Argument

Steve Bannon’s War on India’s High-Tech Economy

Steve Bannon’s War on India’s High-Tech Economy

Steve Bannon is clearly no fan of Asia. Back in 2015, when he was a mere far-right media provocateur, Bannon chatted on his radio show with then-candidate Donald Trump and bemoaned the fact that as many as two-thirds of Silicon chief executives were “from South Asia or from Asia.” That statistic turned out to be wildly inaccurate — the true figure is probably more like one in eight — but it was hardly the first time Bannon, now Trump’s chief strategist, had expressed alarm over threats from the East. “I’m an economic nationalist,” he said last November. “The globalists gutted the American working class and created a middle class in Asia.”

In the early days of Trump’s administration, Bannon’s antipathy toward globalization has mostly targeted manufacturing industries, and especially the threat American companies face from Chinese competitors. But there are already signs the administration may open up an equally damaging second front in its protectionist battle, targeting global services as well. Beginning with a crackdown on the visas used by Indian software engineers working in America, this would accelerate the reverse of globalization and mark a further attempt to unpick the supply chains upon which global companies rely, just as Peter Navarro, the head of a new White House National Trade Council, made clear that unwinding those supply chains is now an explicit objective of U.S. policy.

The initial focus of this push will be America’s H-1B visa system. This allows 65,000 highly skilled foreigners to work temporarily in the United States each year for anything from a few months to a few years at a time — a process sometimes pejoratively referred to as “body shopping.” In practice, nearly all the visas are handed to Indian IT companies that handle outsourced work from the United States, or U.S. companies like IBM and Accenture that directly employ thousands of techies in cities like Bangalore and Hyderabad.

Outsourcing of IT services is big business in India, earning annual revenues of roughly $120 billion. But in the United States it is undeniably controversial. During his campaign, Trump attacked companies for “flying in cheaper workers from overseas,” in a jab at those using the H-1B route.

Shares in Indian IT groups like Infosys and WIPRO plunged last week after a bill from Rep. Zoe Lofgren, D-Calif., proposed to more than double the minimum salary for H-1B applicants to $130,000, a level that would price out all but the most senior Indian executives. Lofgren said her approach would ensure the system helped to “create jobs here in America, not replace them.” And while her own bill is unlikely to become law, Indian software businesses appear to be resigned to the fact that Trump will bring in similar measures soon.

That prospect causes alarm in New Delhi, not least because it will sharply increase costs for India’s software houses. But as Arvind Subramanian, the government’s chief economic advisor, noted last week, the bigger worry is that these restrictions could herald a wider crackdown on outsourcing of all kinds, from back-office support to research and development and financial services. “We [India] are much more vulnerable to restrictions on services,” he said. “So one has to worry quite a bit that any reversal of globalization in this atmosphere could also mean restrictions on exports of services. And that’s bad news.”

Changes to H-1B visas are an important part of these worries. Indian outsourcing companies like Infosys use the H-1B system to bring engineers to work with clients like Apple and Walmart, which employ Indian companies to install and manage complicated IT systems. Workers using the visas are typically managers, rather than coders, who talk to clients about projects and then work with engineers in India to deliver them. Critics of this system are right to point out that Indians are paid less than their local equivalents, although not by much. Median wages for American IT workers were $81,000 in 2015, while Infosys paid its employees on H-1B visas roughly $76,000, according to Kotak, a Mumbai-based broker. But Indian IT companies handling outsourced work from the United States prefer sending foreigners rather than hiring Americans for other reasons too, such as their willingness to move around the country to work with different clients, or their ease working with teams of Indian engineers back at home.

Critics like Lofgren are also right that the H-1B system has drifted over the years, from one designed to attract entrepreneurs to something akin to an IT guest worker program. If Trump reverses this, it would hardly be a disaster. The likes of Infosys will hire more people in the United States, pushing up wages for software workers, but also hiking costs for Indian and U.S. tech businesses (and their clients). Mostly, though, Indian IT companies will respond by concentrating more of their work at home. The result would be less business and lower profits, but the basic “global delivery model” of Indian IT would remain intact.

Yet this scenario leaves unanswered the more important question of whether that will be the end of the changes, said Kawaljeet Saluja, Kotak’s head of research: “The big thing we don’t know is whether Trump’s intent is to dent the outsourcing model or to kill it.”

There are good reasons to suspect a wider assault is coming. First, for those like Bannon, who see America as engaged in a battle for global economic supremacy, a blow against Indian IT would be symbolic. It was in Bangalore, after all, that a conversation with Infosys co-founder Nandan Nilekani inspired Thomas Friedman to write The World Is Flat. This insight — “He said to me, ‘Tom, the playing field is being leveled’” — came to represent an enthusiasm for just the kind of tech-infused, globally interconnected company that Bannon views as so damaging to U.S. interests.

More than that, though, services matter because they make up an ever-larger component of global trade. Services exports account for about $5 trillion annually, according to the World Trade Organization, worth about a quarter of trade in goods. But that increases to “half or more” if you measure the value added at each stage of production, said Razeen Sally, director of the European Centre for International Political Economy.

Trump’s crusade to bring factory jobs back to America is not likely to succeed, to put it mildly. But to the extent that it does, it will have a knock-on effect on services in any case, given the way that manufacturing and services are closely intertwined in what trade experts dub “global value chains.” For every production facility the president badgers into returning home, much of the services upon which it relies — from transport and logistics to finance and legal services — will have to come back too, adding to production costs.

But more broadly, if you fear that Indian IT workers are undercutting wages in the United States, why not target other kinds of outsourcing too? Companies like GE and Cisco operate big research-and-development centers in India, employing thousands of engineers and scientists in jobs that could plausibly be done by more expensive American workers. Financial services is another example. Goldman Sachs, which often attracts Trump’s attention, runs its second-largest global office in Bangalore, employing more than 6,000 people. Rather than the stereotype of bored call-center workers, many of these perform sophisticated analysis or management tasks of the type that used to be done only on Wall Street.

There are many ways Trump could target these kinds of relationships. His administration could pressure companies to begin “reshoring” positions, not more basic call-center jobs, which would strike a populist tone, given the fact that many consumers dislike calling helplines abroad. The tax system could be used to target IT outsourcers too, not least the rules, known as transfer pricing, by which global companies are allowed to account for trade between internal units spread around the world. “If Trump wants to go after outsourcing, there are so many ways he could do it,” Saluja says.

Put another way, an initial skirmish over India IT visas is likely to be the thin end of a much bigger wedge. Of course, it’s possible that Bannon and Trump won’t go down that path. Joblessness is rare in U.S. white-collar sectors, meaning that pressure for action against foreigners is weaker. The costs of hiring locally would also be higher for U.S. businesses, which might provoke an even wider backlash from tech companies, many of which are opposing Trump’s wider ban on migrants from Muslim-majority countries. Meanwhile, the likely angry reaction from Indian Prime Minister Narendra Modi might give Trump pause — although, on current form, probably not for very long. It may depend on whether the administration can settle on a single enemy; if the crusade against China continues, India, a democratic power with its own nationalist leader, may be a critical ally.

Perhaps most critically is the fact that Trump’s economic worldview appears firmly stuck in the 1980s, when the location of factories, rather than the complexities of supply chains, was what mattered in the global economy. But Trump’s view of the world may be overshadowed by the nihilistic visions of his advisors, from Bannon to Navarro, who imagine a zero-sum world in which any victory for a foreign company is a loss for an American one — in any sector. Given the bruising record of Trump’s early weeks in power, it would be wise to take that threat both seriously and literally.

Photo credit: CHANDAN KHANNA/AFP/Getty Images