Aug 1, 2015

ITA-II agreement at WTO and India: Some points

The Information Technology Agreement - II (ITA-II) is now tentatively finalised at WTO. India has decided to stay away, blaming the earlier version ITA-I for the sorry state of IT related hardware manufacturing in India today, and believing that India needs to retain duties on IT products in order to bring the Indian IT manufacturing industry to speed. This agreement is mainly a tariff reduction agreement that would bring the import duties on agreed products to zero thus (probably) helping trade. 

ITA-I was finalised in 1997, around 18 years ago and included products that are no longer in practical existence, and excluded products that have since been invented. Also, due to faster product life cycles of IT hardware the rate of obsolescence is high. A revision was necessary to that extent. 

There were differences over items in the list, as expected, and the negotiators were able to navigate around to reach consensus among interested parties. 51 countries that agreed to go ahead with ITA-II cover more than 90% of the total IT products manufactured and traded. The countries in the list, especially China, Japan, South Korea and Taiwan strived hard to protect some products they believed their domestic industry needed tariff support. The recent bilateral agreement between China and US on IT products helped in hastening ITA-II. 

There were some news items in the inside pages about this deal in India. There was no notable debate on the subject here. One reason might be that the impact of this deal appears limited to one sector, and that too not a particularly sensitive sector like agriculture. However, as India is looking to become a manufacturing hub, this sector cannot be ignored. Also, given that electronic hardware imports will surpass oil imports in coming decade, this sector will gain importance. The stand that ITA-I has harmed our IT manufacturing sector was accepted as wisdom, without anyone substantiating as to how exactly ITA-I damaged our industry.  That premise, or wisdom, needs to be questioned. 

Let me take a simple case. Suppose a high tariff on Cisco IP-phones, which the IT services sector uses commonly in voice conferencing, is essential to protect our infant domestic industry that makes digital phones. How do you justify the cost and does it really help to place such products behind tariff walls? 
Logically, the benefit of high import duties on Cisco phones should go to domestic equipment manufacturers, local firms that make similar equipment. There are currently very few suppliers of such phones in the world who can compete with Cisco. The technology might be easy for a local firm to duplicate, but the economies of scale (the product is mainly manufactured in China), the proprietary communication protocol it uses, and the established network support of Cisco will keep it ahead. In short, the entry barrier is steep. So a domestic firm replacing Cisco is ruled out in near term.  Therefore, a tariff barrier in India would directly add to the cost of IT services knowing that the demand for Cisco IP phones is almost inelastic.
That leaves us with the other possibility. Cisco might consider manufacturing in India to avoid high import duties and make the product cheap for Indian customers. This possibility arises if India becomes a significant market, that provides manufacturing cost advantage, and Cisco senses that it would lose out on another competitor who produces locally. Otherwise, given current monopolistic domination of IP phones by Cisco, it is difficult to imagine Cisco moving into India from China. China currently provides other advantages in terms of good infrastructure including better connectivity. 
Also, there is a significant effect of global value chains on IT hardware manufacturing. I have blogged about this in detail earlier.
Given the above, the cost of imposing import duties on Cisco phones would directly pass on as additional cost on IT/ITES sector. Of course, Govt. would be slightly richer by way of import duty collections. 

Most of the products on the ITA-II list are similar. They are used by IT software sector (LCD screens, processors, printer ink etc), or by IT hardware manufacturers (NC machine tools etc). Of course, there are nonsense consumer items which can be considered simple white goods and not IT hardware. Products such as smart refrigerators, smart air conditioners, LCD televisions are unacceptable in the list. Some were opposed and struck down, such as LCD television, but some still exist. India should have probably bargained to remove such white goods, while not totally walking away.

I mostly agree with India's stand of walking away. This has given India the flexibility to take a call on each product independently. If India wishes, she may impose or reduce duties on items of interest. However, knowing that we have product lines with inverted duty structures, items where raw material duties are higher than on finished products, the ability of commerce/finance ministries to strategise on such details is moot.
Also, the fact that there was no brouhaha over India not getting into the deal points in the direction that we do not matter at world stage in this area, indicating that probably this is not the right time for India to get into ITA-II. We would be in bad bargaining position.
Nevertheless, we need to work on IT hardware manufacturing, given that we would be moving into increasingly digital age where even the governance would need huge IT hardware. There are some good (M-SIPS) and some half hearted initiatives (DGFT) related to this by various ministries. It's time an umbrella strategy is made and implemented to avoid getting caught in a situation where we continue hiding behind tariff walls, to protect the ever infant industry, and opposing ITA-III, IV or whatever number the world agrees on.