Analysis: Bold Action Required on Renewal of the Information Technology Agreement During APEC Summit

In the end, Ernst concludes, both the U.S. and China have a strong interest in finding a compromise during the APEC Summit. From the U.S. perspective, a mini ITA-2 without China would be an oxymoron. Not only is China the world biggest smart-phone market, it is also by far the most important market for U.S. semiconductor firms.
11/08/2014 03:58 pm ET Updated Jan 08, 2015

One of the most-watched issues at next week's Asia Pacific Economic Cooperation summit in Beijing will be whether China and the U.S. can overcome longstanding differences and strike a deal to update and extend the nearly two-decade-old Information Technology Agreement, a 78-economy pact that eliminates tariffs on such high-tech products as semiconductors, computers and telecommunication equipment.

Earlier this year, Dr. Dieter Ernst, an economist at the East-West Center in Hawaii, prepared a think piece for the "E15 Initiative" by the World Economic Forum and the International Centre for Sustainable Trade and Development, in which he documents the very different experiences of China and India with ITA.

Ernst demonstrates that the success or failure of trade liberalization is determined by a country's economic structure -- i.e., its institutions and policies, its market size and sophistication, and the managerial and technological capabilities of its firms -- as well as its integration into geographically dispersed global networks of production and innovation. These parameters encompass what Ernst terms "domestic determinants of gains from trade for industrial development and innovation."

"These differences in the economic structure of ITA participants pose new, and so far little-understood, challenges for the analysis of liberalization gains," Ernst writes, "especially with regard to the impact on developing countries' industrial development and innovation."

His analysis examines why China's electronics industry has benefited substantially from the ITA, while in India the gains from trade liberalization have been overshadowed by major costs that are eroding domestic electronic manufacturing and innovation. In particular, he focuses on the degree to which domestic economic structures and global network integration are useful to explain the very different approaches of India and China to the current ITA-2 negotiations.

While India decided not to participate, China seeks to co-shape an expanded ITA-2 alongside the U.S., Ernst notes. But the real sticking point remains advanced semiconductors, where China is adamant that it will not accept tariff cuts, a position that is unacceptable for the U.S.

China's position, however, reflects its overriding objective to upgrade its electronics industry through innovation and the development of generic technology platforms like multi-component semiconductors, Ernst asserts. This shift in industrial strategy may largely explain China's role in current ITA-2 negotiations (in addition to the seemingly unending inter-agency rivalries within China's government).

"The stalemate in ITA-2 negotiations signals a possible roadblock to progressive trade liberalization in high-tech industries," Ernst writes. "Mega-developing countries like India and China have enough resources to cope with a possible stalemate of ITA-2 negotiations ... but for the majority of developing countries, such stalled and incomplete trade liberalization could have quite serious consequences, depriving them of speedy access to critical productivity-enhancing information technologies."

Bold action is required, he writes, to avoid possible trade conflicts: "For policy debates, this raises questions like: What changes are necessary in domestic regulations as well as in industrial and innovation policies to reap the potential benefits of ITA trade liberalization? And, equally important: How does a country's innovation capacity in a particular industry affect its approach to multilateral and plurilateral trade agreements?"

In the end, Ernst concludes, both the U.S. and China have a strong interest in finding a compromise during the APEC Summit. From the U.S. perspective, a mini ITA-2 without China would be an oxymoron. Not only is China the world biggest smart-phone market, it is also by far the most important market for U.S. semiconductor firms.

As the senior vice-president of global policy at the Information Technology Industry Council, John Neuffer, has pointed out, "China has got to be part of this. They are too big a player. You can't have an outcome without the Chinese."

View the full analysis.