ILL-Advised

Just a few years back, only a very few would have thought that the citadel of unhindered and unrestricted free-enterprise, the USA would resort to direct and indirect protectionist measures to safeguard its domestic industry and business and to resolve its economic and social problems, which were accentuating – aggravating with each passing year and reaching menacingly monstrous proportions – negative growth rate of GDP and double digit unemployment ratio. Paradoxically, both the Democrats and the Republicans, instead of addressing where it hurts America the most, viz., ‘defence’ spending, present an “ascerbic essay about the difference between true deficit hawks and showy ‘deficit peacocks’, the latter identified ‘by the way they pretend that the budget problems can be solved with gimmicks like a temporary freeze in non-defence discretionary spending.”

In his State of the Union address, President Barack Obama proposed this temporary freeze in non-defence discretionary spending. To justify his freeze, Obama used language that was almost identical to the widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: “American families are tightening their belt, but they don’t see government tightening its belt.” Obama now: “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.”

Nobel laureate and columnist Paul Krugman has written in the New York Times that, “Presumably, Obama’s advisers believed he could score some political points by doing the deficit peacock strut. I think they were wrong that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.”

To tide over the severe financial crisis and economic slowdown in the USA (which was transported and transformed as a global crisis), Obama administration offered a multi-billion stimulus package to the very rogue financial corporates, who were the reason for the crisis, and now it’s clear the stimulus has failed to lift the country from the morass of the crisis, which led to mass job destruction. Instead of combining actions that will create jobs now and reduce deficit-later, the administration tries to score over the hawks by political gimmicks.

Faced with dwindling popularity ratings just a year into the presidency, Obama might have felt the need to reconnect with his political constituency. The rise of China and India merely provided the focus for a populist pitch taking the form of a renewed pledge to protect jobs. That is not to say, the stated plan to slash tax breaks for firms outsourcing ‘US jobs’ isn’t problematic for India, even as political rhetoric.

Protectionism may win Obama domestic brownie points but, legitimised as policy will cut both ways being open to retaliation. US business will lose to cost-effective companies elsewhere. If other countries too resort to retaliatory measures, the already fragile US economy is likely to crumble. It’s long back that it was an aiding country and over the years the USA had turned into the largest aided country in the world

Foreign countries started to buy US. debt as an investment of their surplus US Dollars. Nowadays, China is the primary holder of US bonds. China owns so many US bonds, there is fear that if they stop buying or withdraw them, the US economy would collapse. By 2009, China holds US debts worth $798.9 billion, followed by Japan $751.5 bn, UK $249.3 bn, Oil Exporters $185.3 bn, Caribbean $171.7 bn, Brazil $144.9 bn. The bonds issue further links the US and China economies so tightly that the USA fear the consequences of a potential slow down in China’s purchase of those bonds. In her visit to China, US State Secretary Hillary Clinton called on authorities in Beijing to continue buying US Treasuries, saying it would help jumpstart the flagging US economy and stimulate imports of Chinese goods. (Source : The US Treasury)

Will India, which is known as the world’s back office, suffer the most by Obama’s move? The IT sector accounts for 5.8 per cent of India’s GDP in 2008-09 up from 1.2 per cent in 1997-98. Though the US contributes 50-60 per cent of its $60 bn revenues, there are other fish in the sea. According to NASSCOM, India’s IT revenues from the Asia-Pacific in 2004-08 increased by a compounded 42 per cent annually. The recession-related cutback in business from America and Europe got Indian firms exploring elsewhere. The US firms generally scout overseas for skills that are scarce or unaffordable at home. So, opportunities for India won’t dry up. Finally, for most US firms, the gains of outsourcing will most likely outweigh the pinch of tax penalties. So as long as it makes business logic, India should see Bangalore or Beijing in the game with Buffalo.

Besides, right from US IT and computer majors like Bill Gates’ Microsoft, Dell, Oracle and manufacturing MNCs like Caterpillar to soft drinks giants like Coca Cola and Pepsi, have not only their operations globally but also make and repatriate home huge profits from around the world. It is highly unlikely that they will approve of the President’s move. If other countries resort to retaliatory steps, the US can give effect to this move only at the cost of its own peril!            

(07-02-10)