Oct 31, 2012

Why India is wrong in opposing WTO IT Agreement-2

WTO members are actively involved in negotiating the second phase of Information Technology Agreement (ITA - 2) at WTO. The initiative is led by US, and supported by Canada, Japan, Chinese Taipei, Korea, Singapore etc. EU and China too have shown positive signs towards the agreement under consideration. The aim is to bring down the tariff of all technology related goods to zero. The agreement includes computers and peripherals, electronic hardware including semiconductors, computer software, telecommunication equipment, and hardware/Capital Goods to produce the above. You can see here, here and here to know more about this agreement under discussion (or Google!)

Now, I had blogged about the issue of our infant electronics hardware/semiconductor industry here. The issue in brief with our electronics industry is: We are lagging in the race of indigenous development of electronic/semiconductor products, and do not enjoy the economies of scale. The reasons and factors were discussed in previous blog that I mentioned. The situation is grim in the sense that electronic hardware is poised to become 'the' biggest import item by 2020 (beating crude imports) if the current trend continues. Govt has come up, in the past and in recent times, with incentive policies. The latest policy on National Electronic Mission was released last week. You can read more about it here and here. The idea is to encourage domestic electronic hardware/semiconductor manufacturing. The good news is that the projected growth of electronic hardware industry is around 22% based on current trend, unless we do something stupid! 

Policy wonks in Delhi believe signing ITA-2 is one such stupid act. To guage what Delhi thinks, you can read this interesting article from mint on this link. Let me summarize the points in the article. The wonks believe, it is bad to sign ITA-2 because:
  1. It will lead to disadvantage to our domestic electronics manufacturing industry as tariff will become zero and our industry won't be able to compete with imported products on cost. 
  2. It is a plot by electronic giants (Intel, Cisco, Huawei etc) and countries (US, Japan, Korea, China) to retain monopoly. 
  3. It's NAMA by another name and why should India give up the tariff barrier without getting anything in return? 
  4. It includes consumer durables like ACs, Regrigerators and Washing machines under the guise of electronics, which is foul play, as they don't belong to strictly electronic hardware classification. 
Point no. 1 and 2 are actually linked. They are linked by what is known as "International Production Networks" (IPN). You can read an interesting paper on IPN and electronics industry here. Electronic hardware manufacturing is no longer a one country isolated phenomenon. If one sees the manufacturing process of an I-Phone or Nexus tablet, end to end, you will see the involvement of multiple nations and organizations. Semi-manufactured and intermediate goods move back and forth between nations, and firmware and software is designed across national boundaries to bring out the end product. China might be the final assembler, but ASEAN puts in a lot of small components, while EU, US and other countries put in their designs, firmware and software (yes, include India here!). And remember, most of the firms assembling in China, are the global giants in electronics, and not homegrown industries. 

Point 3 is negotiators delight. If you want to see a conspiracy, you can see it everywhere. The game is to get something to give up something. The question I am going to ask later is, by insisting on Point 3, who is losing? 

Point 4 is a no-brainer. One should be able to negotiate out of that by taking a firm stand on correct definition of electronics/digital products. 

The current state of negotiation of ITA-2 is in a stage where it covers 70 countries preparing to sign, covering 97% of IT trade worldwide. India is opposing and is not ready to sign. We want to sit out. 

So what's the idea? 

Let's assume for a moment that India doesn't sign and decides to go alone with its policy missions on electronics and tariff walls and incentives. This would literally shut us out of any calculations of any reasonable participation in any type of electronics IPN. And if IPNs are the future of electronics, we will end up totally isolated behind our tariff walls. That shuts out MNC investment in the sector, as moving intermediate goods to/from the country would incur additional tariff costs, nullifying any other advantage we might incidentally have. 

Of course, India being a big market, final products will keep coming in, with an additional duty burden, thus inflating the costs of such products in India. That would imply, that those sectors which use such goods as infrastructure, would incur additional costs. 

India is suffering in electronic hardware manufacturing sector due to lack of proper planning and investment during 90s. We blame it, rightly or wrongly, on ITA-1 that was signed during initial WTO agreements. That explains some reservation. But it also indicates a lack of understanding of evolving dynamics of electronic hardware manufacturing. Anyone wanting to make it big in this sector, cannot think of doing it in isolation. And what exactly are we trying to achieve with an infant industry, isolated from world production networks, behind tariff walls? Are we serious, when we say on one hand, that we will create some special electronic zones or provide some incentives to this sector, while on the other hand, literally shutting it out of the world? 

I believe, the way to go is to be a part of the team, and not someone who sits outside the field. You don't get to play if you are out. You just watch. And carry water for the players. 

I think the sensible course of action is to bargain hard, and be a part of the team that plays the game. Our special manufacturing zones might then bustle with global MNCs manufacturing and assembling electronic components here, and providing jobs to millions. And who knows, the next Huawei might be our TATA.