Jun 6, 2015

The ITA II at WTO and India's stand

Way back in 2012, I had written about how India is wrong in opposing ITA 2 agreement at WTO blindly. You can find it here.

ITA 2 is the Information Technology agreement - Version 2, that is currently being negotiated at WTO. The agreement is solely a tariff cutting mechanism in the trade of IT hardware products. India was a signatory to the first version, and rightly or wrongly blames it for the poor state of electronic hardware manufacturing industry in India today. India has strongly opposed any expansion of product coverage under the deal. You may read the news reports here and here. The premise is, if we cut the import duties on electronic goods, our domestic electronic manufacturing would suffer as it would then be easier to import than to produce locally.

In the light of time that has elapsed since the last post,  I thought I should revisit the issue.

Meanwhile, Krugman has opposed USA's trade deals, the transpacific and transatlantic deals that are under discussion. He says that these deals appear more to be oriented towards big pharma and Hollywood's needs, in terms of IPR strengthening, than anything arising through the deal in terms of Ricardian gains arising out of increase in trade volume due to respective comparative advantages in different products by decreasing tariff barriers. Because the tariffs are already at the floor and there is hardly much that remains in  terms of tariff negotiations among these nations. 

The views of our policymakers, in terms of opposing the ITA2 deal at WTO, matches Krugman's latest view of cautious opposition about regional agreements. However, the similarities stop at that. Our opposition stems from the insecurity arising out of lack of knowledge about what would happen if we agree on tariff reductions, and a blind belief that we need to oppose in order to gain an upper hand at negotiations. While one may understand that lack of knowledge may lead to taking wrong positions, one fails to appreciate opposing the deal for the sake of opposing. It is naive to support tariff barriers in IT hardware sector for two reasons.

One, the current IT hardware products are manufactured in value chains spread across nations. An iPhone might have its R&D centre at California, but it is manufactured across multiple east asian countries including China. The parts shuttle across boundaries, without hitting tariff walls, until the iPhone is finally assembled at China and is shipped out. Any country that places an additional cost in terms of tariff walls on the free movement of parts risks being excluded from the chain. If India chooses to keep the barriers, it chooses to continue in the silo that it has built for itself. There is hardly any mentionable IT hardware manufacturing in India today. We blame it on ITA1, whereas the truth lies elsewhere.

Two, we have IT software and services sector, that is doing well, and which has a complementarity  with cheap availability of IT hardware. A reduction in import cost of IT hardware directly adds to the bottomline of this sector.

One must also add that the infant industry argument, when it comes to IT hardware manufacturing sector, doesn't hold good. In this sector, an isolated infant industry, protected by tariff walls, cannot survive in this century. One might suggest a myopic approach of using special economic zones to achieve global integration, but if a policy sounds so good for a zone, it cannot be so wrong for a nation. The right way to go about it is to give right incentives to invest in IT hardware manufacturing in India. The recent efforts by the IT ministry is laudable in the regard. We need to integrate with the global value chains if we are to build economies of scale.

Finally, our officials must acknowledge that the era of tariffs is passe. Countries using such regressive  measures face serious threat of being left out from all regional groupings. If one wants to erect walls, it has to be regulatory in nature, through intelligent non tariff barriers such as quality and technical requirements, IP laws and so on. The game has changed.

Lest I be misunderstood as an 'yay-free-trade' champion, I must put the disclaimer that I am talking specifically about IT hardware manufacturing sector here, with regard to ITA2 agreement at WTO. There are areas such as agriculture, where we still need some direct tariff barriers and such general 'yay-free-trade' approach might not be right.