14 January 2015

Information Technology Agreement-II – Should India join?

by Manoj Gupta

Recently we saw how two bilateral agreements made the existence of WTO seem more relevant, by infusing more energy in the apex trade body. While agreement between India and USA on India’s food security programme and subsidies relating thereto allowed the WTO to move forward on the Trade Facilitation Agreement (TFA), an agreement between USA and China on the other hand brought the Information Technology Agreement (ITA) back to the negotiating table and under the media glare once again. Though the expanded part of the latter agreement could not see the light of the day due to some last minute issues raised by South Korea, it is nevertheless important for discussion because according to the WTO sources, this liberalization would be three times bigger than present world trade in clothing.

Information Technology Agreement is one of the earliest plurilateral agreements which started with just 29 countries in 1997 after drafting of IT Agreement during the WTO Ministerial meeting in December 1996 in Singapore and conclusion of the negotiations in March 1997. Unlike other Agreements, the coverage of the products is fixed in the IT Agreement. Every Member country signing this Agreement is required to eliminate tariffs on the IT products listed in Annex A and Annex B to the IT Agreement. Pursuant to this agreement, India eliminated customs duties on 217 tariff lines over a period and the last tranche of reduction/elimination was completed by 2005. The number of participant countries has grown to 80 today.

ITA-I or the original agreement which was concluded in 1997 covered computers, semiconductors and their manufacturing equipments, data storage media, telecommunication equipment and parts and accessories. This agreement is now proposed to be expanded to cover around 200 additional products. ITA-II, seen as the first major tariff cutting deal at the WTO since its inception, would now include next generation semiconductors, medical devices covering equipments like MRI machines and CT scanners, GPS technology devices, printed matter/cards to download software and games, printer ink cartridges, software media such as solid state drives, video game consoles and certain consumer electronic goods. Here, it may be noted that issue of inclusion of electronic consumer goods was raised initially by Hong Kong, Malaysia and Singapore way back in 1998 but was opposed by India along with EU and others.

Once a country binds itself and eliminates or reduces its customs duties on the products covered under this agreement, the commitments have to be implemented on Most Favored Nation (MFN) basis and hence the benefit of reduced tariff and market access would be available to all the countries. This is so, because the tariff reductions are bound in the WTO schedules of the participants. Further, since the commitments are part of the schedules annexed in GATT, individual ITA concessions of each participant are enforceable under WTO DSU also.

Should India welcome the ITA-II also with open hands as ITA-I or is there something which it should be cautious of? There are views, both in favour of as well as against this proposed expansion.

In the 1990s, India accorded priority to growth of IT sector and there was a need for access to economical world class technology to low income sectors, etc. The reduced Customs duties on goods like computers as implemented gradually through the years can be said to be one of the reasons which played its role in India becoming a major software export hub. Here, it would not be out of context to mention that gains in productivity certainly reduces prices, reduced prices raise income saved which in turn stimulates demand leading eventually to overall growth.

Since largest exporters are also the largest importers placing their reliance on the global supply chains, according to one school of thought, it helps any country to allow access to its markets in order to promote its exports. There are of course other options available in India, like taking the route of various export promotion schemes as promulgated under Foreign Trade Policy, but out-right exemption is better than claiming any conditional exemption which involves unnecessary locking up of money in various guarantees and securities/sureties. Such complicated procedures also increase compliance and transaction costs. Unconditional exemption on the other hand gives a clear picture to the foreign company planning to invest in India. Mere opening up of more sectors for Foreign Direct Investment (FDI), would not automatically bring investment unless backed by policy concessions and tax breaks.

However, according to another school of thought, India’s domestic information technology industry also needs to be encouraged and protected till they are competitive enough to withstand any challenge from the developed world, multi-national corporates or from our Asian neighbors. In case, there is a need to reduce the Customs duties, in order to promote exports, the same can very well be done without binding India before the WTO. Further, it should also be noted that foreign markets will not automatically become accessible, for additional products, as soon as the ITA-II is signed. There are number of other hindrances and non-tariff barriers (NTBs) like patents, national/local standards and certifications, which block India’s exports and hence such issues have to be taken up with the concerned countries. Loss of revenue due to elimination of Customs duties is also a point of concern for the developing world.

Effectiveness of this agreement also comes under question when we see that, according to some sources, USA’s trade deficit in computers and parts has only increased after provision of tariff-free access to other countries, particularly China. Further, India’s share in the world’s export of IT products was 0.3% in 2010 while that of Mexico, who is a not a participant in Information Technology Agreement, is 2.7%. Likewise, during the same year, in case of imports of IT products, India’s share was 1.1% while Mexico accounted for 3.5% of the world’s import of such products [see end note 1]. It clearly shows that being a part of the agreement has not helped India on the expected lines. It may be noted that tariffs are already very low in some jurisdictions and some of the bigger consumer economies like Brazil have not joined this agreement and LDCs have always evaded the question of such integration.

So how important is this expansion of ITA for a country like India? Question relevant for India is how the agreement will help its industry and allow more market access. ITA-I did not significantly increase hardware manufacturing capabilities of India though it became a software major. India is a growing market and in case of consumer electronics, it is a major player as far as consumption is concerned. India needs technology and import of critical parts and not fully deliverable consumer goods should be its priority to take forward the campaign of ‘Make in India’. It is another matter that India’s certain preferences to domestically manufactured telecommunication products have been questioned number of times by EU and others – latest being on 16-9-2014 at WTO. It would be better for India to wait and watch how things take shape in 2015.

[The author is an Assistant Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]


End Note:

  1. WTO Secretariat. Based on UN Comtrade.

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