BY FRANK WISNER , RAVI VENKATESAN | JULY 26, 2013
The U.S. and India are headed for a trade war over immigration and protectionism. Can it be stopped before it's too late?
India and the United States have come a long way over the past two decades. A once fraught relationship has developed real strategic significance, especially as both nations face major security challenges in Asia. Much of this progress has been fueled by the enthusiasm of U.S. businesses, who recognize that to be successful in a globalized economy, they need access to Indian talent and the giant subcontinental market. India also understands that to lift itself out of poverty and become globally competitive, it needs access to U.S. markets and the capital and technology of American firms. As a result, bilateral trade has quadrupled to nearly $100 billion since 2006 and, with this, cooperation has blossomed in many other areas -- including intelligence and security.
However, with U.S. Vice President Joe Biden visiting Mumbai and New Delhi this week, it's worth noting that over the past three or four years, the business environment for U.S. firms in India has deteriorated, and tensions have grown over trade and investment matters. American pharmaceutical firms and multinational companies are concerned about how policies and regulation compromise their business model. Many others face nightmarish tax challenges. For their part, Indian IT companies are very concerned about proposed changes in the U.S. Senate's immigration bill to the rules on skilled Indian workers who want to emigrate to the United States.
All companies, Indian and American, face severe headwinds in their day-to-day business operations. As a result, the business ties that have been a pillar in U.S.-India relations for decades have been dramatically weakened. Honeywell CEO and co-Chairman of the U.S.-India CEO Forum Dave Cote spoke for many of his colleagues recently when he said, "Over the last two years, we have felt a cooling when it comes to U.S. interests in investing in India." Ajay Banga, CEO of Mastercard and chairman of the U.S.-India Business Council added frankly, "There are cracks in our relationship." But this cooling may not remain restricted to trade and investment alone; the United States and India may be headed for a collision that could be seriously detrimental to the strategic interests of both nations unless U.S. President Barack Obama and Indian Prime Minister Manmohan Singh lead forcefully and personally to get things back on track
The list of grievances on both sides is long. For U.S. firms operating in India, relentless harassment by tax authorities is at the top of this list. Add to this the much-criticized Preferential Market Access (PMA), a proposed policy that would give preference in government procurement contracts to domestically manufactured electronic, computing, and telecommunciations hardware. Pharmaceutical companies are concerned about intellectual property rights protection and enforcement. Solar panel manufacturers, and companies in insurance, retail, and defense complain about continued regulatory and bureaucratic hurdles to market access in their sectors. Progress on the civil nuclear agreement between the two countries that was signed with much fanfare in 2008 remains stalled over concerns on liability which has scared away French, Russian, and American firms.
Lack of progress on improving infrastructure, a rapidly slowing economy and a rapidly depreciating currency raise further concerns about India's economic progress. For multinational companies eager to enter the Indian market, the mounting list of issues is causing frustration and annoyance to mutate into anger as more and more CEOs fear that India is discriminating against U.S. firms and failing in its obligations as an emerging economic power.
U.S. government officials expect India to collaborate with them in multilateral trade negotiations to shape the global trading system rather than setting dangerous precedents that other countries might emulate. This would drive a stake through the heart of the global expansion of American firms. It is a matter of paramount importance and urgency therefore to get India to act responsibly.
From India's standpoint, the most urgent and lethal threat is that some of the provisions of the U.S. immigration bill currently being considered by Congress would create a huge problem for the country's flagship IT industry, not to mention the American companies that are its clients. The most onerous proposal is one that prevents U.S. technology firms from placing personnel at client's sites if more than 15 percent of their employees are on H1-B visas. This destroys the business models of many global IT service providers and is also extremely problematic for U.S. companies that have become dependent on the amazingly competitive, 24/7 capability provided by Indian firms.