IIPM Prof. Arindam Chaudhuri on Internet HooliganismIn retrospect Obama should realise that his protectionist policies could boomerang on the US if other nations decide to follow suit November 2008: the world, and most specifically Asians, greeted Barack Obama's victory with high hopes expecting that a Black President would engage Asia in dialogue instead of taking unilateral decisions. As the world was still twisting in agony from turbulent and a never-ending financial crisis, many hoped that Obama would tread the free economic market policy path. However, there were sceptics who expressed that the crowing of Obama would bring protectionist measures to the United States. They feared that Obama with his isolationist and inward-looking mindset would be forced to throw in the towel and raise the barriers of US protectionism, which would eventually hurt economies. The sceptics were perhaps as true then as they are today. With congressional elections due, the US and its key politicians as well as policy-makers are inadvertently preparing the ground for a bout of protectionism.
Sample this: "For years, our tax code has actually given billions of dollars in tax breaks that encourages companies to create jobs and profits in other countries... I want to change that." Well, this is US President Obama's economic policy speech, an obvious case of potential protectionism, wherein he clearly advocates giving tax breaks to companies that create jobs in America and not to those who create jobs overseas. If you term the above a political gimmick of a politician merely trying to court voters, do spare a second thought and consider these new developments: the United Steel workers union has filed a 5,000-page legal case with the US administration accusing China of subsidising exports of wind turbines, solar panels, nuclear power plant and other clean energy equipment. There is a controversial legislation to increase fees for the visas in the H1B and L1 categories from $320 to $2,320 and from $320 to $2,570 respectively (hurting India's IT sector as the bill names Indian firms Wipro, Tata, Infosys and Satyam). Above this, the US commerce department's announcement to hike import duty rates from 43 per cent to 289 per cent on Chinese steel wires and import tariffs on Chinese tyres (35 per cent in the first year, 30 per cent in the second year and 25 per cent in the third year) further inflates protectionism. Faced with high unemployment (the Bureau of Labour Statistics puts the unemployment rate at 9.6 per cent and states that 14.8 million people were essentially unemployed in September, 2010) and other economic woes (the national debt is $13.6 trillion and is expected to increase to $15 trillion by 2015), the protectionist measures as adopted by the US are attempts to make scapegoats of the developing countries, including India.
But the US fails to realise that the unilateral approach would worsen the existing economic environment if deficit countries too resort to protectionism to deal with their trade problem – the move will lead to ruin and not to prosperity. Protectionism – ( for the sake of clarity, is defined as economic policy of restraining trade between nations through methods such as tariffs on imported goods, restrictive quotas et al designed to discourage imports and prevent foreign takeover of local markets and companies) even for the sake of national economic survival has inevitable harsh effects on tit-for-tat protectionism. This was very much evident when, in a joint statement, French President Nicolas Sarkozy and German Chancellor Angela Merkel asked the US to "reject the temptations of protectionism." This remark by the European Union, China's censorship of Internet companies such as Google Inc and its unwillingness to allow its currency to appreciate, is in fact a reply to the US' protectionist measures.
Obama's rhetoric towards outsourcing has been well-known since his campaigning days. A few so-called trade pundits explained that it was a campaign tactic and his attitude would certainly change (if not take a U-turn) when he actually assumes office and gets a first hand experience on the real functioning of foreign economic policies. But things have been quite to the contrary. Obama has been vehemently explicit in keeping investment at home and saving American jobs; in a bid to restore confidence he has promised to create 3.5-4.1 million new jobs. At this juncture one would ponder as to how would the President create new avenues for jobs. But as a well-thought strategy, Obama's mantra was against outsourcing jobs to Asia, thereby spelling bad news for the Business process outsourcing (BPO) and information technology sectors. The negative implications of such protectionist measures have had a significant effect on India, Philippines and other countries. The US' protectionist brunt has been borne by relatively more competitive manufacturing centres like China and Vietnam. Surely, India, Philippines, China, Vietnam and other low-cost providers of services and producers of goods in the Asian region would be hurt temporarily given the mutation that the world's largest economic geography is undergoing. The increasingly protectionist measures would undoubtedly redirect trade flows of the Asian countries but will under no circumstance eliminate them. In a positive perspective, exporters in Asia and specifically India, would emerge stronger by the time the US puts an end to the unilateral protectionist approach. Even India and other Asian countries would learn the art and science of directing their efforts to lower their dependence on the US market by looking for consumers elsewhere.
India, which accounts for approximately 50 per cent of the global outsourcing market, has become the world's back office as western firms set up their call centres. However, number crunching and software development outlets to cut costs, have reasons to worry. Considering the fact that the US contributes to about 70 per cent of the India's outsourcing sector's billing (that is close to 5 per cent of India's total economic output), the protectionist approach adopted by the US (which includes an end to tax break for companies which ship jobs overseas and increasing professional visa fees) is bound to reflect on the balance sheet. The Indian viewpoint as expressed by Finance Minister Pranab Mukherjee, in his meeting with the US Secretary of State Hillary Clinton, was that the US protectionism is regressive in nature and would not serve to strengthen the relationship between the two nations. The Indian IT industry should thank the Senate Republicans who blocked the passage of the anti-outsourcing bill, dealing a blow to President Obama's unilateral protectionist measures.
Protectionism ultimately hits the protectionist. Marc Faber warns, "For the US economy, rising protectionism would also mean higher inflation rates, as well as huge competitive disadvantage on the global markets for US corporations." It's time that the US pick a lesson or two from the warnings of the man who is known for his uncanny predictions.
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