Crippling Import Duties on Security Manufacturers

The Information Technology Agreement (ITA) has been one of the most successful multilateral tariff-reduction agreements in history, helping increase global trade in information and communications technology (ICT) products by more than 400 percent since the treaty went into effect in 1997.  Negotiated through the World Trade Organization (WTO), 70 countries generating 95 percent of the world trade in ICT products are ITA participants.

Under the agreement, participants completely eliminate import duties on covered products, which fall within several broad categories: computers, telecommunications equipment, software, semiconductors, semiconductor-manufacturing equipment, software and office machines. But there is a challenge! Since 1996, the landscape of IT-related products has changed and dramatically expanded.

So when it comes to exporting IT-related security products to one of the world’s fastest growing markets—China—U.S. manufacturers continue to be penalized with a 35 percent tariff, among the world’s highest. This presents an uneven playing field for many firms in the Chinese market—and for some it is an insurmountable barrier to entry.  Meanwhile, the maximum import duties charged by the United States for these products is only 2.1 percent.

This is one reason why the U.S. government has for years staunchly supported expansion of the ITA to include about 250 more products, including the harmonized schedule product category encompassing digital and IP security cameras, the fastest growing segment of the physical security market.

Despite tremendous support for ITA expansion among the participants, it is being held up by only one—China, which demanded the exclusion of more than half of the new product categories under consideration. Last year, China eventually narrowed its demands and agreed to inclusion of many of the products in the expansion, including digital and IP video cameras. However, the remaining categories included some major items such as networked medical devices, bringing talks to a halt in November 2013 amid rumors that Chinese political leaders had not given negotiators enough flexibility to seal the deal. Reportedly, the reluctance to make more concessions stems from concerns about lost tariff revenue and protecting nascent domestic manufacturers.

There are several reasons to be hopeful that talks could be revived.

First, negotiators were extremely close to a deal. Compared to WTO discussions on other potential agreements, such as agriculture, ITA is light years ahead, although its difficulties are already casting a shadow of doubt on the prospects of other agreements. Negotiators understand that ITA expansion is key to demonstrating that the WTO is an institution capable of delivering genuine movement toward trade liberalization. According to a March statement by Ambassador Michael Punke, the United States is ready to “get back on the horse” but needs to see an indication that China is willing to do so as well.

Perhaps most importantly, China has ample reasons to reconsider its position. It is perhaps the largest beneficiary of the current ITA that is in place.  According to a report by the Information Technology and Innovation Foundation (ITIF) released in April, China stands to benefit from ITA expansion as well. While exports of ICT products accounted for 2.2 percent of Chinese GDP growth in in 1996, it rose exponentially to 30 percent by 2012. Overall cost reductions from eliminating tariffs on ICT products will increase global demand by 8 percent, and increase China’s exports of these goods by $12 billion annually. Further, the report finds that ITA expansion would result in an annual $8 billion reduction in tariffs now paid by Chinese exporters, which more than offsets $6.4 billion in forgone tariff revenue.

China is a critical emerging market with an enormous latent demand (i.e., unmet needs) for physical security products. Clearly, U.S. manufacturers face an intensifying disadvantage as the Chinese market matures. It’s absolutely critical that talks resume and a deal is reached. The security industry is global, and stands to gain in part from $800 billion in increased trade in ICT products the ITIF estimates would result from ITA expansion. The industry must engage U.S. and Chinese government and private sector leaders to help bring the trade agreement across the finish line.