India having lost the WTO dispute on customs duties on mobile phones and certain other IT products is now old news. But an important facet of the dispute appears to have escaped attention of the analysts — why did India voluntarily join the WTO Information Technology Agreement (ITA) in 1997 and commit to eliminating customs duties on about 200 IT products? An answer to this question has enduring lessons for trade negotiators from India and other developing countries.
At the outset, recounting a bit of history of the ITA appears relevant. During the first ministerial conference of the WTO held in Singapore, a few WTO Members concluded the ITA on December 13, 1996.
Under the agreement, the participants decided not to impose customs duties on about 200 products related to the IT sector.
The main proponents of the ITA included the European Union (EU), Hong Kong, Japan, Korea, Singapore, Thailand, and the US. These WTO members were either benefiting from royalty flows from sales of branded IT products, or had become significant manufacturing hubs in this segment on account of foreign investment from the developed countries.
In short, countries with strong technology and manufacturing base stood to benefit from the ITA. On these twin aspects India was on the backfoot.
While India did not join the ITA at the Singapore ministerial meeting, it appears to have engaged actively in negotiations on this issue. It is relevant to recall what India’s Commerce Minister said on this issue in the Lok Sabha on December 16, 1996: “India had taken the view that strengthening of the global information technology infrastructure would be generally beneficial and therefore, subject to the interests of domestic producers being adequately safeguarded, India could consider joining the programme of phased tariff reductions.”
Subsequently, when India joined the ITA, the press release of the Commerce Ministry dated 26 March 26, 1997 highlighted that the interests of the domestic industry and the need to enhance the competitiveness of Indian IT industry had been carefully balanced. It boldly asserted that “by deciding to join the IT, India has taken the most important step forward into the information age”.
The rose-tinted view of ITA changed soon. This is what the website of the Department of Commerce (DOC) continues to say till today: “India’s experience with the ITA has been most discouraging, which almost wiped out the IT industry from India”.
What explains the slide from an almost euphoric perception of the ITA in 1997 to the downbeat assessment about it a few years down the line? With the luxury of hindsight, it can be speculated that the basis of the decision to join the ITA seems flawed.
The central objective of joining the ITA appears to have been enhancing the competitiveness of IT services by making hardware imports cheaper — a laudable objective.
However, a relevant question that should be asked is — how substantial was the contribution of IT hardware to the overall value-addition of IT services? Calculations using OECD’s Trade in Value Added (TiVA) database suggest that in most of the years during 1995-2018, for each $100 of IT and telecommunications services sold in India, machinery and equipment, including IT hardware, contributed less than $1 to the final output of IT services and $2 for telecommunication services. More than 50 per cent of the input cost is on account of IT services itself, such as salaries; hardware is a one-time cost.
This raises questions regarding the extent to which the ITA contributed significantly to enhancing the competitiveness of IT and telecommunications services in India.
After joining the ITA, was the government able adequately safeguards the interests of India’s IT hardware industry? The answer is an emphatic no — a fact admitted by the government on the DOC website.
Calculations based on the TiVA database suggest that the India’s domestic producers of computer, electronics and optical products, the category which comes closest to ITA products, took a massive hit.
Their share in total demand of these products in the country plunged from 70 per cent in 1995 to around 45 per cent in 2011. Having signed away the right to impose customs duty on IT hardware, the government was left with no effective policy instrument to protect the domestic IT hardware industry.
If India had not joined the ITA, the government would have retained the option of keeping customs duties low, but raising it when the domestic industry was unable to cope with imported IT products. This would have been a more useful way of balancing the competing needs of IT services and IT hardware industry. Of course, government officials would not have had the benefit of OECD TiVA while taking the decision to join ITA.
In conclusion, often trade negotiators are called upon to take crucial decisions without having sufficient information. It is reasonable to assume that India’s negotiators would be facing this problem in ongoing FTA negotiations with the UK and the EU, as well as in the engagement with the US under the Indo-Pacific Economic Framework for Prosperity (IPEF).
In particular, it may be difficult for the negotiators to envisage the interventions which the government might be required to make in future in sectors with fast-changing technology.
A useful rule of the thumb should be to choose an option that preserves the policy flexibility of the government to support its domestic producers to the maximum possible extent. Being deprived of policy tools through trade agreements for supporting domestic producers, especially in new and emerging areas, can come to haunt India. In its ongoing trade engagements, the country can ill-afford to repeat the mistake made in the context of ITA.
The writer is an expert on international trade issues. Views are personal