Putting New Wine into Fresh Wineskins: A feast of a debate on ICT trade liberalization

"Recently my boss keeps asking me to monitor protectionism," mumbled my old friend and negotiator from the office of the U.S. Trade Representative when we dined together this past summer in Geneva, a city in which the secretariat of the World Trade Organization (WTO) is located. Indeed, ever since the collapse of Lehman Brothers, alarm bells have been ringing to warn of rising protectionism. World leaders pledged commitment to rejecting protectionism in their statements issued at the Group of Twenty (G20) summit meetings, held in quick succession in November 2008 and April 2009, and then in the Group of Eight (G8) L'aquila summit held in July 2009 in Italy. Also in response to the economic crisis and growing protectionism, Director-General Pascal Lamy of the World Trade Organization (WTO) established a task-force to monitor protectionism. Since January 2009, he has issued three monitoring reports.^*1

Despite all these efforts, developments in recent months indicate that addressing protectionism continues to be an urgent issue, as exemplified by U.S. President Barack Obama's announcement in September of his decision to invoke safeguard provisions to curb the surge in tire imports from China. Trade officials from countries across the world, however, are not being passive bystanders in approaching protectionism. In what follows, I would like to introduce some of the strategies they are pursuing at present, focusing on trade liberalization efforts in the area of information and communication technologies (ICT) as an example.

First, I would like to briefly explain the current state of protectionism in ICT trade. The ICT industry is an area where technology development and the amalgamation of functions are occurring at a particularly fast pace. Taking undue advantage of these characteristics, some economies have changed the tariff classification of certain ICT items to apply higher import duties and thus prevent the import of such products. For instance, the European Union reclassified liquid crystal display (LCD) monitors for computers from "units for automatic data processing machines" subject to zero tariff to "video monitors" subject to a 14% custom duty.^*2 These sorts of protectionist practices that abuse the characteristics of ICT products are not unique to the EU with developing countries such as China beginning to follow suit.

There are two possible approaches to addressing protectionism in the trade of ICT products. One is a build-up approach, that creates new rules within the existing legislative framework through an accumulation of judicial decisions on specific cases, and the other is a regime-building approach, that creates a new legislative framework through negotiations among member economies. Each approach is explained below.

In May 2008, Japan, together with the United States and Taiwan, requested WTO consultations with the EU, claiming that EU tariffs on three ICT items including LCD monitors are inconsistent with the relevant WTO agreement, more specifically the EU's scheduled duty-free tariff concessions under the Information Technology Agreement (ITA). Japan, the U.S., and Taiwan are seeking to secure the zero-tariff treatment of the three ICT items as a short-term goal. At the same time, they aim to establish de facto guidelines for judgment on the tariff classification of ICT products as a long-term goal by accumulating WTO decisions on similar cases.

Decision-making provisions of the Marakesh Agreement Establishing the World Trade Organization provide that the decision to adopt an interpretation of WTO rules shall be taken by a three-fourths majority of the members at the ministerial conference. It would be extremely difficult to obtain approval from 115 member economies (i.e., three-fourths of the 153 members of the WTO) at the ministerial conference for each of the ICT products in question. In comparison, the build-up approach has an advantage in that rules can be made on a de-facto basis by utilizing the WTO dispute settlement process. However, this approach also has its limitations. Contentious points on tariff classification are very diverse. Thus, even if the WTO Dispute Settlement Body (DSB) adopts a decision on the tariff classification of a certain product, it would not necessarily be applicable to other products.

The regime-building approach is an attempt to solve the limitations of the accumulative approach in one shot. Let me explain this by citing two proposals. One is the so-called "E&E proposal" to eliminate tariffs on all products in the electrical and electronics sector, which has been proposed by Japan and other like-minded economies in the Doha Development Agenda (DDA) round of negotiations,^*3 while the other is the EU-advocated ITA-II proposal to expand the scope of items covered by the ITA.

The E&E proposal is an ambitious attempt to apply zero tariffs to all 500 items of ICT equipment including audio visual (AV) equipment and home appliances. If all of the ICT products that may be subjected to the reclassification dispute become duty free under the E&E proposal, reassigning tariff numbers would not result in the imposition of import duties. This would virtually eliminate the reclassification problem. The E&E proposal is thus expected to provide a fundamental solution. At the moment, however, only six members - including Japan and the U.S. - have expressed formal support for the proposal. How to ensure the participation of the EU and China, two big ICT markets, remains a challenge to be addressed.

Meanwhile, the EU, which hopes to protect home appliances produced in Eastern European countries, has been proposing to solve the problem of protectionism in the ICT area by means of expanding the existing ITA. This ITA-II proposal is to eliminate import duties on additional ICT products, primarily those that are likely to pose the reclassification problem. For instance, video monitors (to which the EU applies a concessional tariff of 14%) and other products whose reclassification has been subject to WTO dispute settlement are among the most likely candidates for inclusion in the list of zero-tariff items. Being an attempt to expand the current ITA, this proposal has advantage in that 81 economies that are party to the ITA - including Japan, the U.S., the EU, and China - can be brought to the negotiating table from the very outset. However, since certain products such as home appliances might not be included, the ITA-II proposal could be limited in the scope of zero-tariff items compared to the E&E proposal (and to that extent, the possibility of the abuse of reclassification tactics would remain), which should be raised as a disadvantage of this proposal.

"No one puts new wine into old wineskins; otherwise the new wine will burst the skins and be spilled, and the skins will be destroyed. But they put new wine into fresh wineskins, and both are preserved."^*4 This passage from the New Testament is often quoted in teaching the need to take a new form or method in order to express a new thought or idea.

Companies such as TOYOTA, SONY, and Fast Retailing are rapidly globalizing their supply chains. Indeed, what we have been watching since the turn of the century is the globalization of economic activities of an unexpected nature proceeding at an unexpected pace. The greater the force of liberalization, the greater is the dynamism and complexity of the counter movements (i.e. protectionism). In order to put this "new wine" produced by the global economy, we probably need to have "fresh skins," that is, a new framework that would bring a paradigm shift.

Needless to quote Thomas Kuhn, what holds the key to a paradigm shift is knowledge (concepts) and strategies to increase supporters of the concepts. Presently, trade negotiators are having a feast of a debate to create new skins. Which of the approaches and proposals I have discussed above will win the support of WTO members and bloom to full maturity? It will be a little while longer before we know the answer to this question. What is certain, however, is that Japan, as one of the greatest beneficiaries of trade liberalization, is being required to make a more substantial knowledge contribution to the international community.