Unsung success among trade

It’s the 10th anniversary of one of the most successful international trade agreements India has signed. But nobody is celebrating it. Indeed, the remarkable fact is that few have even heard of it.

This is the Information Technology Agreement (ITA) of 1997, which bound countries to eliminate in four stages, from 1997 to 2001, all import tariffs on equipment relating to information technology (IT).

This agreement became a major global force in reducing prices, stimulating demand and expanding IT-based activities. It enabled India’s software industry to import computers and allied equipment duty free, overcoming the earlier handicap of a high-tariff economy.

Indian software gained competitiveness at a crucial time of take-off, and boomed after 1998.

Import duties were high in the 1980s, especially on IT equipment (to protect India’s fledgling computer hardware). Computers cost double or thrice as much as abroad. So, software exporters, burdened by high-cost equipment, got off to a very slow start.

Duties were cut in the 1990s, but were still high in 1997, when the ITA was signed – the peak rate was 40%. Finance Minister Yashwant Sinha in 1998 said he was presenting a “swadeshi budget” to protect domestic producers.He levied a new 8% special

additional duty on imports (later reduced to 4% after protests). Earlier in the decade, import duties were cut budget after budget.

But in 1998 Yashwant Sinha increased duties on several items. The Asian financial crisis had led to huge devaluations by India’s competitors, and import prices were plummeting. Indian industry cried out for relief, and Sinha responded.

Given this background, the ‘swadeshi budget’ did something remarkable. Ignoring protests from IT hardware manufacturers, Sinha slashed import duties on a wide range of IT equipment.

In successive budgets till 2001, he gradually eliminated all duties on IT equipment. This helped the software and BPO industries to rise meteorically.

On the 10th anniversary of the ITA, we need to recall why it was signed, and why it attracted so little attention. I covered the 1996 Singapore meeting of the World Trade Organisation, which clinched agreement on the ITA.

But the main issues at Singapore were very different. Developed countries wanted to expand the WTO agenda to include unfettered foreign investment, and the imposition of environmental and labour standards on Third World exports. The resultant row between rich and poor countries dominated newspaper headlines. The Singapore meeting ended in a deadlock on these key issues. Meanwhile, negotiators reached agreement on the ITA, without controversy or media attention.

The rationale of the ITA flowed from recognition that the world was moving towards a knowledge age. The computer, telecom and internet revolutions had suddenly made possible enormous changes in access to knowledge through IT.

Seen in this light, IT equipment was not just machinery, it was the very infrastructure that carried knowledge. Taxing IT equipment amounted to taxing knowledge, and this was undesirable. So, the argument went, just as we do not tax infrastructure for goods – taxes are not levied on the use of roads or railways – we should not levy taxes on infrastructure for knowledge.

That was the rationale for reducing all import duties on IT to zero under the ITA.

Now, the relevance of this for India could have been contested. India did not tax the use of roads, but certainly levied heavy taxes on truck permits and petroleum fuels. Public sector monopolies in ports, railways, electricity and airlines were implicit taxes on infrastructure.

The pernicious result was reduced competitiveness of Indian exporters. Since the government had persisted with high-cost physical infrastructure, it was not obvious that an exception would be made for knowledge infrastructure.

And yet it happened. Why? One answer is that knowledge infrastructure, unlike physical infrastructure, was still in its infancy, and was not dominated by public sector monopolies with trade unions opposing all competition.

The computer hardware industry was small, mainly in the private sector, and lacking in lobbying clout. Meanwhile, users of IT hardware liked the idea of duty-free imports.

This was doubtless a major reason for India deciding to join the ITA. Yet, it seems that the ITA might have stumbled and stalled at Singapore had it been the main agenda.

Some analysts saw it as one more ploy of rich developed countries to win duty-free access for their exports while denying such duty-free access to items of Third World interest.

Luckily, the ITA stayed hidden in the corners of Singapore, while much heat and dust was raised by issues like foreign investment and labour standards. The dust obscured the talks on ITA, which went through almost by stealth, barely noticed by the media or public.

It has been a whopping success. The major IT hardware exporters today are not rich countries but China, Korea, Taiwan and Mexico.

High-tech industries in the West have moved up the value chain to high-end hardware and software, while developing countries have enjoyed a boom in low-end software and BPO.

This win-win outcome makes ITA one of the most successful WTO initiatives. Let us raise a glass to it on its 10th anniversary.

What do you think?