As the World Trade Organisation talks were collapsing in Cancun on September 14, the United States of America government announced the formation of a special task force to investigate Chinese trade policies that, according to the Americans, are unfair and impose a number of restrictions on foreign companies that prevent them from increasing their market presence in China. China also stands accused of refusing to let its pegged currency be revalued upward in relation to the dollar, of allowing software and music piracy to continue unchecked. The creation of an unfair trade practices team in the US commerce department comes in the wake of escalating alarm on the loss of some 2.7 million manufacturing jobs during the past three years since President George Bush took over, a decline last seen during Herbert Hoover’s presidential tenure during the Great Depression over seven decades ago. American manufacturers have complained that low-cost imports from China are the main reason for such an unprecedented decimation. They have drawn support from politicians across the spectrum who are calling for higher duties on imports from China.
Economic recovery is very much on in the US and all projections are that real gross domestic product growth in the third and fourth quarters of 2003 will be somewhere around 5-6 per cent on an annualized basis. Productivity growth is spectacular, confounding most scholars. During 1995-2000, the period of the “great boom”, productivity increased by about 2.5 per cent per year. Since 2000, this has increased to 3.4 per cent per year reflecting, in many ways, the long-hoped for payoffs from the huge investments made in information technology in different sectors of the US economy. But by common consensus this is a “jobless” recovery. Productivity increases are taking place in an environment of growing job losses in industry that accounts for 40 per cent of the US GDP. Adding edge to the debate is the fact that the US presidential campaign has already commenced and Democratic candidates are aggressively targeting Bush on the gloomy employment situation.
Actually, India is also beginning to draw flak, perhaps not as much as China as yet but it is under attack nevertheless. The growing American fear is that as “blue collar” manufacturing jobs are being lost to China, “white collar” service jobs are being lost to India. The loss of service jobs has not been as dramatic as in manufacturing. Some estimates, like that made by Forrester, a leading US IT consultancy firm, are that about 400,000 jobs may have been offshored already. Over the next decade, 200,000 service jobs may be outsourced annually in the IT and IT-enabled services area. India could account for anywhere between a third and a half of these jobs. State governments in the US like that of New Jersey, Maryland, Connecticut, Washington and Missouri have sponsored or are considering legislation to prohibit or restrict the state government concerned from contracting with companies that outsource to countries like India. The federal government has been silent. But while announcing the special task force in Detroit, the US commerce secretary, Donald Evans, said : “American manufacturers can compete against any country’s white collars and blue collars, but we will not submit to competing against any country’s choke collars”.
So, while the immediate focus of the task force is China, the prospects of India also coming under the scanner for its trade, investment and market access restrictions cannot be ruled out. In this context, a recent research study by the Washington-based McKinsey Global Institute entitled “Offshoring: is it a win-win game” is very timely and comes as a shot in the arm for those who have to combat growing protectionism in the US. This estimates that offshoring creates net additional value for the US economy that did not exist before, a full 12-14 cents on every dollar offshored. The study shows that of the full $1.45-1.47 of value created globally from offshoring $1 of US labour cost, the US alone captures $1.12-$1.14, while receiving countries like India capture, on an average, just 33 cents. The American media is increasingly highlighting the shift of skilled service jobs to India. Most of these reports are alarmist, although recently the Los Angeles Times carried an article on how Oracle’s hiring of more engineers in Bangalore is good for Oracle in the US. It also drew attention to the creation of new businesses by Indian-American entrepreneurs in the US that create new jobs both in America and in India. But such balanced pieces are very infrequent.
At the recent meeting of the WTO at Cancun, China was assertive but not argumentative. It kept a relatively low-profile. It was certainly part of the G-22, the group of 22 developing countries led by Brazil that included India and which confronted the US and Europe on the issue of farm subsidies and other issues. But its style was relatively less confrontationist than that of other G-22 members. It ran with the G-22 hare and hunted with the American hound. The terms of WTO accession agreed to by China are sweeping. China has undertaken to fulfil a very large number of market-opening obligations by 2006. It definitely is in no mood to take on any additional commitment and to that extent it is with the G-22. At the same time it is conscious of the deepening political backlash against the enormous trade surplus that it enjoys with the US. This surplus could well be in the region of $ 130-150 billion in 2003 and a full one-fifth of the US trade deficit is on the China account alone. The US market is key to China’s prosperity. For this reason, at key moments, China went along with the US at Cancun and while most G-21 ministers decried the stance of the rich countries, the Chinese commerce minister, Lu Fuyuan, donned a statesmanlike-mantle and declared that a stalemate was in no one’s interest. Unlike India, China wants genuine liberalization in global farm trade. India wants advanced countries to cut import tariffs and subsidies while retaining the right to have high tariffs and subsidies for itself. China wants free trade in agriculture and is prepared to cut subsidies at home knowing that it cannot sustain them for ever. In addition, its whole objective is to get more and more people out of agriculture, something that government policy actively discourages in India.
What should India do, apart from playing it low-key on job relocation and apart from lobbying with the US congress' Clearly, India’s merchandise imports from the US, that in 2002 amounted to just about $4 billion (as compared to India’s merchandise exports of almost $12 billion) must increase both in the civilian and defence sectors. US service exports to India in 2002 amounted to $3 billion and this too could increase. More than that, Indian companies must begin to acquire companies in the US, particularly in the manufacturing industry like auto components, engineering and textiles. Chapter 11 companies (that is, companies that have declared bankruptcy but still have great potential for revival) are a pool from which such acquisitions can be made. This could help mitigate the negative impact of growing outsourcing. Keeping aside what happened at Cancun, India has to keep the US engaged intensively on trade and commercial issues.