News and Analysis • Volume 13 • Number 1 • March 2009

Trade in Information Technology: Is the ITA Still Relevant?

by Iana Dreyer and Brian Hindley

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Trade in information technology goods faces an increasingly uncertain legal environment. A major component of that environment is the Information Technology Agreement, the application of which has recently been challenged at the WTO.

Signed in December 1996, the ITA created tariff-free trade in a broad range of goods such as semiconductors, computers and their peripherals, telecommunications equipment, and various electronics and scientific goods. It has 43 members (counting the EU as one), and applies to about 97 percent of world trade in the goods it covers. It is widely considered one of the WTO’s most successful agreements. The WTO dispute, however, exposes flaws.

The case brought against the European Union by the United States, Japan and Taiwan involves three sophisticated IT products: set-top boxes, flat screen monitors and multifunctional printers. All three have several functions and can be used for different purposes. A TV set-top box can provide internet access, a flat screen monitor can be plugged into a computer or be used for TV, a multifunctional printer can make photocopies.

The problem is that some of these functions pertain to products that the ITA did not originally cover, such as consumer electronics (most importantly televisions) and certain kinds of printer.

The EU says such products cannot be classified at customs as belonging a product category covered by the ITA, and therefore eligible for duty-free entry. Instead, it classifies them under headings that lead to the imposition of import tariffs, sometimes as high as 14 percent.1

The complainants in the case argue that the EU is not respecting its ITA commitments, and that it violates the spirit of the agreement, which was to expand free trade in IT goods. At first sight this seems to be a technical classification issue, but the case has important implications for the integrity of the ITA and for the security of the legal environment in which trade in information and communications technology (ICT) goods will occur in the future.

The exclusion of consumer electronics, namely TV and video, is a structural problem in the ITA. First, twelve years into the treaty’s existence it is now clear that the technological assumptions on which it is based are outdated. The boundaries between media and their platforms and the handling of data and information have been blurred, and this directly interacts with the design and functions of IT products. Technological development of this type will continue in future, and competition between different platforms is likely to intensify, bringing clear benefits to consumers. But the ITA, by excluding consumer electronics, hampers this trend. The second problem with the ITA lies with its review mechanism. The signatories in 1996 were aware that the ITA did not cover sufficient goods. But entrenched protectionism in some sectors, namely the EU’s TV and other consumer electronics sectors at that time, did not allow them to go further. The Ministerial Declaration on the agreement calls on the parties to “meet periodically (…) to review the product coverage specified in the Attachment, with a view to agreeing, by consensus, whether in the light of technological developments, experience in applying the tariff concessions, or changes in the HS nomenclature, the Attachments should be modified to incorporate additional products” (emphasis added).

The negotiations never succeeded. For a trade agreement covering goods that are subject to rapid technological development, the demand for consensus, combined with the absence of specified negotiation dates and objectives, produces inertia. The third problem is that the ITA is based on an excessively rigid positive product list, and new products can only be added to the list under the rule of consensus. When a product evolves in such a manner as to contain several features of ICT products that were left out of the ITA, a temptation may emerge to classify the product at customs in a category not covered by the ITA, with the risk of it becoming dutiable.

What are the likely consequences of the coming panel ruling? If the EU wins the case, this is a Pandora’s box for other ITA members to reclassify complex ICT products into dutiable customs categories. This would weaken the agreement significantly. If it loses the dispute, this risk will be mitigated, but the fundamental problem of the ITA will not be solved, namely that trade in ICT goods is facing an increasingly uncertain legal environment.

The WTO case might solve the three cases at hand, and it will help develop a useful case law on interpretation of classification rules for multifunctional products in the ITA. The ruling, however, should rather serve as a base for a renegotiated ITA that accommodates technological change and further liberalises trade in ICT goods. Product coverage should be broad and the product list ‘negative’, i.e. only exclusions should be made explicit and negotiated on. It should include disciplines on the handling of multifunctional products at customs that accommodate technological change. A new ITA should also start tackling an impediment to trade that is more pernicious than tariffs, namely non-tariff barriers, such as inadequate licensing requirements or government procurement practices.

Iana Dreyer is Trade Policy Analyst and Brian Hindley is Senior Fellow at the European Centre for International Political Economy. They are authors of Trade in Information Technology - Adapting the ITA to 21st Century Technological Change, freely available on www.ecipe.org.

endnote

The EU’s arguments may be partially weakened by the 20 February ruling of the European Court of Justice, which found that wide-screen LDC monitors with multiple connection possibilities do fall under the scope ITA and thus should be imported free of duty.