This article has been written by Raunak Sood, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho), and Indrasish Majumder (Intern, Lawsikho).
This article has been published by Shoronya Banerjee.
The Information Technology Agreement (hereinafter referred to as “ITA”) is a plurilateral agreement in which many countries of the world (including India) are signatories. The ITA’s main objective is to reduce trade barriers and accelerate trade gains for the purpose of mass production and upheaval of communication and Information Technology (hereinafter referred to as “IT”).
Looking at the ITA from a worldwide perspective, expansion in the area of IT trade and fewer trade barriers can potentially generate significant gains in the form of technological innovation and manufacturing. But the golden question is whether the envisaged objectives and benefits of ITA have been delivered to a developing country like India. India joined the ITA in 1996 because it did not possess a strong domestic muscle in the area of electronics and its precedential manufacturing. India in the 1990s lacked the technological muscle to innovate and increase its domestic production of IT goods and services, therefore it entered into the ITA for reducing the trade barriers and importing more electronics to stimulate its own domestic IT production.
This article lays down suggestions for the Government of India (“hereinafter referred to as “GOI”) to overcome the losses, improve mutual gains under the ITA, draw in FDI, accelerate the growth of the budding IT sector and increase the manufacturing capacity of the IT industry.
Information Technology Agreement
The ITA came into effect in India in the year 1997 with 29 countries of the World Trade Organization but later on more members became signatories and now this agreement includes 74 countries. There are countries like China, Taiwan, and the United States (“US”) who are already leading in the technological world but there are upstart countries as well like Thailand and the Philippines who have the potential to become technological players in the near future.
The USA was the proposer of this agreement wherein only the developed countries were the initial participants of this agreement. The ITA was incorporated to lower the custom duties associated with the export and import of IT-based technology as such a move would help in the growth of innovation from the perspective of the US. Developing countries have made the most benefit out of the agreement but it failed to account that developing countries have structural defects in their manufacturing capacities and therefore they cannot reap the benefits of the liberalisation measures undertaken in this agreement. As of now i.e. the year 2022 new members have been added to this agreement but no promises of liberal trade and reduction of tax barriers have been implemented by some of the new and previous participating members.
Will trade in information technology based goods and services lead to innovation?
The ITA was created with the objective of reducing trade obstacles and fasten up the procedure to procure goods and services from the trading country, the ITA is a plurilateral agreement means that any rules constituted under the ITA, the respective signatories have the choice of adopting the rules by their own motion, and the trade barrier reduction is industry-specific. Looking at ITA from a worldwide perspective, the reduction in trade barriers in IT products can lead to innovation because developing economies like India can benefit a lot in the form of an increase in manufacturing and innovation but the same could not take place in India because the IT manufacturing of India was not developed enough to make visible gains. From an economic perspective, it is pertinent to note that manufacturing and innovation are directly proportional to each other, new ideas, inventions, and innovative thoughts can be put into practice only where there is increased manufacturing of goods (example printers, 3D technology, models utilities, etc) because manufacturing gives a platform to develop new products by tapping the same ideas, thoughts, and inventions into a final marketable product. It implies that where the domestic manufacturing of a country is on a backfoot, the best research and development facilities are of minimal use due to a lack of manufacturing units to transform research ideas into tangible products.
Therefore, it can be concluded that when trade in IT-based goods and technology is imported and an additional improvement can be made to the existing technology which will lead to innovation, subject to a condition that the domestic manufacturing capability should be as technologically advanced to be able to make use of the IT goods being imported and use them to make a finished product.
Indian information technology sector
India joined the ITA in 1996 that is 5 years after the foundation of this agreement, being a latecomer India had to face the following disadvantages:
- Cost disadvantages – The Indian electronic industry suffered huge losses because there were many cost disadvantages which lead to less investment in plant and machinery, technology assimilation, and development of production and manufacturing capabilities.
- Lower rates of manufacturing in China – There are many multinational companies which have their base in India but because of lack of technology and higher manufacturing prices, such companies prefer to sell the finished goods in India but do not indulge in domestic manufacturing.
- Competition – The policy of multinationals to manufacture in China and sell in India has increased the pressure on Indian companies to compete with multinational corporations on low prices, hence manufacturing as a whole is being transferred to China and India only serves as a market for selling goods.
- Increased demand – Under the ITA, reduction of trade barriers has led to more imports of key IT components whereas the domestic production could not keep up with the imports therefore the liberalization of information and telecommunication services lead to an increase in the demand for IT goods and services but the manufacturing and production is way behind to cater to the demand, hence excessive imports have increased the fiscal IT trade deficit of India.
In terms of innovation, India faces the fundamental issue that even though India has skilled and well-trained IT engineers, the talent and skill of such trained engineers is not being utilized as the research and development done by these engineers is not being able to turn into a finished product because of the lack of technological capability.
Overall experience of india regarding the Information Technology Agreement
When India entered the ITA, it was not in a dominating position because of lack of domestic manufacturing capabilities but this was a blessing in disguise because even though India could not gain significant amounts of inward FDI, excessive IT import acted as a stimulant for the domestic electronic manufacturing of India. Being a signatory of ITA the import tax of IT goods was reduced to nearly zero, hence the trade deficit, in this case, did not lead to negative growth, instead, it boosted the innovative growth of the Indian IT sector.
As per data obtained from the WTO Secretariat, between 1999 to 2005 India had only 26 patents whereas China had 206 patents under the ITA. Hence seeing the higher number of patents it can be concluded that there has been the almost negligible amount of innovation in the industries of India, and whereas China which stood at a better technological pedestal has been making use of its dominant position to sell cheap technology at lower prices thereby lowering the domestic productivity of IT-based goods and products in India.
Policy implications and suggestions
- India should advocate for an ITA-3 (a new agreement where India can be the international leader and publish the proposed draft at a global platform) where there is a reciprocity mechanism set-up to distribute the gains of various countries to the largest importer and it should provide incentives to its own domestic industry to rise-up and compete with multinational companies in the same area.
- International community should take into account that the countries who are signatories of plurilateral agreements have different capabilities, hence before entering into ITA protective mechanisms should be set-up to help the domestic production of IT services for these weaker countries.
- Another ITA should be negotiated with it being friendly towards developing countries because all signatories have a common interest which is zero trade barriers, but the newly negotiated ITA should provide for mechanism to lessen the impact of asymmetric trade deficits, hence it is proposed that some countries should be allowed to charge slightly high trade barrier so that its own domestic competition can compete with foreign players.
- Now is the right time for India to negotiate further exemptions other any other offset to the products of similar nature
- India should push towards generating revenue by excessive patenting and using intellectual property to create a monopoly over the research and development of IT products and finished goods.
Even though the Government of India in 1996 wanted to liberalize trade in India, at that point in time the Government did not properly analyse the risks and benefits associated with entering a trade agreement where only the technologically dominant giants were present. When the agreement came into effect the manufacturing capacity of India was completely wiped out and even the project stimulus to the growth of IT services in India could not take place because of the humongous amount of imports which took place at almost zero import duty.
The Indian industry could not survive, and the Government was not supportive, at that time the best which could have been done was to give some seed funding to those domestically established companies so that they could compete with the foreign market players thereof. Hence in light of the aforesaid reasons it is concluded that ITA was a disaster for India and it only acted as an impediment in the area of innovation altogether.
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