Use Outsourcing to Spur Change in India

The backlash has begun against the outsourcing to India of service jobs, ranging from software-development engineers to call-center operators. To date, congressional proposals to curb the export of such jobs have been limited in scope, naive in their denial of the compelling economic case for shifting work to low-cost India, and largely the product of protectionist pique. Such initiatives are akin to trying to hold back a swift river with a sieve. Nevertheless, the sending of service jobs offshore is clearly an issue that Congress and the Bush administration will ignore at their peril in this election year. So what is to be done? First, to buy time for the American public to adjust to the new international competition, broader efforts are needed to slow the loss of white-collar jobs. Second, rather than serving merely as protectionist sops to public fears, anti-outsourcing initiatives should be designed as negotiating tools to force India to liberalize its long-protected service economy.

A provision in this year’s Omnibus Appropriations bill prohibits the offshore outsourcing of some government contract work. Sen. Christopher Dodd, D-Conn., has proposed extending that prohibition to all federal procurement of goods and services and to all state government procurement using federal funds. Other members have proposed limiting the outsourcing of militarily sensitive work or of work related to homeland security.

And Sen. John Kerry, D-Mass., has suggested requiring all call centers—including those abroad—to inform consumers where the operators are located when providing customer service. But government contracting is only a small portion of total outsourcing. And consumers care more that a call-center operator can answer their questions than whether he or she is an Indian. If members of Congress are serious about slowing outsourcing, they need to think about constraints that have some bite. International trade agreements are based on the principle that countries give as good as they get. India, however, is not a signatory to the World Trade Organization’s Agreement on Government Procurement.

According to the U.S. trade representative’s annual Foreign Trade Barriers report for 2003, “Indian government procurement practices and procedures generally discriminate against foreign suppliers.” To encourage India to liberalize its own government procurement practices, proposals to limit U.S. government outsourcing should include a carrot as well as a stick. The sticks could automatically expire when India signs the WTO procurement code. New Delhi also discriminates against foreigners trying to sell services in India. For example, only graduates of Indian universities can qualify as professional accountants in India. Moreover, foreign architecture and engineering firms working on many Indian government projects may be paid in nonconvertible rupees only, meaning that the money has to stay in India. What is sauce for the goose is sauce for the gander. Because more and more American accounting, engineering, and architectural work is being outsourced to India every day, Congress could enact legislation that mirrors Indian restrictions. It could direct the IRS to accept only those tax returns that have been prepared by accountants who graduated from American universities. The federal government could decide that henceforth it will pay only in rupees for government engineering and architectural work that has been farmed out to India. The need to ensure the confidentiality of the growing volume of private data on Americans—credit histories, health records, and the like—that is being shipped to India for processing offers additional opportunities for trade-negotiating leverage. The United States and the European Union already have a code of conduct that U.S. firms must adhere to in order to meet E.U. standards on data privacy protection. These principles include requiring businesses to disclose when they are transferring information abroad, to whom, and how they are safeguarding that information. If the United States is willing to accept such strictures imposed by the Europeans, it should have no qualms about imposing them on the Indians. In 2005, New Delhi is supposed to come into compliance with the WTO’s intellectual-property standards. It’s a tall task that almost no developing nation accomplishes overnight. To provide the Indians with added incentive to comply, while slowing the outsourcing of U.S. intellectual property to India, the Bush administration could let American companies know they are on their own if they feel their copyrights have been ripped off by software developers or customizers in India. U.S. trade officials won’t go to bat for American firms until New Delhi is certified as being in full compliance with international intellectual property norms.

In the long run, transferring more U.S. service work to India is inevitable. And so is the American political backlash to exporting such jobs. The challenge facing

Congress and the Bush administration is to resist using this backlash for purely protectionist purposes. Instead, they should see the outcry as an opportunity to force long overdue trade reforms in India.