The Consequences of an Indo-American Trade War

Donald Trump has completed 100 days in office. However, he does not have any significant achievement to show for in these 100 days. Supreme Court judges have overturned his travel ban, and his healthcare reform is a mess.

In these desperate times, Trump used an arrow in his arsenal that he knew would not fail as it touches a raw nerve with the American populace. Trump has been repetitively talking about the issue of H1B visas and how they are used by foreigners to steal American jobs. Recently, he announced his intention to overhaul the H1B system in a manner that would hit the Indian outsourcing companies hard.

This has not gone down well with the Indian government. Even though India and the United States share a good trade relationship, India is viewing this as unfair treatment and as the beginning of a trade war. In this article, we will understand why it is not factually correct to think in this manner and how India will end up damaging its own economy in the process.

H1B Executive Order

Donald Trump has signed an executive order that asks for the different agencies to closely work on the H1B system, identify the systematic abuse and end it. One thing that Donald Trump is certain about is that he will end the H1B lottery system which is used to allot visas now.

He believes that this system is unfair and that this has been used by Indian outsourcing firms to game the system. This is because in a lottery, the more tickets one buys, the more the chance of winning. Hence, Indian outsourcing firms flood the USCIS with H1B visa applications. This leads to more than 70% of these visas being awarded to Indian technology professionals. Americans claim that these professionals are not experts in their field. Rather these are run of the mill by ordinary individuals who work at rock bottom pay scale and are therefore hired to displace American workers.

Trump has ordered the USCIS to overhaul the system. This would include removing the lottery provisions from H1B. Instead, Trump has suggested that the higher paying visas jobs must be given priority. This would price outsourcing firms out of the market. Trump believes that the new system will allow only highly paid experts in their field to get the visas. The lower rung programmers who jeopardize the jobs of his voter base will be eliminated.

Tough Stance from India

India has taken the H1B issue as a direct attack on their trade relations with the United States. They believe that the United States is trying to gain an unfair advantage in trade by executing laws that specifically impact India’s service exports. The government of India has taken an aggressive stance. This has got the experts worried that the conflict might escalate into a full-blown trade war. However, experts also know that India does not have the wherewithal to sustain such an open confrontation with the economic giant that is the United States.

Why this is Not Viable:

Here are some of the issues that have been listed down by the experts. These problems suggest that India’s tough stance is misguided and may end up aggravating the problem.

  • Immigration Issue vs. Trade Issue: India is confusing trade barriers with immigration barriers. The United States is not against free trade. It, however, has the right to protect its property from foreigners. It is a country’s own decision whether or not they want to allow immigrants to enter the workforce and if so in what form. India does not have the moral right to influence the United States on adopting an “open borders” policy.

  • Asymmetry: Indian software companies are entirely dependent on the United States of America. About 60% of the revenues being generated via software export originate in the United States. Hence, for Indian companies, it is not one of many markets. Rather it is the only market that matters.

    On the other hand, American multinationals do business in several countries. Even though India is the second largest consumer market in the world, it does not account for even 10% share of the revenues of American multinationals. Therefore, if the situation were to escalate, American multinationals can survive without Indian companies, but vice versa is not true!

  • Shooting Oneself in the Foot: American companies that operate in India employ a large number of Indians. On the other hand, Indian software companies in India do not employ locals. Instead, they import their workforce from India. Hence, if Indian government made tougher rules for American companies in India, they would end up hurting their own people working as employees in these companies. If American multinationals shut shop in India, a large number of white collared jobs in India would be impacted.

  • No Legal Recourse in WTO: Lastly, United States has not announced a discriminatory policy against India. The H1B order does not prohibit Indians from explicitly getting the visas. Instead, it is targeted at low paying jobs which happen to be held by a lot of Indians. This is not a discriminatory practice as per the WTO rules. However, if India were to tax repatriations only to American companies that would be a discriminatory practice. The veiled threats by the Indian government, therefore, would not hold much water in the WTO courts.

To sum it up, India must avoid getting into a trade battle with the United States over small issues. It is true that H1B rules will impact the Indian software industry in a big way. However, several other Indian industries and Indian people benefit from good trade relations with the USA. That should not be jeopardized with megalomaniacal and egotistical policies.

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