I.   The Internet and the Global Trade Scenario

“Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without the talking about the other.”

– Bill Gates, co-founder of Microsoft

The telecom, information and communications technology (ICT), and electronics manufacturing sectors are among the fastest-growing areas in global trade. Dr. Pritam Banerjee, Head and Professor at the Centre for World Studies, noted during a recent workshop that consumer electronics revenue worldwide is projected to reach USD 1,177 billion by FY 2028, with its market share expected to increase from 7% to 8%. The Internet of Things (IoT) market, generating approximately USD 970 billion, is anticipated to grow to USD 2,205 billion by 2028, expanding its market share from 2% to 3%. Globally, Information Technology Agreement (ITA) imports surged from USD 3.2 trillion to USD 4.8 trillion, reflecting strong participation from both developing and developed countries. The trade gap between these groups is narrowing over time.

Despite these promising trends, India’s position in the global consumer electronics market is modest, currently holding only a 2% share. The country remains predominantly a buyer economy, heavily reliant on imports, with local firms not emerging as significant exporters in the electronics or IoT sectors. The market is largely dominated by companies from the U.S. and China, along with significant players from France, Germany, South Korea, Japan, the Netherlands, Sweden, Switzerland, and Taiwan. This article examines the challenges faced by India and proposes measures to reclaim its position in the global telecom market.

II.    India’s Journey in the Global Electronics Industry: The Challenges India Faces

India’s Electronics System Design and Manufacturing (ESDM) industry faces several historical challenges that impede its growth. Firstly, India experiences a competitive cost disadvantage of up to 20% compared to countries like China and Vietnam, especially in manufacturing cell phones. This disparity arises from high tariffs, stringent labor laws, complex taxation systems, and insufficient state-led investments. Secondly, the high incidence of taxes and restrictive import substitution policies may deter global manufacturers from establishing operations in India, highlighting the need to balance local manufacturing promotion with attracting global value chains. Thirdly, the lack of a robust domestic component ecosystem results in significant reliance on imports, driving up costs, even for labor-intensive components that could be feasibly manufactured locally. Fourthly, ease of doing business remains a concern, with challenges in land acquisition, compliance requirements, and limited free trade agreements compared to competitors, leading to higher operational costs and delays. Lastly, while government initiatives like the Production-Linked Incentive (PLI) program aim to boost manufacturing, the stringent eligibility criteria often exclude small and medium enterprises, underscoring the need for a more flexible and inclusive framework.

III.Global Agreements Shaping the ICT Landscape: An Overview of the ITA and ITA-E

A.  A Look at the Information Technology Agreement (ITA)

The ITA, initiated on December 13, 1996, during the Singapore Ministerial Conference, is a sector-specific plurilateral agreement designed to eliminate tariffs on various IT goods. Originally signed by 29 countries, it has expanded to 82 signatories, including India.

The Information Technology Agreement (ITA-1) encompassed a range of products categorized under the Harmonized System (HS) 1996. The primary categories include computers, semiconductors, semiconductor manufacturing and testing equipment, telecommunication apparatus, instruments and apparatus, data-storage media and software, and parts and accessories, etc.

ITA-1 is distinctive as it is the only sector-specific agreement mandating zero tariffs on 203 items, outlined in two attachments. Attachment A details the HS headings, with Section 1 covering 112 items related to IT products and Section 2 covering 78 items in semiconductor manufacturing. Attachment B provides descriptive product listings that do not correspond directly to HS codes, accommodating the complexity of multifunctional products. Additionally, ITA-1 is an MFNized agreement, meaning non-ITA members also benefit from the tariff eliminations.

B.  A Look at the ITA-E

In 2015, the Nairobi Ministerial Conference led to the revision and expansion of the ITA, resulting in ITA-II or ITA-E, which now has 54 participants, though India is notably not a part of this agreement. ITA represents a significant step toward tariff liberalization under the WTO framework. Following the implementation of the ITA, the elimination of import duties on products worth USD 1.6 trillion was reported in 2013—nearly triple the value from 1996.

While ITA-1 focuses on physical IT products, ITA-E broadens the scope to include digital content, electronic transmissions, and diverse electronic items such as software and digital media, photographic equipment, video-recording devices, medical appliances (e.g., MRI machines), touch screens and GPS tools, and video game consoles.

The primary objective of both ITA-1 and ITA-E is to progressively remove tariffs on ITA ITA-E represents an updated list of goods under ITA-1, aimed at expanding the range of ICT products subject to zero customs duty. It includes 95 products categorized at the six-digit HS code level, enhancing coverage for items involved in electronic information processing and communication.

IV. Global Electronics Sector Dynamics and the Agreements: Insights and Impacts on India

A.  India’s Experience with ITA-1 and ITA-E

India’s commitments under ITA-1 involved significant tariff reductions, particularly in 2000 and 2005, which had substantial effects on domestic producers. A total of 217 six-digit product lines were reduced to zero tariffs, benefiting 165 identifiable products. The average tariffs for these products decreased dramatically, from 66.4% initially to zero by 2005, illustrating the profound impact of ITA-1 on India’s trade landscape.

Goods are imported from member countries, benefiting even non-signatory WTO members through reduced tariffs. However, it’s important to note that ITA-E operates differently from ITA-1 in that it is not based on the Most Favored Nation (MFN) principle; only signatories reap the export advantages for specific products included in ITA-E.

B.  The Silver Linings: Impact and Advantages of Reduction of Tariffs under ITA-1

i.      The Impacts

The decision for a country to sign the ITA involves weighing several trade-offs. Firstly, countries evaluate their comparative advantage in the affected product categories to determine if they can compete effectively. Secondly, the need to protect local manufacturers is a key consideration, as reducing tariffs could expose them to intense foreign competition. Thirdly, the benefits of cheaper imports for consumers are balanced against the potential negative impact on domestic industries. Fourthly, the potential loss of import duty revenue is a significant concern. Lastly, countries consider whether increased domestic production resulting from the agreement could generate enough tax revenue to offset the loss of tariff income.

ii.      The Advantages

The ITA offers several advantages for developing countries. Firstly, it can boost the competitiveness of domestic ICT hardware industries, enabling them to compete more effectively in global markets. Secondly, it may lead to lower prices for ICT products, thereby enhancing their usage and driving digitalization and productivity. Thirdly, developing countries could experience an increase in IT product and service exports as a result of reduced tariffs and expanded market access. Lastly, signing the ITA can facilitate greater participation in global value chains, allowing countries to integrate more effectively into international production networks.

C.   The Looming Clouds: Empirical Studies on the Repercussions of the ITA on Developing Countries

Empirical studies highlight several adverse effects of ITA-1 on developing countries, primarily due to their lack of competitiveness in the IT manufacturing sector. Firstly, countries like India saw increased dependence on ITA product imports, while local manufacturing and employment suffered as a result. Secondly, only China and Taiwan benefited from a growth in their IT manufacturing trade share, while other developing nations struggled. Thirdly, the relationship between ICT investment and GDP growth is questionable, with a 10% increase in ICT investment linked to only a modest 0.5-0.6% growth in GDP. This effect remains largely unproven in developing countries due to varying absorptive capacities such as human capital and infrastructure. Additionally, while developed countries may recover lost tariff revenues through other taxes, developing nations, with their large informal sectors, face challenges in generating equivalent revenue. According to UNCTAD (2015), only about 25% of ITA-1 and ITA-E product codes are classified as ICT goods, indicating a broader scope than the traditional definition of ICT. Furthermore, the ITA’s requirement for zero tariffs on finished IT products restricts developing countries’ ability to selectively reduce tariffs on crucial raw materials or inputs necessary for local production.

The next part delves deeper into these challenges and outlines a strategic plan of action for India. You can access the Part II here.

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Tejaswini Kaushal is a fourth-year law student at RMLNLU, Lucknow.

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Picture Credit: WTO/Shutterstock