The Ohio ban comes on the heels of a series of protectionist measures and proposals by the US government targeting the IT industry. In August 2010, the US government hiked H1B and L1 visa fees, causing a hue and cry in India over the cost implications for Indian IT companies. Earlier, the US President had proposed tax cuts for jobs created in the US and not those outsourced, raising alarm bells in India and China. Hence, a protectionist mood has been prevailing in the US ever since the 2008 crisis, reflecting the domestic compulsions of an economy in recession, with unemployment hovering around 10 per cent.

Although NASSCOM and the Indian Ministry of Commerce have criticised these measures and are taking these up with relevant US officials, it is widely believed that India’s $60 billion IT industry will remain unaffected financially. Government outsourcing constitutes a small share of the Indian offshore work and is also a small part of overall US and global demand for offshore services.

But does this mean that Indian government and industry should continue with business as usual if there’s little immediate impact to be concerned about? This might not be the correct response. Both government and industry should take a long term view of such protectionist measures and assess the take-away for their integration strategies and negotiating priorities.

There are broadly four sets of issues that are thrown up by these recent developments.

First is the importance of diversifying export markets and the export basket to mitigate the impact of protectionism in key segments such as services outsourcing. About two-thirds of India’s software services exports are to the US market. Over 90 per cent of this industry’s revenues are based on export earnings. Given this high dependence on the US economy and its trade policy swings, with little cushion from the domestic market or third countries, protectionism in the US necessarily raises a stir in India. The Ohio ban or the earlier visa fee hikes should spur Indian companies to explore opportunities in other developed countries and regions to reduce this vulnerability. Equally important is the need to serve the domestic market in India and to increase linkages with the domestic economy. Likewise, Indian companies also need to diversify the basket of software services exported, moving into intermediate and higher value services which are less likely to be seen as taking away mass low skilled jobs in developed countries and which are less prone to being shifted to competing destinations or back to the home country.

A second issue highlighted by the Ohio ban is the need for developing country companies to complement their offshoring activities with other modes of engagement. Companies engaged in offshore work must consciously attempt to visibly contribute to their client country markets, through local subsidiaries and employment creation. Such tangible presence is important as the benefits of offshoring are for the most part not directly evident or understood by the public. Several of the larger Indian companies engaged in outsourcing are already localising their operations in client country markets. Local presence needs to be increased over time, alongside the expansion of offshore development work, if political economy concerns are to be kept under check. Such engagement could also facilitate synergies in trade and investment relations by helping build local investment contacts and relationships with overseas clients, by increasing trade flows in related areas, and by enabling a better understanding of the mutual gains from outsourcing and spinoff benefits to the home economy. It could also help in strategically negotiating the movement of service providers as a facilitator to investment presence in the client country.

A third important take-away from the Ohio ban is the need to pre-empt similar restrictions in future by taking a strategic approach to economic relations, particularly through integration arrangements covering services and investment. India’s recent CECA with Singapore, CEPA with Korea, its soon to be signed CEPA with Japan, and its ongoing negotiations encompassing services with partner countries such as Australia, reflect this strategic approach. Not only can such efforts help in export diversification, they can also help pre-empt spillover of protectionism from the US to other developed countries and regions.

The Ohio outsourcing ban also requires developing countries like India, which are not yet signatories to the WTO’s Government Procurement Agreement (GPA), to examine their position on government procurement, multilaterally and bilaterally. The market for government outsourcing is likely to grow in future and such bans could hurt in future, even if not today. Might it then be in the interest of a developing country like India to become a signatory to the GPA and to make government procurement a part of its bilateral negotiations (a contentious issue thus far). Of course, the potential benefits from being able to challenge future government outsourcing restrictions would need to be weighed against other national considerations.

In sum, the recent US restrictions on outsourcing require developing countries like India to move beyond standard rhetorical responses and to consider new approaches that can secure their long-term strategic interests.

Rupa Chanda is Professor of Economics at the Indian Institute of Management, Bangalore.