ITA-2 Success in Nairobi

December 18, 2015 12:15 PM

The major success of the WTO’s Tenth Ministerial Conference in Nairobi is the conclusion of the Information Technology Agreement 2 (ITA-2). After three years of negotiations, the WTO finally announced that the plurilateral agreement, covering $1.3 trillion of trade was finalized in Nairobi on December 16, 2015. In total 24 participants (53 countries) including the United States, European Union and China agreed to remove tariffs on 201 information and communications technology (ICT) products by 2024 (the products are enumerated by six-digit tariff lines in the Harmonized System [HS]). Tariffs on major products among the 201 items will be removed within three years (covering 89 percent of the 201 items by trade value). The covered goods represent about 96 percent of global trade in the enumerated ICT products. Because the ITA-2 was negotiated on a unconditional most favored nation (MFN) basis, when the pact enters into force on July 1, 2016, every WTO member (i.e., all non-participants) can benefit from the MFN tariff removal when goods are exported to markets of the participating countries.

More broadly, the success of the ITA-2, along with ongoing negotiations on the environmental goods agreement or EGA, points to plurilateral agreements as the way ahead for the World Trade Organization.1

Overview of ITA-2

Since the first ITA was concluded in 1996,  total IT trade has grown rapidly to reach $4 trillion in 2014, surpassing trade in farm and automotive products. As a consequence of technological innovation, ICT products have become more diverse. Since customs nomenclature has lagged behind technological innovation, disputes have arisen over the proper product classification of imports. In June 2012, the ITA-2 negotiation was launched in order to both expand the coverage of ICT products and address classification issues. Participating countries focused on tariff elimination for new products, but put other questions to the side so that they could reach an agreement more quickly. Even though non-tariff barriers (NTBs) continue to hamper trade in ICT products, addressing them would have prolonged the negotiations, especially since some NTBs enjoy strong political support.

Even so, the road to concluding an agreement was not easy. The negotiations were at an impasse for almost two years until the United States made progress with China at the 2014 APEC Summit to agree on a comprehensive list of products to liberalize. In July 2015 the first round of ITA-2 was concluded calling for eventual tariff elimination on 201 products in four stages—immediate, three, five, and seven years. In the second round, ITA members were supposed to submit their proposed national tariff schedules for the 201 products, showing the stages of tariff elimination. China’s proposed tariff schedule listed 40 percent of the ITA products under the five and seven year phase out stages, and this was simply not acceptable to the other ITA participants.2 Since China is the largest importer of listed ICT products, valued at $414 billion in 2014, earlier staging of China’s tariff elimination schedule was demanded by the other participants. In Nairobi, non-binding compromise language committed China to faster liberalization, but the full detail has not yet been released.

Tariffs Schedule and Product Scope

The WTO announced that 65 percent of the ITA-2 tariff lines will be immediately eliminated by July 1, 2016. Participants will fully eliminate tariffs on 89 percent of products within 3 years. Sensitive products, for example, certain medical equipment, loudspeakers, and radar apparatus in the case of Korea, will be liberalized within five years and seven years. Within five years, 97 percent of tariff lines will be liberalized. All 53 countries are committed to fully liberalize the 201 products by January 1, 2024.

The expanded ITA covers 201 products clustered in five categories of two-digit HS product headings that include: 37 photographic or cinematographic goods; 84 machinery and mechanical appliances; 85 electrical machinery items; 88 parts of telecommunication satellites; and 90 measuring devices. ICT products include components and parts as well as finished goods: next generation semiconductors, new generation multi‐component integrated circuits (MCOs), touch screens, GPS navigation equipment, portable interactive electronic education devices, video game consoles, and medical equipment, such as magnetic resonance imaging products and ultra‐sonic scanning apparatus.3

Table 1 shows average tariffs on the covered ICT products for major exporting countries.4 The data shows that the largest market, China has the highest average tariff on aggregated products of 5.8 percent. Even if average tariffs don’t seem high, individual tariffs can reach up to as 30 percent, depending on the product and the importing country.

Table 1 Average tariffs on ITA-2 products
Country  Average tariff Imports, by value (US$ billion)
China 5.8 414
European Union 2.4 167
Japan 0.04 73
Korea 6 66
United States 1.2 218
ICT = information and communications technology
Source: World Bank, World Integrated Trade Solutions (WITS) database.

A USTR factsheet provides a sample of products with the highest tariffs. Tariffs on next generation semiconductors are as high as 25 percent; Magnetic Resonance Imaging (MRI) machines reach up to 8 percent; Computed Tomography (CT) scanners up to 8 percent; Global Positioning System (GPS) devices up to 8 percent; printed matter/cards to download software and games up to 10 percent; printer ink cartridges up to 25 percent; static converters and inductors up to 10 percent; loudspeakers up to 30 percent; software media up to 30 percent; and video game consoles up to 30 percent. All participants are legally bound to eliminate these high tariffs within the seven-year phase out period.

Impact of ITA-2

The WTO emphasizes major benefits for developing and developed countries alike. Elimination of high tariffs on ICT products will boost global trade and expand annual global GDP by $190 billion. The trading environment will become more predictable, which will help business groups plan their investments. There will be more opportunities for countries to attract foreign direct investment to build manufacturing plants. Moreover, free access to major markets will enable developing countries to participate in IT growth.

The benefits of ITA-2 are also big for the United States, a global IT leader. US exports of the 201 products in 2014 were approximately $150 billion, and this figure will grow with tariff liberalization. According to USTR, ITA-2 could support an additional 60,000 jobs in US manufacturing and technology industries. At the same time, lower costs will benefit US consumers.

Notes

1. US Trade Representative Michael Froman alluded to this view in recent remarks calling for a “new form of pragmatic multilateralism.” See “Remarks by Ambassador Michael Froman to the Opening Plenary Session of the 10th Ministerial Conference of the World Trade Organization,” December 17, 2015 (accessed on December 18, 2015).

2. According to the Chinese proposal, tariffs would be immediately eliminated on 49 products, eliminated for 71 products within 3 years, 62 lines within 5 years, and 19 lines within 7 years. See “JCCT Fails to Yield ITA Progress, But U.S. Industry Likely to Acquiesce,” Inside US Trade, November 27, 2015 (accessed on December 1, 2015).

3. However, key products such as flat-panel displays and lithium ion batteries are excluded from tariff liberalization primarily due to China’s opposition.

4. The data includes 186 products coded by six-digit HS tariff lines. 10 products in Attachment B, listed by description and not HS code, are not included in the table.

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