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Economic Protectionism in America: How much does India need to worry

By on May 18, 2017 in Trade Policies with 0 Comments

Economic protectionism in America

Late on November 8th 2016, as the results of the U.S presidential election started pouring in, it became increasingly clear that contrary to all opinion and exit polls, the republican nominee Donald Trump was on his way to the white house. As was expected, this also led to widespread apprehension in major international economies ( India included) about what would Trump’s economic policies be. During the campaign, as part of his motto “Make America Great again”, Trump had said on more than one occasion about countries such as China ripping off the United Sates through their trade policies ( China has artificially kept it’s currency valuation low, helping it to gain a competitive edge in the export market). Moreover, Donald Trump also promised that he would bring back jobs to the united states by levying a much higher import tax on imports coming from countries such as China and India.

All this naturally resulted in panic in some sectors of the Indian economy. Firms such as Infosys, TCS, Cognizant are some of the few Indian companies engaged in outsourcing software services to the United States. This all led to fears of job losses in aforementioned companies and similarly in companies engaged in other sectors also. While some experts of the Indian economy have said the fears are largely unbounded, some have said the opposite. Keeping aside these polarizing view points,we look at how will this economic protectionism affect the Indian economy, through some facts.

H- 1B visa reforms

Donald Trump has promised to reform the approval process of granting H- 1B visas to foreign nationals, in the hope of restricting trained professionals from coming to the united states for jobs. As you might have guessed by now, this is the visa availed by Indians when they go to work in the United States. By restricting H- 1B visas, Trump hopes that millions of American jobs will go to American people, thereby lowering unemployment. The realization of these reforms will mean lesser number of Indian expats in the United states and as a result lower remittances back to India. Lower remittances in millions of Indian households will mean lesser consumer spending, adversely affecting the Indian economy.

As was the case in 2008 when Obama won( he also promised H- 1B visa reforms), the likelihood of this happening however is very less. As Obama found out that restricting H- 1B visas would simply mean lack of people with the requisite skill set and thus he reneged on it, Trump also would find out the same and know that restricting these visas would mean American companies falling behind those from other parts of the world in terms of efficiency and competitiveness.

Effect on outsourcing

Another one of Donald Trump’s plans for making America great again is to cut outsourcing, through which millions of jobs are shifted abroad rather than going to the American people. He has promised this across all sectors, whether it be information technology, automotive, biotechnology etc. In fact during the election campaign, Mr. Trump’s words on outsourcing were pretty harsh, he almost blamed outsourcing for wrecking the American economy.

Whether this happens or not is yet to be seen. Reducing the number of processes in various sectors from getting outsourced is a herculean task, it becomes more so when you count in the cost benefits from outsourcing to American companies. Simple fact, American people won’t work with the pay scales that people from counties like India and China work under. Moreover, the minimum mandatory wage in the United states is in a lot of cases higher than the wages offered to people working in outsourced processes.

Having said that, some people in the United States have suggested some out of the box approaches to reduce outsourcing. One such recent measure is building special economic zones on the lines of china. These special economic zones will allow investors to enjoy certain tariff exemptions and tax breaks which they cannot get in other parts of the United states. If this eventually does happen, it will be a big blow to many Indian firms, especially in the IT sectors, with giants like Infosys, Wipro, TCS likely to take a major hit.

Increase in current account deficit of India

It’s also quite possible that protectionist trade policies undertaken by the Trump administration might result in a considerable increase in the value of dollar as against the Rupee. India, being a net importer ( net importer means India imports more than it exports) will suffer hugely if this were to happen. Some notable negative effects will be an overall increase in the prices of various products leading to higher inflation. As a result of this, the RBI will be forced to draw from it’s reserves, whose end effect is contraction of the domestic economy.

About the likelihood of this happening, your guess is as good as mine. This is one of those long term negative effects which everyone dreads. One thing that provides some hope is that this won’t happen only due to one trade policy decision of the Trump administration but rather due to a series of protectionist measures.

Corporate tax cuts in the United States

During the campaign, Mr. Trump promised to cut the corporate tax rate in America from the prevalent 35 percent to 15 percent. If this indeed does happen, there is a possibility of major firms that have invested in India rushing back to the United States. Firms such as Ford, General Motors, Microsoft have invested billions of dollars in India and account for thousands of jobs here. If these decide to go back due to reduced tax rates, this will naturally result in job losses in India along with losses in revenue to the Indian exchequer.

The likelihood of this happening is again in the realm of speculation. The biggest reason that this might happen in future is the fact that Trump’s own party, the Republican part has always supported lower tax rates for businesses.

 Renegotiating on various trade partnerships

Another one of Donald Trump’s promises during the campaign was renegotiating on innumerable trade partnerships which he blamed were one of the major causes of economic disadvantage. Mr. Trump went as far ahead as to say that other countries were the unworthy beneficiaries of American largesse through trade partnerships that were only meant to benefit them. If this does happen, it will have large scale impact for India ( both positive and negative). A notable positive is that Indian goods will not be at a disadvantage in many international markets, while one negative effect would be increased protectionism amongst other major Asian and European counties.

The likelihood of this happening is very less. Trade partnerships are never signed only keeping in mind the economic benefits. A major reason for signing trade partnerships is strategic, it allows countries to expand their influence in major corners of the world, from land to sea. So it would be difficult for President Trump to renegotiate or opt out of these partnerships as it will surely result in some adverse reactions from countries that have been allies of the United States for a long time.

 

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