Mounting job cuts and pressures from the tax payers are pushing President Obama to impose strict protectionist measures for international outsourcing by bailed-out US companies. Now some experts are starting to say that any similar measures, if adopted by US State governments, could have a devastating effect on the state economies.
Consequently, the advice now being urged upon US state governments is; "do not give in to internal pressures; instead do business internationally as usual."
Indeed the last four weeks have been unprecedented as far as US trade-restrictions are concerned. In early February for instance, the US Senate voted for imposing strict conditions on hiring of people with H-1B visas by American companies that receive federal bailout money. And two weeks later, Obama in his first address to the Congress announced that his administration will end tax breaks for corporations that ship jobs overseas.
"Following these steps there may be stronger voices in the US calling for more protectionism and protectionism could well spill over to the state level in the US," says Rodney A Nelsestuen, Research Director, at the Massachusetts-based IT Consulting firm, the Tower Group. "US states hardly outsource IT services themselves, so the real issue is that state governments might regulate business that are domiciled within their state. And if the federal government imposes protectionist steps, state governments tend to follow the federal government moves by imposing taxes on their own."
He added that US States "can create tax incentives and tax burdens that drive behavior, as well as most states have corporate taxes and they can influence separately their own tax policies. But the real issue is that states need to be very careful about taking any kind of protectionist actions against IT because they could face other barriers from elsewhere."
According to Nelsestuen, while formulating any initiative that gives preference to US-based suppliers, State Governments should keep the following points in mind;
• Procurement processes that become politicized run the risk of proliferating as a "good-old-boy" system of decision making.
• Domestication of IT infrastructure delivery limits scalability and reduces access to IT best practices in an important, increasingly technical, but also highly commoditized service.
• Limiting outsourcing to domestic providers will make the industry less competitive, with fewer value-added services than when global resources are in the bidding process.
• Project selection will be driven by limited capital focused on a higher-cost delivery model.
• Increasing costs may drive architectural decisions to bolt on functions rather than more holistic IT solution strategies.
• Efficiency goals will be redefined with lower expectations, increasing operating costs that will be passed on to clients and customers.
However, says Guillermo Kopp Executive Director, Tower Group, the most important point to note is that "protectionist barriers to international suppliers will cause foreign governments, businesses, and individuals to retaliate in kind by shunning products and services that are being sold abroad by US providers."
Take the US states of Arkansas, Nebraska and Minnesota for example, which have tremendous amount of export of agricultural products. If these states wish to be as protective as the Obama administration wants the US to be, other countries - like Brazil, Russia, India, and China that import agricultural products from these states against exporting IT services to US - may well stop importing commodities from them. "And that could be devastating for these states," says Nelsestuen.
Besides, there could be another significant fallout to the protectionism, particularly with regard to outsourcing and offshoring of IT services. Following the last few years of consolidation in the global IT arena, pure US "domestic" technology vendors are increasingly hard to find.
Last year for instance, US-based vendor EDS was purchased by US-based Hewlett-Packard. Since, both companies have long been global, having operations centers outside the United States, any protectionist move could severely complicate this de facto global status of these companies.
Protectionism, then, would need to be redefined. "Because even as it comes with all good intention in the short rum, it is a very high risk proposition in the long run," says Nelsestuen. "That's because the health of companies based in developed nations depends on their ability to take part in the global economy, and protectionist moves further depress business results in these companies and increase unemployment everywhere."
