Trade and Innovation: India’s and China’s Diverse Experiences with the Information Technology Agreement


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When: Sep 22 2014 - 10:30am until Sep 22 2014 - 12:00pm
Where: 1819 L St, NW, Washington, DC. Sixth Floor Conference Room

Trade and Innovation: India’s and China’s Diverse Experiences with the Information Technology Agreement

An Asia Pacific Seminar featuring:

Dr. Dieter Ernst
Senior Fellow, East-West Center

Trade and Innovation: India’s and China’s Diverse Experiences with the Information Technology Agreement from East-West Center on Vimeo.

Dr. Dieter Ernst highlights the different emphasis that China and India have put into R&D investment.

The Information Technology Agreement (ITA), an important plurilateral trade agreement, is widely expected to facilitate the diffusion of innovation in the information and communications technology (ICT) industry. Proponents emphasize that developing countries could reap significant gains from trade for innovation from the ITA, as tariff reduction will lower import prices, improve market access for exporters, and enhance competition.

This optimistic outlook assumes that each country meets certain preconditions and capacities; in reality results have varied. Recent research has shown that the success or failure of trade liberalization is determined by the economic structure of a country (institutions; market size and structure; managerial and technological capabilities of firms), and that integration into global networks of production and innovation may also significantly affect a country’s approach to and experience with trade liberalization.

In his talk, Dr. Dieter Ernst compared the diverse experiences of India and China with the ITA. He addressed two questions: Why has China’s electronics industry benefited substantially from the ITA, while in India, gains from trade liberalization were overshadowed by major costs that are eroding domestic electronic manufacturing and innovation? And to what degree are domestic economic structures and global network integration useful to explain these different experiences, and the very different approaches to the current impasse in negotiations to expand the product coverage of ITA?

Dr. Ernst first gave some background on what exactly the ITA was and what it meant, in the most optimistic sense, for developing countries. Established in 1997, the IT currently encompasses 78 WTO members, 35 of which are developing countries. Under the plurilateral agreement, MFN status is given to all WTO members irrespective of whether they belong to the ITA or not. What is more, zero tariffs are applied to a long list of electronic products, specifically those classified as information and communication technology (ICT). With these decreases in tariffs it is believed that the IT will contribute to a greater adoption of ICT products, which will lead to greater economic growth. In short, the ITA would foster innovation in ICT products, which would lead to greater productivity in and greater prosperity for developing countries such as India. 

However, such optimistic scenarios could only come to pass if a country possessed two things: a strong absorptive capacity where firms would recognize te economic value of new external information and then apply it to their own products and a well-functioning industrial commons where there are enough suppliers to aid in innovation and plenty of opportunities for R&D development. It is here that the differences between India and China become readily apparent.

India joined the ITA right when it started in 1997. When it did so it had an extremely weak manufacturing industry but it was quite willing to take the measures necessary to improve this, including reducing tariffs. Despite these measures however India continues to not benefit as much from the ITA as it should. This is chiefly due to its policy of limiting just how big firms can grow. When combined with low FDI, no unified tax structure, and large imports of materials rather than producing them domestically, India lags far behind China in accruing benefits from ITA.

China joined the ITA relatively late in 2003. This late start did not harm it however since at the time China was already the world's 3rd largest exporter and 4th largest importer. Furthermore, China has pushed hard for innovation and R&D education; since 2000 roughly 10% of GDP per year has been spent on R&D. China is also highly integrated into both the global production and global innovation commons. Both of these factors have led to it benefiting immensely from the ITA framework, although that has been slowing down in recent times given the ongoing economic slowdown. 

 In his final point, Mr. Ernst showed just how different India and China's experiences with the ITA are in light of ongoing negotiations to expand the list of products covered under the ITA. India has decided to not join in on these discussions since it believes that the products that will be added will only aid those countries which already have a huge lead in manufacturing them instead of helping countries just starting out. Mr. Ernst pointed out that even if India does not join it will not harm the ITA negotiations in any way since its role in global manufacturing remains quite insignificant. China was a different story. In the current negotiations China has done its best to co-shape negotiations to fit them to its best advantage. Should China ultimately decide not to be a part of the negotiations it would be detrimental to the agreement since it is the world's biggest market for smartphones and semiconductors among other things. Without China, Mr. Ernst believed the ITA would "cease to function" in any beneficial capacity. 

 For more images, please visit the album for this event on the East-West Center's Flickr page. 

Dr. Dieter Ernst is a Senior Fellow at the East-West Center. He is an authority on global production networks and the internationalization of research and development in high-tech industries, focusing on standards and intellectual property rights. His research examines corporate innovation strategies and innovation policies in the United States and in China, India, Malaysia, Taiwan and Korea. He has served as a member of the United States National Academies “Committee on Global Approaches to Advanced Computing”; senior advisor to the Organisation for Economic Co-operation and Development, Paris; research director of the Berkeley Roundtable on the International Economy at the University of California at Berkeley; professor of international business at the Copenhagen Business School; and scientific advisor to governments, private companies, and international institutions.

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