Why Is China Scaling Back ITA Expansion Ambitions When It So Clearly Benefits?

Last week, China precipitated a suspension in global negotiations to expand the Information Technology Agreement (ITA) by asking for the removal of about 100 products from ITA expansion negotiations. Originally signed in 1996, 75 nations now participate in the agreement, which completely removes tariffs on eight categories of information and communications technology (ICT) goods covering hundreds of products. But as the agreement has not been updated since it took effect in 1996, negotiators have been working over the past year to add coverage to the myriad products invented since then—such as multi-component (MCO) semiconductors, GPS systems, and video game consoles—or ones that were not originally included in the agreement—such as flat screen TVs, DVD players, audio speakers, and video recording equipment.

In fact, negotiators have identified 256 ICT product lines for possible ITA inclusion. But when countries began identifying “sensitive” items they either wanted to exclude from the agreement or reserve for tariff phase-outs over several years, China identified 148 products, including 106 it wanted to remove outright. In contrast, the European Union identified ten sensitive products, the United States one, and Canada zero. The next biggest “sensitivities” list was more twice as short as China’s. This desire to scale back ITA expansion ambitions was both surprising and disappointing, because the ITA has been a boon for developed and developing countries alike, particularly for China.

As ITIF argued in The Benefits of ITA Expansion for Developing Countries, the ITA and ITA expansion benefit developing countries in five principal ways, by: 1) boosting exports of ICT products and services; 2) undergirding the development of ICT software and services industries; 3) promoting innovation in developing countries’ ICT sectors; 4) contributing to the competitiveness of developing countries’ manufacturers; and, most importantly, 5) lowering ICT costs, which facilitates the diffusion and adoption of affordable ICT products and services that in turn boost productivity and innovation and thus enhance economic growth. On each of these accounts, ITA participation has benefitted China enormously.

By removing tariffs on the importation of ICT products in all ITA-participating countries, the ITA has proven instrumental in turbocharging global trade in ICT products, which increased more than 10 percent annually, from $1.2 trillion to $4.0 trillion, from 1996 to 2008.

Perhaps no country has benefited more from this than China. When the ITA was originally signed in 1996, China accounted for 3 percent of the world’s exports of ITA-covered products. Today, China accounts for one-quarter and leads the world in exports of computers and telecommunications equipment, and ranks second in semiconductor exports. In fact, China boasted a 34 percent compound annual growth rate in exports of ITA-covered products from 1996 to 2008, the third-highest rate in the world, bested only by Hungary and Slovakia at 37 percent each. Today, ICT goods exports account for 29 percent of China’s total goods exports, and from 2000 to 2010, China’s ICT goods exports as a percentage of all Chinese goods exports increased by 57 percent. The ITA has also contributed to a dramatic increase in Chinese exports of ICT services, as from 1996 to 2011, ICT services exports as a percentage of China’s total services exports grew by 81 percent.

As the U.S. International Trade Commission (ITC) concluded, “China’s rise to preeminence in the global ITA market is the most significant shift in ITA trade in Asia—and the world.” And it’s important to note that, while China benefitted immensely from the ITA before it acceded to the agreement itself in 2003—the ITA operates on a World Trade Organization (WTO) most-favored nation basis, meaning that even if a country is not an ITA member, its exports of ITA-covered ICT goods to ITA-member countries are not tariffed—even after China joined the ITA and eliminated its own tariffs on ICT products, it continued to benefit. As the U.S. ITC observed, “China’s ITA trade accelerated after implementing its WTO commitments to reduce trade impediments, including eliminating its tariffs on ITA products. By 2003, when China entered the ITA, it was already the third largest exporter…by 2008 it was the largest.” In short, by promoting explosive growth in global trade in ICT products, the ITA has acted as an enabler to China’s (not to mention other developing countries’) export-led growth strategy.

The ITA has also proven instrumental in boosting countries’ innovation potential in the ICT sector itself. As the World Trade Organization’s 15 Years of the Information Technology Agreement report notes, “Among developing ITA participants, the rise of China, Korea, and Chinese Taipei as the top traders in the GPNs [global production networks] of IT products is mirrored by a profound shift of relative innovation efforts into ITA-related industry fields in these economies.” The report notes, for example, that, “patenting activity among applicants from China shifted disproportionately into computer technology and telecommunications after 2000.” Put simply, ITA participation boosts countries’  innovations in ICT industries. This means that it will be by continuing to participate in the ITA—and indeed broadening it—that China can expand its innovation capacity in ICT sectors, allowing it to move up the value chain toward higher value-added production and design activities. Further, it’s worth noting that modern manufacturing processes increasingly rely on sophisticated ICTs—such as digital-control systems, computer-aided design (CAD) modeling and simulation software, robotics, etc.—making access to cost-effective, best-of-breed ICTs a foundational building block for any country’s manufacturing base. If China wants to realize its goal of expanding its manufacturing base while migrating it further up the value chain, expanding tariff elimination on a larger range of cutting-edge ICT products through ITA expansion will play an important role.

But for all this, it’s not from bolstering ICT exports or even boosting the innovation potential of China’s ICT or broader manufacturing sectors that the ITA has most benefitted China. For the reality is that, while ICT production is important for economies, the vast majority of economic benefits from technology—as much as 80 percent—come from the widespread usage of technology, while only 20 percent of the benefits from technology comes from its production. ICTs are so powerful precisely because they enhance the productivity and innovative capacity of every individual, firm, and industry they touch in an economy. Indeed, ICT is “super capital” that has a much larger impact on productivity and innovation that virtually any other form of capital. Ultimately, ICTs’ productivity-enhancing and innovation-enabling benefits at the individual, firm, and industry level aggregate up to enable productivity and economic growth at an economy level. And this is why ICT usage has played such a critical role in China’s broader economic growth, accounting for 38 percent of Chinese total factor productivity growth and as much as 21 percent of GDP growth from 2000 to 2006.

As Richard Heeks of Manchester University writes, “ICTs will have contributed something like one-quarter of GDP growth in many developing countries during the first decade of the 21^st century.” As there is a 1.5 percent increase in demand for every 1 percent drop in price in ICT products, by eliminating tariffs on hundreds of ICT products, the ITA has played an instrumental role in spurring adoption and diffusion of a wide range of ICT products and services—everything from mobile phones, tablets, and laptops to the Internet itself—that boost productivity and economic growth in China.

Ultimately, if China wants to restore the 8 to 10 percent annual GDP growth to which it has become accustomed, it can't do so by creating a few hundred thousand jobs in some ICT manufacturing industries, it has to do so by transforming all its industries—including non-traded ones in domestic-serving sectors of the economy—and having those sectors use more ICT and so more efficiently will be a key driver of that. Not reducing tariffs on these key ICT growth drivers is going backwards, not forward, for China.

To be sure, the ITA has not been the only reason behind the growth of China’s ICT industry, or broader economy, since 1996. A number of other factors, many good—such as China’s dramatically increased investments in research and development (R&D) and its graduation annually of hundreds of thousands of highly skilled scientists and engineers—and many distortive—including forced localization policies such as forced production or technology transfer as a condition of market access—have also contributed. And certainly China needs to winnow its use of the latter type of policies and expand its use of the former, of which ITA participation counts as a prime example.

Still, there’s little doubt that China’s participation in the ITA has significantly benefited the country, deepening China’s role in global value chains, boosting its exports of ICT goods and services, and boosting the innovation capacity of Chinese firms, including those in its manufacturing sector. Hopefully, upon deeper inspection, China’s leaders will come to see broad ITA expansion for the win-win-win promise it holds for China, other nations (developed and developing alike), and indeed the broader global economy.