New Delhi CNN Business  — 

India and the United States are risking a fight over trade and technology. Both sides have applied new tariffs, and the Trump administration has raised objections over barriers American companies face.

Now, there’s reportedly a new threat hanging over the relationship — the United States may be looking to hit India where it hurts by slashing the number of visas available to its skilled workers.

The Trump administration has told India it is considering capping the number of H-1B visas granted to some countries, Reuters reported Thursday, citing three sources with knowledge of the matter. The cap would apply to countries that force foreign companies to store data locally, according to Reuters.

“We have not heard anything officially from the US government on this matter,” Raveesh Kumar, the spokesperson for India’s Ministry of External Affairs, told reporters on Thursday.

The US State Department denied considering a cap on the number of H-1B visas.

“The Trump Administration has no plans to place caps on H-1B work visas for nations that force foreign companies to store data locally,” a State Department spokesperson told CNN.

US Secretary of State Mike Pompeo is due to arrive in New Delhi next week, the first visit by a high-ranking American official since Indian Prime Minister Narendra Modi began his second term in office following a comprehensive election win last month.

Pompeo “looks forward to his trip to New Delhi next week to advance our strategic partnership,” the spokesperson added.

Damage all round

H-1Bs have been a major irritant in the US-India relationship in recent years.

The visa program allows tens of thousands of workers to come to America every year, and India accounted for 75% of approved H-1B applications in 2017 — the latest year for which US government data is available. China, the second-biggest recipient, accounted for less than 10%.

Trump has repeatedly accused tech companies in the United States of using the program to replace Americans with cheaper foreign workers.

His “Buy American, Hire American” executive order in April 2017 called for a comprehensive review of H-1B visas, and his administration has already made several changes to the program.

“This review is not targeted at a specific country and is completely separate from our ongoing discussions with India about the importance of ensuring the free flow of data across borders,” the State Department spokesperson said.

Issuing far fewer visas would increase tension with India and hurt big companies on both sides.

The program has been critical to the growth of India’s $177 billion tech industry, with outsourcing firms like Infosys (INFY), Wipro (WIT) and Tata Consultancy Services leaning heavily on it to send workers to American clients such as Pepsi (PEP)Co, Kellogg (K), Microsoft (MSFT) and GE (GE).

Silicon Valley giants like Apple (AAPL), Google (GOOGL) and Facebook (FB) also make use of H-1B visas. Eric Schmidt, the former executive chairman of Google (GOOGL)’s parent company Alphabet, has previously called the annual limit of 85,000 H-1B visas “the single stupidest policy in the entire American political system.”

“We have emphasized, time and again … the contribution of Indian skilled professionals to the growth and development of the US economy,” said Kumar, the Indian government spokesperson.

A trade group representing India’s outsourcing industry said on Thursday that cutting down on H-1B visas would ultimately hurt America’s global leadership in technology by reducing its ability to attract the most talented workers from around the world.

“If US policy makes it more difficult to hire advanced tech workers, it will only weaken the US companies that depend on them to help fill their skills gaps, put jobs at risk, creating pressure to send technology services abroad,” the National Association of Software and Services Companies said in a statement.

Why now?

Pompeo’s visit to India comes at a tense time. India last week raised tariffs on 28 US goods, including apples and almonds, in retaliation for US tariffs on Indian steel and aluminum last year.

India’s tariffs — believed to affect only about $240 million worth of US exports — are largely symbolic, but point to increasing friction in the trading relationship with the United States. The new tariffs were imposed just days after the Trump administration removed India from a preferential trade program that exempted Indian goods worth over $6 billion from import duties.

The Trump administration is unhappy about the US trade deficit with India, and has criticized Indian regulations on some of America’s biggest companies.

Reuters reported that the US threat to cap H-1B visas was a response to efforts by countries around the world to prevent companies from storing user data outside their borders. India has already imposed data storage restrictions on digital payments — affecting Google, Facebook, and Mastercard (MA) — and is considering similar curbs on e-commerce that would hit Amazon (AMZN) and Walmart (WMT).

India, like many other countries, wants to protect its citizens’ data by forcing companies to store it locally, also making it easier for Indian authorities to access the data when required.

But the US government and companies have pushed back, saying the restrictions will hurt their investment in India and hold back innovation in the country.

“As President Trump has said, trade relationships should be based on fairness and reciprocity,” US Commerce Secretary Wilbur Ross said during a visit to New Delhi last month. “Our goal is to eliminate barriers to US companies operating here.”