The current economic downturn, which has severely affected the technology sector, has been particularly difficult for low-skilled white-collar workers. These workers, who increasingly find themselves unemployed, have drawn significant negative attention to the common American business practice of outsourcing labor-intensive technology functions to workers in emerging market economies, such as India and the Philippines. In the process, they have empowered powerful protectionist interests intent on restricting the burgeoning cross-border trade in technology services. By contrast, American businesses, which critically depend on the cost-savings generated by outsourcing to remain competitive, have been slow to respond to critics of the practice. In large part, the inadequacy of their approach reflects a lack of appreciation about the seriousness of the protectionist groundswell, as well as confusion with regard to their own strategic imperatives. This failing must be promptly remedied if the American economy is to continue to enjoy the very significant benefits of outsourcing.

That outsourcing has become an important aspect of American business practice is now a truism. The practice has become ubiquitous in a wide variety of sectors, ranging from financial services to software, high technology and telecommunications. Equally, the cost savings to U.S. businesses, which are often in excess of fifty percent, are manifestly clear, and extremely valuable in the difficult economic circumstances of the last three years.

Paradoxically, however, the patent benefits of the practice seems to have convinced one segment of American business opinion that the problem is less serious than it seems. Indeed, many believe that the economic argument for unrestricted outsourcing is so obvious on its face that opposition to the practice must necessarily be a fringe-element activity with little hope of long-term success.

By contrast, another group of thought leaders within the American business community, who readily concede the magnitude of the problem, are so alive to the sensitivity of the issue that they seem to be paralyzed by a collective action problem. While they correctly anticipate the delicacy of advancing a pro-outsourcing agenda in the middle of a protracted economic downturn, they are hampered from effective action by their very cautiousness.

In light of recent developments, neither approach seems likely to result in the kind of vigorous response needed to counter opposition to the practice. Since February of this year, protectionist political activists in five states—New Jersey, Maryland, Connecticut, Washington and Missouri—have sponsored or are actively considering legislation to prohibit or severely restrict state government entities from contracting with firms that outsource contracts or discrete services to workers in low-wage developing countries. Additionally, the labor unions, most notably the Communications Workers of America (CWA), have extended logistical support to these activists and have begun to regard the growing controversy over outsourcing as a powerful recruiting tool with respect to white-collar technology workers. If the economic downturn continues, and if such actors better coordinate their efforts, there is a significant possibility that they will advance similarly restrictive legislative efforts in other states or at the federal level to ban or curb outsourcing. Indeed, the recent attempt by WashTech, an affiliate of the CWA, to persuade Congress to examine the allegedly negative effects of outsourcing on U.S. workers, foreshadows a more concerted initiative in the near future.

Moreover, the protectionist camp has realized that there are legislative alternatives to an outright ban on foreign outsourcing that may be equally effective in restricting the practice. For instance, there is currently a bill before two state legislatures that will require call center telephone operators to identify themselves and their geographical before they can service the customer. The customer will then be given the option to continue with that call, or, if the operator is based abroad, to have the call transferred to a U.S.-based operator. Failure on the part of the offshore worker to comply with such procedures would result in the levy of fines and penalties on the company employing that worker. As the sponsors of such bills well realize, variations of this sort are potentially as harmful as statutory bans on foreign outsourcing: in addition to imposing costly and cumbersome regulatory burdens on companies pursuing outsourcing, they also have the potential to create public relations problems arising from consumer pressure against the perceived “export of U.S. jobs.”

The gravity of the backlash against outsourcing, then, is clearly not to be underestimated. Nevertheless, this central fact has not yet resonated sufficiently with the American business community to impel it towards decisive action.

Unsurprisingly, however, the magnitude of the threat has registered powerfully upon India’s technology firms, seventy percent of whose software export revenues are derived from the United States. In recent months, the Indian national software industry association, NASSCOM, has embarked on a high-profile lobbying effort in Washington, D.C. The Indian government has also dedicated resources to the issue in its bilateral discussions with its U.S. counterpart.

Unfortunately, however, the manner in which the Indian stakeholders in this debate have sought to influence its direction is likely to prove highly counterproductive. As a foreign interest group, they not only lack standing to influence mainstream American opinion, they also draw unwelcome attention to themselves and India as somehow primarily culpable for the alleged “export of U.S. jobs.”

For this reason, among others, it is vitally important that the American business community emerge from its quiescence to decisively tilt the emerging national conversation on outsourcing towards free trade in technology services. If popular opinion in the United States is to be convinced that outsourcing is a net benefit to the country as a whole, opposition to protectionist initiatives must be, and be seen to be, forthcoming from mainstream American businesses and employers, the primary beneficiaries of foreign outsourcing.

In other words, American businesses must create a multi-industry domestic coalition to fight restrictions on outsourcing at both the federal and state levels. Specifically, the coalition must redefine the terms of the current debate by emphasizing that foreign outsourcing by private U.S. firms directly increases U.S. business competitiveness, which, in turn, leads to economic growth and the preservation and creation of private sector jobs in the United States. Similarly, foreign outsourcing by U.S. state and federal government entities directly results in significant cost savings, and hence, better use of taxpayer dollars and the more timely and cost-effective delivery of public services. Additionally, in justifying outsourcing, the coalition must address, and be seen to address, the plight of downsized U.S. technology workers. That is, American businesses should not attempt to justify outsourcing solely on the basis of cost savings. Rather, they should pre-empt their protectionist critics by proposing to dedicate some proportion of the cost savings derived from outsourcing for worker-retraining programs. Finally, the coalition must prepare to mount aggressive legal challenges to protectionist state or federal legislation and muster sufficient financial resources to finance such litigation.

For their part, Indian companies and industry associations such as NASSCOM must limit themselves to discreetly providing financial and logistical support to the efforts of mainstream U.S. companies. Such assistance will chiefly consist of helping the coalition to monitor legislative developments in various jurisdictions, coordinate tactical responses and manage public relations. Indian companies can also help mobilize support for the efforts of U.S. businesses among in countries such as the Philippines, Russia, Israel and Ireland, whose technology companies also provide their U.S. counterparts with outsourced services. But it is critical that Indian business interests and their representatives avoid the limelight and, instead, enable U.S. business interests to serve as the principal defenders of outsourcing.

Protectionist opponents of outsourcing have presented U.S. businesses and their allies with a complex challenge in an extremely sensitive economic and political climate. If their opportunistic and economically illiterate assault on the mutually beneficial trade in services between the United States and emerging market economies is to be defeated, mainstream American businesses must take decisive action. The pressing need of the moment is for a homegrown coalition of U.S. business interests that can articulate a nuanced defense of foreign outsourcing practices at both federal and state levels. Active support from other stakeholders in the debate, such as Indian technology firms, may be a valuable addition to their efforts if properly extended, but it is not, and cannot be, an effective substitute.

Rajesh Swaminathan is an attorney at Steptoe & Johnson LLP, a major Washington-based international law firm. His practice includes a variety of corporate, commercial and international trade policy matters on behalf of clients in the financial services, high technology, telecommunications and industrial sectors.

Swaminathan has published widely in leading academic journals on structural adjustment and macroeconomic reform in emerging market economies; the enforcement of economic and social rights; labor market reform; and telecommunications regulation. He holds degrees from Columbia Law School, Oxford University and Williams College and is a member of the New York Bar.