Globalism and Trade: India, China and the Trump Administration

By Sunitha Natti, Non-Resident Fellow

 

Every four years, when the United States goes into elections, India holds its breath. Asia’s third-largest economy and its thriving IT industry invariably come into sharp focus, thanks to the outsourcing rhetoric. The run-up to the 2016 elections was no different.

And now, President Donald Trump’s aggressive pitch to contain American job losses is giving nightmares to the Indian IT industry. But more than India, Trump’s ‘Buy American and Hire American’ strategy has managed to rattle China, prompting President Xi Jinping to publicly embrace economic globalism, perhaps for the first time, in an irony that couldn’t be missed.

Speaking at the recent World Economic Forum at Davos, Xi’s sermon on openness, inclusiveness, free trade and investment liberalization was in stark contrast to Trump’s avowed policy to look inward and build borders in order to regain lost prosperity and strength to resurrect America’s greatness. In fact, across the European Union, too, a wave of protectionism is emerging amid slower growth and rising nationalist sentiments, reflecting the beginning of the end of the free-market policy rationale promoted by the Thatcher-Reagan era. Perhaps all of this prompted Xi to espouse the benefits of globalization as a last resort. Ironically, China itself is less liberal, with foreign-trade partners having little or no access to its economy, as the world’s most-populous nation continues to subsidize its own public and private enterprises to operate and flourish.

For a start, this could change as China is battling slower growth, with trade and exports hitting a blind spot. A trade war with the United States would further dent its growth prospects and could even trigger the downfall of its economy. It’ll be interesting to see how Xi opens up, whether it’s by giving a level-playing field to foreign firms or encouraging Chinese firms to invest in the United States to create jobs that Trump promised back home.

It’s the same jobs thread that’s unsettling Indian firms. Though it’s proven that outsourcing offers economies of scale, visa and immigration policies and alterations in trade treaties are already changing the political acceptability of offshoring. Incidentally, for the IT industry, the seeds of protectionism were sowed as early as December 2015, when the Obama administration passed legislations to jack up the fee for H-1B and L-1 visas. The move tripled visa costs, which fundamentally affected Indian IT companies. This was against the principle of uniformity, and India has taken up the issue with the World Trade Organization.

The Trump administration has now lined up a raft of proposals, including raising the minimum wage under H-1B visa by about 50% over the prevailing rate. If implemented, this could knock the business case off the outsourcing story. The other side of the coin, real or perceived, of Indian IT firms abusing the H-1B visas is not helping matters.

Indian Prime Minister Narendra Modi wishes to have a meaningful engagement with the Trump government as the United States accounts for over 60 per cent of the revenue of Indian IT industry. Likewise, for the United States, Indian firms and students – particularly in science, technology, engineering and mathematics streams – comprise a significant chunk. For instance, Indian IT created over 4 lakh direct and indirect jobs in the United States, of which nearly 3 lakh include U.S. nationals and green-card holders. Indian firms also paid $22.5 billion in taxes to the U.S. treasury in the past five years.

The Trump administration seems well aware of this contribution and has penciled in a few measures that could boost the Indian IT industry. Initiatives like ensuring the brightest students educated in the United States get preferential visas or easing troublesome H-1B visa paperwork indicate a potential for a fruitful, long-term dialogue. It could lead the Modi-Trump administration to agree with Xi that no one will emerge a winner in a trade war.

It is significant that Trump chose to ring up Modi — his first major foreign contact after assuming office after calling up his neighbors Canada and Mexico, and Israel — ahead of picking up the hotline to Beijing or Moscow. In fact, Modi was among the first to call Trump after the latter’s stunning electoral victory. This budding relationship promises a lot of converging on India’s and America’s security and economic interests in Asia. Since both leaders share a similar ideology of putting the nation first, which was also their election slogan, there is a strong belief in New Delhi that the Trump administration could well prove to be a natural ally much more than the Obama administration. Any disagreements on the trade front, therefore, aren’t and cannot be too intractable.