ITA-2 could put India at a debilitating disadvantage in the digital age

Rashmi Banga, Senior Economic Officer, UNCTAD, explains the moot issues vis-à-vis the complaints made against India’s customs duties on electronics products under ITA-1, and how the agreement impacted India’s competitiveness in the electronics sector. She also elaborates on why India (and other developing countries) should be extremely careful about signing ITA-2, as the implications of this agreement are even more dire from a futuristic perspective.

The onset of the Fourth Industrial Revolution promises massive changes in production, management and governance across the globe. It is expected to bring unparalleled and exponential transformation in industries. The era of millions of mobile devices, coupled with emerging technologies like artificial intelligence (AI), autonomous vehicles, 3D printing, nanotechnology, biotechnology, quantum computing, etc. is expected to breed myriad possibilities & opportunities that are unimaginable in the present day.

But at the same time, it also bodes unimaginable risks for organizations and nations, as these technologies could alter the competitive landscape permanently post-COVID. This is because the ecosystem and know-how for these technologies are presently housed in a few countries. Unless regulated properly, this lopsided growth trajectory could further intensify, putting many countries at a possibly debilitating disadvantage.

This dilemma is well exemplified by the ongoing discussions at the WTO over India’s ICT duties. Chinese Taipei and Japan have raised complaints against India’s imposition of duties on certain electronic goods including telephones for cellular networks, machines for reception, conversion and transmission or regeneration of voice, images and other data, etc. They allege that India has imposed duties greater than the bound rate of 0% committed under the ITA-1 agreement. EU has also challenged India’s ICT duties on products like base stations, mobile phones and components, base stations, integrated circuits, etc, alleging that it affects € 400 million in annual ICT exports. India has maintained that the products in question are beyond its commitments under ITA-1, and it is not a signatory to ITA-2.

Both these agreements have to be viewed in a much larger context, but first let us understand their background. ITA-1 was signed in 1996 with 29 participants initially (EU as one member), where the signatories agreed to eliminate custom duties and other duties and charges on selected IT products on MFN basis. In 2019, there were 52 participants of ITA-1 (EU as one member). The ITA-1 products broadly cover many high technology IT physical products including computers, telecom equipment, semiconductors, semiconductor manufacturing and testing equipment, software and scientific instruments and a significant number of other products.

In 2015, at the Nairobi Ministerial Conference, some WTO members concluded the expansion of ITA (ITA-2), which was signed by 25 participants, including US, EU and China. In 2019, the number of ITA-2 participants reached 27, with the inclusion of Macau and Georgia. While ITA-1 focuses on physical IT products and traditional carrier media of software, ITA-2 covers all electronic transmissions like software and digital content; digitized and digitisable products like photographic or cinematographic products, touch screens, GPS navigation equipment, video game consoles, portable interactive electronic education devices, etc along with physical IT products. These products and software are now being extensively used in digital technologies.

Undone by the fine print

Now let us look at the implications of signing ITA-1 from India’s perspective, which will also help us understand the broader context of this issue. If you look at the balance of trade in ITA-1 products, imports of India have increased and outgrown exports of these products. While exports grew at an average annual growth rate of -0.2% between 2013 and 2018, imports of these products have grown +15% per annum. Although India was always a net importer of ITA-1 products, imports have grown much faster than the exports over the years. This has led to a growing trade deficit, which increased from US$ 24 billion in 2013 to US$ 41 billion in 2019.

More importantly, we must consider what kind of imports have increased? We always say imports of inputs are good for the growth of the Indian IT industry. But by signing ITA-1, it’s not just inputs, but finished products are also being imported duty-free, which has hindered the growth of the domestic electronic and digital infant industry. Over time, many studies have shown that India’s competitiveness in ITA-1 products has been adversely affected after the agreement was signed, leading to a substantial rise in imports of these products.

With ITA 2, the problem multiplies because of 2 reasons. First, the coverage of ITA-2 goes much beyond inputs for IT industry and includes many consumer electronics, such as video games, video recording and reproduction apparatus, radiobroadcast receivers, digital cameras, loudspeakers etc. Secondly, there are several products, which do not yet have identified HS codes. It is therefore difficult to estimate the impact of not regulating their imports on the domestic industry. These products are increasingly used in digital technologies and their usage is growing exponentially, for example multi-component integrated circuits (MCOs) and light-emitting diode (LED).

A state of deja vu

When India signed ITA-1, some products were included with descriptions and without corresponding HS codes. With the digital revolution many new age products are now being included in the signed agreement based on their descriptions. At the time of signing, no country knew how the digital revolution will unfold and what kinds of new age products will emerge. India also did not realise what products of the future will be included in ITA-1 after it signed the agreement. That is why today we have members like EU, Taiwan and Japan challenging India’s tariffs on some of these products.

Given this background, India must be careful in taking any binding commitments on digital products and digital services. While ITA-1 includes only physical IT products, ITA-2 includes all digital content, which is electronically transmitted. If in the WTO, developing countries remove the moratorium on customs duties on electronic transmissions, but sign ITA-2, then all electronic transmissions will be imported duty-free and removal of the moratorium will not be effective.

Currently, the net exporters of ITA products are China, Hong Kong China, South Korea, Singapore, Germany, Japan and the US. There is a huge market concentration in these products. The share of these countries exceeds 50% of global exports. These countries have a growing interest in India’s domestic market, since India is one of the fast-growing digital economies.

It is also important to be clear about the scope of ITA-2. The scope of ITA-2 is much broader than the scope of the WTO moratorium on customs duties for electronic transmissions. In ITA-2, there are many products and digital content, which are electronically transmitted and do not have identified HS Codes. In future, there is a danger that many services, which are digitally delivered will be included in ITA-2, since they will fit the descriptions of the included products.

In the WTO, there is a similar debate on the moratorium on electronic transmissions. Since the scope of the moratorium was not agreed in 1998 when it was put in place, today there is an attempt to include many digitally delivered services under the scope of the moratorium. This will severely limit the capacity of the countries to regulate imports of these services. Very few countries have therefore signed ITA-2.

Further, given the rise of digital technologies such as artificial intelligence and 3D printing, signing ITA-2 has grave dangers. Foreign firms can 3D print products within the national boundaries of the developing countries without any physical presence. By signing ITA-2, the software used to 3D print the products will also come duty-free. This will imply that all the negotiated tariffs in the WTO and the GATS flexibilities available to developing countries will become meaningless.

In the electronics sector, India has the potential to become a global manufacturing hub. The domestic industry needs protection to develop its domestic supply chains. Duty-free imports of many of the ITA-2 products can adversely impact the development of the electronics industry in India. Foreign firms will also be discouraged to invest as they will be able to export their products duty-free to India. Further, due to the rising security implications of IT products imported into the country, it is critical to retain the policy space to regulate their imports.

It is important for the developing countries to protect their domestic infant digital industries. The inputs, which need to be imported can be imported duty-free without taking any binding commitments. Countries can unilaterally lower their duties of the inputs which are needed by their domestic industry because of limited manufacturing capacity. Taking binding commitments by signing agreements which have unclear scope can lead to more complaints in the WTO in future. The digital revolution is still unfolding, developing countries need to retain policy space for their digital industrialization.