APEC Gives Thumbs Up to Future Tariff Reductions Between China & WTO on IT Products

November 12, 2014 Posted by China Briefing Reading Time: 5 minutes

Updated information technology agreement will have a broad impact, from video games & computer software to medical equipment & semi-conductors

While the media has concentrated on trite items such as the significance of handshakes, smiles and smirks, much has been accomplished outside the spotlight at this year’s APEC meeting in Beijing. China’s FTAAP study – which many have dismissed as a sop to give Beijing “something to announce” – merely competes with the U.S. engineered TPP agreement. There is also the U.S.-China agreement on carbon emissions, which while also headline making may not last beyond this “agreement stage”, with both countries having a history of not meeting previous obligations. It seems the biggest deal, however, and the only one that will affect consumers worldwide, has been left until last.

Arguably the biggest chunk of tangible business to come out of APEC this year has been an agreement between China and the United States – and potentially extending to the entire global structure of the WTO – to eliminate tariffs on Information Technology (IT) products, from video game consoles and computer software to medical equipment and semiconductors.

This agreement the U.S. has said, will open the door to expanding the current WTO agreement on these products, assuming that other countries will accept the same terms as those tentatively agreed upon with China. And with China in agreement, the U.S. anticipates a fast resolution on the issue.

This makes sense: China is a major producer of the component parts that go into IT products, and global consumers want the cost of processing these to remain low – not just the iphones, video games and hi-tech monitors of today, but also future generations of product development. The implications are that China will develop as an R&D hub for IT, while the global market will be guaranteed access to high-quality technology at prices affordable for the everyman.

The United States trade representative, Michael Froman, stated “We’re going to take what’s been achieved here in Beijing back to Geneva to work with our W.T.O. partners. While we don’t take anything for granted, we’re hopeful that we’ll be able to work quickly”. This, if successful, will take place through an expanded version of the existing Information Technology Agreement.

On Tuesday, U.S. President Obama credited APEC with the initiative to reduce tariffs, saying, “The United States and China have reached an understanding that we hope will contribute to a rapid conclusion of the broader negotiations in Geneva.” Talks with China over expanding the 1997 accord on IT collapsed last year over the scope of products to be covered by the agreement. However, intensive negotiations prior to President Obama’s visit led to yesterday’s agreement to eliminate more than 200 additional tariffs.

While the United States still exports many high-tech goods, China is the world’s dominant exporter of electronics and has much to gain from an elimination of tariffs. For their part, Taiwan, South Korea and Japan have increasingly found themselves supplying China’s huge electronics industry.

The US Department of Trade has estimated that expanding the Information Technology Agreement could create up to 60,000 jobs in the United States by eliminating tariffs on goods that currently generate US$1 trillion sales per annum. About ten percent, or US$100 billion of those products are American-made.

If the same commitments are passed by the WTO, China will continue to act as an investment magnet for international businesses involved in manufacturing IT products, and likely triggering a second investment wave of such companies. While some industry applications may be considered either too sensitive or complicated for China, existing factories elsewhere in Japan, South Korea and Taiwan can also be expected to take up part of this slack, with software development continuing to remain based largely in the United States and Europe.

This agreement therefore is an excellent example of how decisions and consensus reached at a regional level – such as APEC – can potentially gravitate upstream to later affect the entire global supply chain and consumer patterns.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

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