Indo-US trade wars Part 1: The great outsourcing debate

No issue has the ability to spark an online conflagration as much as a debate on outsourcing. So you can well imagine how much of a role it could actually play in either strengthening or destabilising US-India relations. After all, all of India's tech biggies, from Infosys to Wipro, to TCS, to Cognizant, and many of its smaller players (Mindshare, Happiest Minds, Tech Mahindra) have their futures firmly in Uncle Sam's backyard. Any attempt to jeopardise that trough of revenue is likely to cause shrill alarm, while the continued trend of using low-cost tech labour — specifically H-1B workers — by shipping them over to the US to work at clients' sites will continue to get the American techie worked up.

It is a greatly divisive issue that could have major spill-over effects, with disastrous tit-for-tat outcomes — but Narendra Modi and Barack Obama would fervently hope that it doesn't come to that, since the business stakes are high for both countries.

It doesn't help that the recent Immigration Reform Bill (S744), passed last year in the Senate by a comfortable 68 to 32 margin, has simply poured jet fuel over this issue. However, the temperature is going to really shoot up into the stratosphere if the House of Representatives decides in the coming months to go ahead and pass what is essentially a very similar-looking Bill.

Meanwhile, the Indian software industry is on tenterhooks. The Indian American Advisory Council (IAAC) which advises US House of Representatives on India-related issues, estimates that the Indian economy could take a $30 billion hit if the Bill goes through.

On the other side of the debate, US observers say the Bill could be disastrous for US tech workers, who in effect are being let down by American companies as well as their governments. Who to believe depends on what kind of math you end up doing. (Ironically, it's probably the first time in recent history that both parties in a rancorous debate on protectionism are in agreement.)

Broadly speaking, the proposed Immigration Bill actually boosts the number of H-1Bs from the current 85,000 to 195,000, but that's just candy coating that hides the bitter medicine underneath, say pro-outsourcing critics of the Bill. This cohort is horrified by the clause that states that a company with more than 15 percent of its workforce on H-1Bs will be barred from placing H-1B workers at client sites. Companies using L-1s (another short-term visa similar to the H-1B) would have to prove that it didn't replace any American workers in the same field 90 days before or after the L-1 filing. Lastly, no company can use L-1s or H-1Bs to make up more than 50 percent of its workforce after October 2016.

If this weren't bad enough, say pro-H-1B critics of the Bill, the killer blow is in the fees that would be levied on companies currently exceeding the future caps: $2,250 for L-1 petitions and $2,000 for H-1B petitions for companies that have more than 50 percent of their workforce on these visas. That fee would rise to $5,000 per visa in fiscal 2015 for companies with 30 to 50 percent of employees on these visas, and a whopping $10,000 per employee for a company that has 50 to 75 percent on them. To add to all of this, there is a requirement that employers pay H-1B workers no less than the mean wage for the occupation that could boost a $60,000 per year entry-level job to $92,000.

No Indian company thought that when Barack Obama used the tagline "Say no to Bangalore and yes to Buffalo" in 2009, in an effort to revive the post-meltdown American economy, it would come to this.

"The Senate Bill unfairly targets American companies trying to remain globally competitive by reducing their ability to contract with global IT service providers and restricting their access to the international expertise they need," said Ron Somers, former president of the US-India Business Council, a year ago. He also cautioned that it could strangulate innovation and job creation, and compel businesses to move jobs outside the country.

Not true, say anti-outsourcing critics of the Bill, who think that in reality, this is just one more nail in the coffin of the American tech worker who has a long history of being replaced by low-cost H-1B workers. That is apparently because of what has been widely dubbed as the Facebook Loophole — a clause in the Bill stating that if companies help their H-1Bs and L-1 workers to apply for Greencards (which can take a few years to materialise), they can reclassify them as "immigrants in waiting", and duck the new requirements altogether.

"I think it's a pretty large loophole, and it defeats the purpose of trying to get these firms that are heavily dependent on H-1B visas to hire American workers. Now, they have an additional way to avoid hiring American," said Ron Hira a year ago, a policy guru who researches outsourcing at the Rochester Institute of Technology. "Really, the tech industry wrote it."

Even if this loophole wasn't exercised, whatever these companies fork out in additional fees is a trifle compared to how much they would save because of the cheaper labour that they utilise, say pro-labour critics like Neeraj Gupta, CEO of the IT services company Systems in Motion.

Who to believe? That's a tough call. The widespread stereotype on the American side of the fence is of Indian engineers of poor calibre replacing boatloads of talented American techies who are denied what is rightfully their jobs. These workers also bring wages down, it is believed, and since they are willing to work for peanuts, they help foster unfair work practices.

For instance, a Zogby International poll conducted many years ago discovered that 71 percent of Americans felt that outsourcing jobs overseas negatively impacted the US economy, while 62 percent said that the US government should tax or legislate to try to stem the tide.

Conversely, the pro-outsourcing side of the fence says that the myth of low-quality Indian engineers is way overblown ("look at all the people who work in Silicon Valley — they come from the same stock", they say). Many Americans are simply not qualified for these jobs, whose technical requirements change rapidly, and that many Americans are simply not interested in these entry-level, grunt positions that are not capable of paying back debilitating student loans that Americans are often saddled with. Indeed, many American employers complain that retaining an American, who often take flight to jobs that pay a few dollars more, is a monumental pain and an expensive proposition.

So, where does the truth lie? For a real measure of the economic impact of H-1B workers on the American jobs, it is probably only logical to analyse the job market and wage growth for this sector. It turns out that Ian Hathaway, research director at Engine, an American economic research outfit, has conducted an analysis that shows the job market in science, technology, engineering, and mathematics fields (STEM), as well as computer and math sciences (CMS), is actually a whole lot tighter — which means a lot more jobs available per unemployed worker where employers must compete to get employees — than for other fields. Apparently, At the end of 2012, there were 2.4 CMS job openings for each unemployed CMS worker, and 1.4 STEM openings for each unemployed STEM worker versus four unemployed workers in non-STEM and CMS fields per job opening.

What's more, Hathaway shows that wage growth for STEM and CMS workers with at least a bachelor's degree was far more "robust" in the last 12 years compared to other fields. "Not only did wages grow at the median for these fields while wages in all other professions fell substantially; that growth also reached workers with a broader set of income levels," pointed out Hathway. In fact, it is "irresponsible for researchers to claim there is an oversupply of STEM workers," he added.

Hathaway also pointed to another study, conducted by William R Kerr, a Harvard business professor, who examined 300 American companies and found little empirical evidence that pointed to American engineers being displaced by foreign ones. In fact, Kerr's study suggested quite the contrary, where the growth of immigrant workers apparently "helps younger American technical workers — more of them are hired and at higher-paying jobs — but has no noticeable consequences, good or bad, on older workers". Kerr also said that "In the short run, we don't find really any adverse or super-positive effect on the employment of Americans," adding that "People take an extremely one-sided view of this stuff and dismiss any evidence to the contrary."

This is more or less borne out by another study done by academics at the University of California at Berkeley, which says that foreign-born STEM workers increase employment and wage opportunities for high-skilled native-born American workers (STEM and non-STEM).

The study found that over the span of a decade in an urban area, a 1 percentage (of total employment) increase in foreign STEM workers during a decade actually increased the wages of native-born American college graduates by 4 to 6 percent, with small effect on their employment. Moreover, "the technologies introduced in the period 1990-2010 by STEM workers likely increased total production, and even more strongly the productivity of college-educated. We also found that college-educated natives moved in response to foreign STEM workers to more human capital-intensive sectors of the city economy, they increased the 'creative' skills used in production, and their house rent increased, eroding part of their wage gain."

This is all startling stuff and an overwhelming refutation of the widespread scaremongering regarding outsourcing and H-1Bs. The inevitable conclusion, then, is that the American tech worker has no reason to fear H-1Bs, regardless of what they hear through the grapevine or their own occasional bitter experiences. What these studies overwhelmingly point to is that paradoxically, H-1Bs actually help them.

There are other reasons for outsourcing opponents to perhaps revisit their positions. Today, as this New Republic piece points out, many large global American firms in fields from finance to healthcare have gargantuan back-end systems that require careful tending to, something that the lower-end H-1B worker is perfectly suited for, allowing American tech workers to focus on climbing the employment value chain. Not doing so could stymie growth prospects for these companies, thereby making it even harder for American workers to find the kinds of jobs they want.

Several hundred years ago, economist David Ricardo postulated his theory of comparative advantage by saying that the essence of a sound, free-trade system is that which allows countries to focus on their core skills, thereby producing something that they are the most efficient at, instead of a product that someone else is better at churning out. Here, outsourcing is simply a service instead of a good, and by protecting low-end service jobs instead of trying to create higher-end ones, the US is simply being more inefficient.

And while the new areas of tech employment, rife with self-driving cars, bots, and other forms of artificial intelligence may be disruptive and appear to be "anti-people", they actually require a whole new wave of techies to code, build, and manage them. This is the emerging, new world of employment, along with analytics and big data, that Americans should be focused on conquering, instead of fretting over the inconsequential lower-end ones.

As David Clark, a senior research scientist at MIT's Computer Science and Artificial Intelligence Laboratory, has observed, "the larger trend to consider is the penetration of automation into service jobs. This trend will require new skills for the service industry, which may challenge some of the lower-tier workers, but in 12 years, I do not think autonomous devices will be truly autonomous. I think they will allow us to deliver a higher level of service with the same level of human involvement."

Getting replaced by someone else at work is a humiliating experience. If it happened to me, I would probably be angry, bitter, and vengeful. And I would, if I were American, not be able to appreciate the thick irony that the biggest proselytiser and enforcer of opening up markets, especially in developing countries, has been the US.

However, considering all of the evidence that points to outsourcing and H-1Bs having a negligible — indeed, a positive — impact on the US worker, never mind the US economy, maybe it's time for the American tech worker to deep-six his or her understandable animosities toward H-1Bs and the likes, and focus on ruling the emerging technology landscape, just as their predecessors have been doing for decades.

Which means that any debate on the Immigration Bill going ahead should take this into account, lest a flawed conception of what H-1Bs do to the American economy result in torpedoing what could be a fertile era for Indo-US trade and cooperation.

Click here for the introduction to this series.