A Welcome Expansion of the Information Technology Agreement Has Arrived

On July 1, the global production, trade, and usage of information and communications technology (ICT) products received a long-awaited boost when the expanded Information Technology Agreement (ITA)—a trade agreement that eliminates tariffs on hundreds of ICT products—came into force. The World Trade Organization (WTO) considers the initial ITA, concluded in 1996, as one of the most successful trade agreements ever. The expanded ITA is the biggest tariff-cutting deal in WTO history. It’s hoped that the deal will have similar success in driving ICT-based trade, productivity, and innovation as its successor.

The expanded ITA will build on the significant impact that the initial ITA exerted on growing global ICT trade. From 1996 to 2008, total global two-way trade in ICT products covered by the agreement increased by more than 10 percent annually, from $1.2 trillion to $4.0 trillion. The expanded ITA promotes affordability and accessibility to a new generation of ICT products by eliminating tariffs to trade on an updated list of 201 ICT products. The initial ITA cut tariffs on eight categories of ICT products, such as semiconductors, computers, and telecommunication products. The latest list includes scores of products that the initial ITA did not cover, such as types of computer memory, and many new and innovative ICT products, such as multi-component semiconductors, GPS devices, medical devices, and video games. This expansion eliminates tariffs on $1.3 trillion in annual exports, which represents about 10 percent of total global trade.

Updating the ITA will not only lower prices and help boost exports, but also facilitate greater diffusion and adoption of ICT worldwide, as ITIF argued in Boosting Exports, Jobs, and Economic Growth by Expanding the ITA. With greater ICT use, there is more productivity and economic growth across the global economy—a win for all participants. Just as important, the expanded ITA can further empower the formation of global ICT supply chains, which have enabled a shift from a closed, linear innovation model to an open innovation model that relies on close collaborations among suppliers, network partners, and customers to bring new ICT products to market. For example, the Organization for Economic Cooperation and Development (OECD) has found that the probability of innovation in a firm increases with the intensity of ICT use and that this holds true for both manufacturing and services firms and for different types of innovation.

Implementation of the ITA expansion was not without complications, especially considering some hurdles introduced by China. July 1 marks a significant date because this is when tariffs on two-thirds of the 201 ICT products will be eliminated, with the vast majority of the remaining tariff cuts phased in between now and 2019. However, China played a last-minute delaying role in negotiations by pushing for much longer phase-out periods (five to seven years) for more than half their products, including major tech items of interest to the United States, such as advanced semiconductors. China also proposed a last-minute amendment to set in place a trigger that would suspend the deal if membership slipped below a “critical mass” of countries, further holding up negotiations. There are also concerns about China’s implementation of the agreement. China’s approach to the ITA expansion is hard to understand given that it has benefited tremendously from the initial ITA, as ITIF argued in How ITA Expansion Benefits the Chinese and Global Economies.

While implementation of the ITA expansion gets underway, focus will start shifting toward getting more countries to join. Membership in the Information Technology Agreement is voluntary as it is a plurilateral agreement, not a WTO agreement. Moreover, because the ITA was negotiated on a most-favored nation basis, the tariff eliminations will apply to all WTO members. In other words, a country does not have to participate in the ITA for its exports of covered ICT products to receive zero-tariff treatment in ITA-participating nations. While some nations have thought they could “free-ride” on this arrangement by keeping their own tariffs on imports of ICT products high while in many cases enjoying tariff-free treatment of their own ICT exports, this reasoning has proved fallacious. Rather, the reality is that countries (such as Argentina, Brazil, and South Africa) that have elected to not participate in the ITA and to keep their tariffs on ICT imports high have seen their participation in global value chains for ICT products decline by over 60 percent since the ITA was initially chartered in 1996.

The original ITA has grown from an initial 29 countries to 82, representing approximately 97 percent of global trade in the goods covered. The expanded ITA starts off with 53 WTO members, including a broad range of developed and developing countries, which account for 90 percent of world trade in these ICT products. Many of the holdouts to joining the ITA expansion are developing countries, which stand to gain a range of benefits by joining the ITA, as ITIF has argued. It’s encouraging to see that Kenya, Moldova, Vietnam, Georgia, and some Arab countries have expressed interest in joining ITA expansion.

Nevertheless, many developing countries, such as India, Indonesia, and Nigeria, continue to see tariffs as a way to pursue misguided state-directed industrial development policies, instead of focusing on measures that raise across-the-board productivity growth. For example, India, while a member of the initial ITA, did not join its expansion, claiming that it has not benefited from the agreement. Lamentably, India continues to see tariffs as a tool to protect domestic manufacturers, applying an average tariff of more than 13 percent on technology goods, including new 10-percent tariffs on some ITA products, in contravention of the initial agreement.

For developing countries, if the policy objective of imposing high tariffs on ICT products is to incentivize domestic ICT production (i.e., to promote import substitution industrialization), why does doing so tend to produce the opposite result? In large part, the answer is that the globalization of ICT supply chains means that ICT products often move across several countries in their production, with key components added at various steps in the process before final assembly occurs. In this case, as noted, high tariffs on ICT parts and products simply compel ICT firms to bypass these countries entirely in their global supply chains and manufacture and assemble elsewhere.

Empirical evidence demonstrates the misguided logic of high tariffs on ICT goods. The World Trade Organization has found that, on average, signatories to the initial ITA increased exports by 8.5 percent and increased imports by 9 to 10 percent. Importantly, this finding suggests that many ITA signatories were able to tap into cheaper intermediate goods imports to grow their ICT industries, leading to cheaper and greater quantities of final goods for exports. It’s no surprise that the top 10 ICT exporters are also the top 10 importers as global production networks, meaning that different countries contribute components that come together to create the final good.

The expanded ITA agreement shows that sub-groupings of WTO members can come together to deliver new economically significant outcomes on trade. In terms of what’s next, given the ITA’s success for physical ICT goods, finishing negotiations on a services plurilateral—the Trade in Services Agreement (TiSA)—would be a natural complement given the critical role that services play in modern trade, as ITIF argued in Crafting an Innovation-Enabling Trade in Services Agreement.

Note: This article was co-authored with Stephen Ezell, Vice President, Global Innovation Policy, ITIF.