The Information Technology and Innovation Foundation (ITIF) issued a report in September titled "How an Information Technology Agreement 3.0 would bolster global economic growth and opportunity," which is likely to ignite a new round of policy deliberation and debate among emerging countries that have not participated in the previous round of ITA. DIGITIMES tapped on the insight of Stephen Ezell, VP of Global Innovation Policy at ITIF, to discuss why it is essential now to start related policy considerations, as the demand for semiconductor capacity, the repositioning of global supply chains, and the call to deal with climate change and fulfill the UN Sustainable Development Goals require an ITA-3 in place sooner rather than later.

Q: ITIF has been a free-trade advocate for ICT goods for years. And as we know that ITA-1 was launched in 1996. And ITA-2 was signed and became effective on July 1^st, 2016. It took 20 years to expand to ITA 2, so why such a hurry to expand to ITA 3?

Ezell: Well, you know, the pace of technological innovation in the ICT sector evolves ever-more rapidly. The toolsets we have today to create next-generation semiconductors, the leaps that we have made energy technology systems that use ICTs like smart meters and smart sensors. As the pace of technological evolution accelerates, so does the need to incorporate the greater number of products that we're creating ever-more rapidly into an expanded ITA.

Look at the experience that the international community has had with ITA-2, essentially, from the idea first being concretely proposed, and then having the WTO and trade organizations and associations getting together to discuss and negotiate it, it was a 5-year process for the ITA-2. I think that's a reasonable expectation for ITA-3, but you know, there is an urgency we have today. In five years, when this really gets done, then that's 10 years since we really had the last agreement. The cycle of the process of negotiations among governments, industry, and other stakeholders, takes time. And that's why there's this urgency to start the process now.

There's potential for tremendous impact in an ITA-3 to meet global goals such as climate change, such as health care, and the prospect of bringing more goods that can enhance energy efficiency in homes and buildings, to help meet COP 26 climate and sustainability goals. If you look at the UN Sustainable Development Goals, obviously many of those pertain to health and public infrastructure. And, you know, a lot of the products contemplated in ITA-3 would be responsive to those global challenges.

Q: In the past, there have been skeptical countries that felt they were shortchanged by ITA-1 and did not even join ITA-2. Do they need to take ITA-3 seriously? What is the opportunity cost they need to bear in mind if they continue to miss out on this opportunity?

Ezell: There are a couple of considerations for countries that have been skeptical about information technology agreement membership. Now one of the first reasons that countries have decided not to join the ITA is because the ITA, like most World Trade Organization (WTO) agreements, is on a most-favored-nation basis. This means that even if you're not a member of agreements, other countries that are part of the agreements are obligated to extend to you that non-tariff access to their market for the products. So for instance, if you're not in the ITA, but you make some of these devices and components, then you can have tariff-free access in foreign markets. And countries think well, why join the ITA, we can keep our tariffs revenues. But the reason why this doesn't work is that countries that are not members of the information technology agreement have seen their participation in global value chains for the production of ICT products decline by 60% since the ITA-1 went into effect in 1996.

And the second reason why is, the evolution of global value chains to produce highly complex ICT goods like semiconductors or computers, as the components move throughout the value chain. If countries aren't offering zero-in/zero-out tariff environments, then they simply get circumvented and excluded from global ICT value chains. And that's why if you look at countries like Brazil and Argentina, they have completely been left out. Whereas the East Asian countries that have participated are now very important players in various facets of the ICT value chain.

You know, India had a specific experience with the ITA. The original ITA-1 was more about final products, whereas the ITA-2 was more about the input components. India felt that reducing its tariffs enabled a flood of imports, especially from China, of ICT goods. And so based on that experience India decided that it would not join the ITA-2. That was a bad policy decision in my view, because much of the flood of ICT goods that came into India after ITA-1 was a result of massive Chinese innovation mercantilism and unfair trade practices, not because of ITA-1.

Indeed, if you look over the last 25 years of the World Trade Organization, the number one country that has initiated trade cases against another country is India versus China. And that's because most of China's practices were dumping products, selling them below cost a whole suite of unfair innovation, mercantilist policies, intellectual property theft, forced technology transfer, etc. So in my view, the damage to India's technology sector was the result of Chinese innovation mercantilism. But Indian policymakers have instead pointed the finger at the ITA-1. So they didn't join the ITA2. But the ITA-2 was, by and large, more parts, components, inputs, and that is important for India because if they fail to import these things in on a zero-tariff basis, they're at a disadvantage trying to produce or build up similar industries. And they'll find themselves again, left out of the global supply chain. So those concerns I think, are real for India, but I don't believe that that ITA has been the real problem (for the underperformance of their ICT-goods producing industries).

The other facet of why countries have decided to not yet join the ITA is because they're concerned about the loss of tariff revenues on these goods. The tariff revenues can be an important part of countries' tax incomes. But what our research has shown through these three reports is that for most countries, over a 10-year period, the increased tax income, realized from increased economic growth stimulated by ITA accession, more than offsets the cost of tariffs forgone. And the reason why is that ICT goods are capital goods, they're general-purpose technologies that empower the productivity and innovation capacity of every downstream industry that uses them. They're essential for innovation. And that's why economists find that for every 10% increase in a nation's stock of ICT capital, their GDP increases by 0.6% per year annually. There's a direct connection between greater ICT stock and GDP growth. When you decrease the tariffs on these ICT goods, then the decrease in the tariff will also stimulate the demand for ICT goods, which are highly price-elastic. So every 1% decrease in ICT goods increases their consumption by 1.3%. So when you increase the stock of productivity- and innovation-enhancing ICT goods, you get more growth in the economy. This increased economic growth drives increased tax revenues. And over the long term, those tax revenues replace the tariff lost. And our research shows clearly, for countries like Brazil, Argentina, Kenya, Pakistan is the case.

Q: ITA-2 or ITA-3 might not be the panacea for development, because some countries joined ITA-2 but they didn't see a value chain focused on them or moved to their territory. Infrastructures or the availability of talents are also important to facilitate a friendly environment for the supply chain. What's your take on that?

Ezell: I think I agree with that. There has to be the whole right set of policies in place at a national level, for countries that wish to be involved in the production of ICT goods. The pool of skilled talent that's available, the physical and digital infrastructure that exists, a broader tax and regulatory environment, the protection of intellectual property, are all very important. So, no, certainly membership in the ITA-1, 2, or 3 is not a panacea. But in my view, when you look at countries like Costa Rica, which is the world's third most technology-intensive exporter, it's achieved that state because it's provided a very welcoming environment. It has a very large medical device industry, a large ICT products, and services sector. And that's because it's got the entire panoply of policies with regard to intellectual property to the skills to tax and regulation and trade policy right, to make it an attractive location for global investment in this industry. And membership in the ITA is one of the many effective public policies Costa Rica has implemented to cultivate a highly competitive ICT goods and services production environment.

Q: And will ITA-3 be able to relieve some of the problems that we see as chip crunch?

Ezell: I think it will help. Not directly, not immediately, but I think the important point to realize about the semiconductor shortage that we are currently experiencing, is that what you really had was a COVID-19-pandemic induced disruption of both supply and demand chains for a wide variety of products. Auto companies canceled a lot of their orders for the chips, not just because they weren't making cars in the factories closed in Spring 2020 due to the pandemic, but more probably because they thought there was going to be a massive decrease in demand due to the global recession. Then in fall 2020, as demand and GDP recovered, what they discovered was a strong recovery in demand for cars, but they had cancelled all the orders for the semiconductors. But simultaneously there was a massive increase in demand for phones, computers, tablets, etc., all that stuff that has enabled us to live and work and study from home during this pandemic. So the auto industry lost their place in line essentially. And by the time they restored their orders, given these takes about six months to fill, then, voilla, you have a shortage of semiconductors for vehicles, and then you get behind and it takes several years to catch up.

By the way, the global economy will see 13 million fewer cars manufactured in 2021-2022. And a hit to $210 billion to that industry, which is really amazing. There are also a couple of other factors. There was a big fire at a Japanese plant called Renesas, that makes a lot of semiconductors for autos, there was a freeze in Texas that knockout Samsung out for a bit. In China and Taiwan, there was a drought. So there have also been a lot of other exacerbating factors involved in the semiconductor shortage. Over the long term, what we really need is more capacity. And the way the ITA-3 would impact that, in theory, of course, is if we reduce the cost of the components and make it marginally cheaper to build the factories and that matters, you know, given that new semiconductor fabs cost $20 billion to make and the capital intensity of this industry is very real. So, to the extent, we can remove some of the costs in the system by taking out the tariffs that will help with more capacity. In addition, the global semiconductor demand is expected to increase by 58% over the rest of this decade and that means we're going to need at least 60 new fabs across the world to meet the demand. So, there's an opportunity for many countries to benefit here, there's work for us all and this can support the jobs that many want to see in the US, Europe, Asia, etc.

The increased capacity will be across a variety of process nodes. Of course, the most sophisticated chips made today, 3, 5, or 7-nanometer process nodes, are those that are going into data centers, very high-powered chips for graphics and artificial intelligence, your cell phone, etc. The chips that are going into home appliances, your toaster oven, a car, those are kind of like older generation 14, 22, or 28-nanometer process nodes, there's a more stable kind of architectures, they're a bit cheaper because they're more known and more stable. So only more of that capacity at those process nodes as well, but we're going to need additional capacity, you know, all the way from the totally leading edge, the 3-nanometer stuff coming out of TSMC, and Intel says, there'll be seven 3-nanometer by 2023-2024. By the way, for 2021, the global semiconductor industry will have increased its capital intensity by 33% over the prior year, to $146 billion (this is double the level of five years ago), but most of that investment will go into the newest chips. In fact, just $1 of every $6 being invested is going toward the legacy fabs (14-nanometer process nodes or higher), so most is going into the newer technologies.

But, UMC in Taiwan, SMIC in China are kind of at that 14-nanometer level, which goes into a lot of stuff. Everything these days has a semiconductor, right? Whether it's your air conditioning, MES system to control their thermostat or even smart trash cans. The city of Barcelona just said they save $2 billion last year because they put in place smart trash cans, and it would send a signal when one was full. So the point is, semiconductors are in the go and everything, we need more of them, across all of these process nodes.

Q: With ITIF initiating the discussions over ITA-3, that will help increase the awareness of people knowing that it's important for us to start now rather than doing it later.

Ezell: Someone once said that a journey of 1,000 miles begins with a single step, right? I think that's wisdom from your part of the world; it certainly applies here.

Factbox of ITA-3

1. In 2015, 53 countries that joined together in completing ITA-2 eliminated tariffs on an additional $1.3 trillion in annual global trade across hundreds of ICT products. ICT goods exports as a share of total goods exports are consistently and significantly larger in ITA members than in non-member countries. If all the 82 signatories of the original ITA-1 were to join an ITA-3 that eliminates tariff on another 250 six-digit product categories, the global economy would grow by $784 billion over the ensuing 10-year period. US and China would be the largest beneficiaries in absolute terms.

2. The countries that would enjoy the largest relative GDP growth if they join ITA-3: Pakistan (3.2%), Kenya (2.2%), Brazil (1.6%), and Nigeria(1.6%).

3. The ITA-3 includes over 400 discrete products that are found across 256 division product codes, that are part of the global Harmonized System product classifications. Counts of proposed ITA-3 products by ICT Category: Semiconductor (60); Energy Efficient Technology (51); Medical Devices and Equipment (26); Meters (24); Electronics Packaging and Transport (20); Flat Panel Displays (17); Cameras (11); Additive Manufacturing/3D Printers (11); Smartphones and Telecoms Equipment (10); LED Light Sources (8); Drones and Satellites (7); Industrial Robots (3); Other (3). Newly created energy efficiency technologies include products like storage batteries, and smart water meters and sensors, and a whole slew of next-generation semiconductors and selected or manufacturing equipment materials.

4. The large part of the semiconductor-related elements are kind of components inputs that are involved in the semiconductor manufacturing process, such as mask and photoresist, cleanroom equipment, injection and compression molds for the manufacturers making the devices machine tools operated by lasers or photo beams or ultrasonic processes, circular polishing pads for the manufacture of semiconductor wafers.

Source: ITIF, 2021/11

Stephen Ezell, ITIF VP of Global Innovation Policy

Bio:

Stephen Ezell is Vice President, Global Innovation Policy at the Information Technology and Innovation Foundation (ITIF), a Washington-DC based science, technology, and economic policy think tank that has been ranked the world's leader in that space for three years running by the University of Pennsylvania Global Go To Think Tank Index. ITIF's mission is to advocate for public policies, laws, and regulations that drive innovation-based economic growth in countries throughout the world.