The Information Technology Agreement, Manufacturing and Innovation – China's and India's Contrasting Experiences

The Information Technology Agreement (ITA), a pluri-lateral trade agreement, seeks to accelerate and deepen the reduction of trade barriers for the critically important information and communication technology (ICT) industry. ITA thus provides an interesting case study of how tariff reduction within an industry-specific trade agreement might affect gains from trade for manufacturing and innovation. From a global welfare perspective, trade expansion could reinforce the diffusion of innovation. Developing countries and especially emerging economies could thus reap significant gains for industrial manufacturing and innovation. But whether this really happens is an empirical question. This chapter compares the contrasting experiences of China and India throughout the history of ITA, from the conclusion of the original ITA-1 agreement in 1996 up to the extended ITA-2 agreement on December 16, 2015. India joined ITA early from a position of weakness in electronics manufacturing. This gap in technological development explains why tariff reductions increased IT imports, but failed to stimulate domestic electronic manufacturing and innovation. By contrast, China joined ITA six years after India from a position of strength as the global export factory in electronics manufacturing. Through a continuous upgrading of its industry, China was able to reap the gains from trade. Two specific questions are addressed: First, why is it that China’s electronics industry has benefited substantially from ITA, while in India the gains from trade liberalization have been overshadowed by major costs that are eroding domestic electronic manufacturing and innovation? And, second, to what degree are domestic economic structures and global network integration useful to explain these different experiences and the very different approaches of India and China to the ITA-2 negotiations about expanding the product lists covered by this agreement? The analysis focuses on the role played by differences in the stage of development of their ICT industry, but also more generally in their growth models and regulations, and their resources and capabilities. In addition, differences are considered in the integration of both countries into the global corporate networks of production (GPNs) and global innovation networks (GINs) of the ICT industry. By inserting these domestic determinants into the analysis of trade and innovation, new insights are expected for the study of trade and innovation within pluri-lateral and mega-regional trade agreements. The paper concludes with suggestions for policy and further research