The accounting principles and governmental capacity to collecting relevant data already exists. This would represent effective ‘tariffication’ of the cross-border supply of ITES.

It is interesting to note that the average salary for a book-keeper in the US according to the BLS is $38,000 per annum, much lower than what typical onsite IT workers on H-1B are being paid.

Increasing automation and menu-based solutions in IT would enable companies to hire from this cohort within the US instead of ‘importing’ Indian IT workers at the lower end of the skill spectrum.

Artificial intelligence and automation would also re-shape the global production network of ITES.

Cross-border delivery or Mode 1 would increasingly become the critical mode of supply. It is, therefore, in India’s longer-term interest to focus on the next generation of barriers to IT in its policy formulation.

Over-emphasis on a liberal visa regime as a policy objective would be strategically detrimental for Indian businesses and government in a long-term perspective.

The writer is Senior Director, Corporate Public Policy (South Asia), Deutsche Post DHL. The views are personal