New global IT trade deal offers little to developing countries

30 July 2015
Maximiliano Mendez-Parra
Comment

Last week, the World Trade Organization (WTO) reached a tariff-cutting agreement for the first time in 18 years. 

80 of its members – including developed countries but also India, China and South-East Asian nations – have taken a major step to eliminate tariffs on information technology (IT) products under a deal called the second-generation Information Technology Agreement (ITA-II).

The deal will drop tariffs on products such as GPS navigation systems, high tech medical devices and telecommunications satellites. These represent around 7% of the world’s trade in goods. Although details remain under discussion, tariffs would mostly disappear by the end of this decade.

But from the developing country perspective, the ITA-II agreement offers very little economic value.

Why is the agreement happening now?

The deal confirms the strategy followed at the WTO Bali Ministerial Meeting in 2013 – and agreed at the Geneva 2011 Ministerial Meeting – of securing deals on easier and probably less controversial trade agreement issues.

This new, practical approach contrasts with the single undertaking principle that ruled WTO negotiations for years. Although the strategy of picking the ‘low hanging fruit’ seems successful in taking the negotiations out of ‘sleeping mode’ – and perhaps kick-start trade policy discussions – the biggest and juiciest fruits for developing countries remain untouched for the most part.

For instance, negotiations on agriculture and industrial goods have advanced very little over the last ten years. While there have been some efforts to make progress on a working programme in additional areas leading up to the WTO Ministerial Meeting in Nairobi in December 2015,  it is unlikely that much will happen in the coming months without a new impetus in these tricky areas.

The WTO talks could be overshadowed by ‘mega-deals’ like the TPP

The agreement is also a reaction to the ‘competition’ presented by mega-regional agreements such as the Trans-Pacific Partnership (TPP) or the Regional Comprehensive Economic Partnership (RCEP). These agreements promise rules on many issues not included in the ongoing set of WTO negotiations –  known as the ‘Doha Round’ (DR). 

These issues are in some ways more relevant in the current context of global production networks (i.e. stages of production across many countries). Rules on intellectual property rights or investment and competition policies, for example, which are essential in developing regional and global value chains, have been addressed deeper in the context of some regional trade agreements and in the proposed mega-regionals.

So while the ITA-II is a small step forward in the right direction, there are risks if it means that there will be no wider agreement at the WTO. As there are now alternative large proposed agreements (some of them open to any willing country), some members may be looking to them with interest and therefore abandon efforts to secure a wider agreement.

This may have serious negative consequences for developing country members because the agreement, without agriculture or industrial goods tariff reduction, would have little value to them. Moreover, mega-regional trade deals are unlikely to accommodate special and differential provisions (i.e. participants would have to commit to the same level of liberalisation regardless of their development status). These agreements are often not shaped with poor countries in mind.

Will the ITA serve developing countries?

Despite the fact that many developing countries in Africa and Latin America have not yet committed to the ITA, they will have duty free access on IT products in the countries that committed to the agreement. This could mean a direct benefit for developing countries that export these goods. But few developing countries do. The fact that the 80 countries that negotiated the ITA represent 97% of the trade in these goods indicates the minor role that non-signatory developing countries have in their production and trade. Therefore, the ITA will do little for development in that sense.

On the other hand, some claim that developing countries may benefit: finished IT products would become cheaper thanks to fewer or lesser tariffs applied on spare parts, such as semiconductors. Nevertheless, as the production of IT products tends to happen in value chains formed by members of free trade areas (e.g. the Association of Southeast Asian Nations, or ASEAN) where tariffs among them are already zero, the effect on the price of inputs and final products would be modest. So the impact for developing countries would, again, be very small. 

Many of these countries still maintain high tariffs on this sort of product. In Nigeria for example, these products are subject to positive and often high tariffs. The fact that these countries maintain high protection on items that they cannot produce and that are essential to their economic transformation efforts reveals just how little trust exists in the idea that trade can enhance their development. Other countries (notably Argentina and Brazil) have decided not to participate in this kind of pluri-lateral agreement on political grounds.

Having the ITA-II agreement is better for development than not having it. In spite of the risks outlined here, there might be some benefits to this ‘early harvest of low-hanging fruit’ approach – although they tend to be marginal for developing countries. The negotiation strategy seems to be working and additional deals are on the horizon before the next WTO Ministerial in Nairobi.

However, these agreements should be seen as stepping stones towards a large and comprehensive agreement – and not a consolation prize.  

Maximiliano Mendez-Parra, Research Fellow – International Economic Development Group

Maximiliano Mendez-Parra