The celebration and the hangover

The US has always had two very different faces, one internal and one external. Internally, it has been a global beacon of democracy, empowerment, and equal rights for the powerful and powerless. Externally, it has used its military and economic power to bully others into submission, sometimes gently and sometimes bloodily. Its internal face is admired across the globe, while its external face is widely disliked.

Barrack Obama’s victory burnishes the US internal face as never before, and has rightly been celebrated across the world. How fantastic that a country that enslaved black people for centuries, that did not even permit them to vote freely till 1964, should now elect a black President! The US has triumphed over its own history, making race and colour irrelevant in ways unimaginable even four years ago. It is a triumph not only for Obama but for all Americans, and for the very idea of America.

Having celebrated the internal US triumph, we must now ask what Obama’s victory means for the external face of the US. The answers are sobering. Indeed, one cannot rule out a hangover.

Indian politicians and businessmen have hailed Obama’s victory, yet plainly have reservations. Obama’s campaign slogan for change, chanted endlessly by his followers, was “Yes, we can”. What exactly does that portend on specific issues?

Now that the US is slumping into the worst recession since 1979, can Obama take measures to reduce the outsourcing of software and business services to India, and reduce visas to Indian software engineers? Yes, he can.

Can he take measures to reduce the flow of direct and portfolio investment to India? Yes he can. He wants to raise the capital gains tax from 15% to 20%. That worsens the risk-reward ratio for US investors, and will make them more reluctant to invest in emerging markets like India, which are considered riskier than the US.

Can Obama devise tax and other measures that will penalize US companies that invest abroad, in countries like India, rather than in the US? Yes, he can.

Can Obama come out with protectionist measures to shift jobs from poor countries to the US? He not only can, he has promised to do so.

Can he increase subsidies for and compulsory use of corn-based ethanol, measures that have caused a big spike in world food and fertilizer crisis? Yes, he can.

Can he kill the Doha Round of the World Trade Organisation by taking a much tougher line than Bush on keeping US farm subsidies high? Yes, he can.

Can he act against India for building up its forex reserves, and hence keeping the rupee stronger than it would otherwise have been? Yes, he can. He has in the past voted to penalize China for doing just this. The current financial crisis has it is wise for Third World countries to keep high forex reserves, but this is not recognized by protectionists in the US.

Now, we must not exaggerate the risks. Politicians are typically more populist during an election campaign than when they assume office. Obama’s most protectionist rhetoric has been aimed against China and NAFTA rather than India. But a major recession has begun, and US unemployment could rise to 8-9%. There is talk of Obama engineering another New Deal. Warning: the New Deal was the most disastrously protectionist era in US history.

What about foreign policy? There are some positives here. Obama voted against the invasion of Iraq. Bravo! He has pledged to bring US troops back from Iraq quickly, and favours negotiations with Iran. Yet the Bush administration has already moved in these directions in the last 12 months, reversing its earlier muscularity. Obama plans to bring some Republicans into his Cabinet, in search of political unity. This suggests that foreign policy may not change all that much.

To the extent it does, it may not be comfortable for India. Can Obama put pressure on India on Kashmir? Yes, he can. He has said that if only the Kashmir issue is settled, Pakistan can better concentrate on Al Qaeda and the Taliban.

The Indo-US nuclear deal is through. But can Obama come up with hurdles on details, like licences for dual-purpose technology? We hope not, but yes, he can. His supporters include non-proliferators who still want to punish India.

Can he insist that India should enact a law limiting the liability of US nuclear suppliers in the event of an accident at an Indian nuclear power plant? Can he urge India to sign an international convention shifting liability from equipment suppliers to the company running a nuclear plant? Yes, he can.

Here again, we must not exaggerate the risks. In practice, US policy may not change much. But history shows that Indo-US relations have usually been better under Republican than Democratic Presidents. Democrats are more protectionist, and tougher on nuclear non-proliferation.

Bill Clinton was personally popular in India, but never did anything for us except impose sanctions after Pokharan II. Bush was personally unpopular in India, yet did us yeoman service by pushing through the nuclear deal. Can Obama do anything to match that? Yes, he can, but I rather doubt that he will.

What do you think?