Tuesday, June 19, 2007

Cap on H1B visas tantamount to local subsidy?

Since 2003, there have been raging debates in the USA about developing countries (read US competitors) using exchange rates as a mechanism of giving indirect subsidies to the home country exporters. To my knowledge the law makers in US have even approached the WTO to consider artificial exchange rate mechanism as an indirect subsidy and as such qualify for anti-dumping duties.

Let us take the case of India. Their argument runs thus:

- RBI keeps the exchange rates fixed (or weak) in order to help the exporters realize more rupees for each dollar.

- To do this RBI purchases excess foreign currency in the market and thereby build up huge forex reserves. Such reserves are kept with RBI itself at a nominal interest rate.

- In order to buy the forex, RBI needs to release an equal amount of rupees in the Indian market. Over supply of rupees leads to inflation.

- In order to bring down inflation, RBI issues bonds at a higher than market rate and attracts the excess rupees back into its fold.

- The difference in interest rates, i.e., forex reserves interest rate and the bond rates, is the indirect subsidy that the exporters are getting in order to remain competitive in the international arena.

Or so the argument runs, at least from the US side. Come to think of it, there is no flaw in this argument because that is what exactly both India and China (in a more severe manner) are doing.

But trade is not just goods. Trade includes services too. And in today’s world services form a larger component of trade than hard physical goods. In 2006, of the $21b worth of exports to USA, roughly 60% constituted services portion.

Therefore shouldn’t a cap on H1B visas by US law makers be considered as a subsidy?

By putting a cap on H1B visas, the US government is in turn restricting the quantum of services that India could have liberally provided in its absence. They are safeguarding their software professionals from international competition and are artificially protecting the price of services that could potentially be much cheaper / better quality.

While I am not in a position to comment on the exact monetary impact on the domestic economy, I am sure the cap in H1B visas acts as a deterrent for companies to actively export their services to USA. It is in a sense a double blow of (a) subsidizing the local US software professional and (b) invisible anti-dumping duty on providers of such services.

Unless USA can justify its artificial cap on H1B visas, it is on weak moral ground to raise its concern on India’s (or for that matter China’s) monitored currency exchange rates.

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