Tax & Accounting Blog

What’s Better Than Duty Free Under An FTA? Unconditionally Duty Free Under the ITA!

Blog, Global Trade, ONESOURCE August 11, 2015

While the benefits of utilizing Free Trade Agreements (FTA’s) are significant for most industries in general, those companies in the technology sector who have benefited from duty savings based on the World Trade Organization’s (WTO) 1996 Information Technology Agreement (ITA)  will have things even better relatively soon if all goes as expected under an ITA expansion.  Utilizing an FTA requires compliance with sometimes complex rules of origin on a continuing basis.  Taking advantage of the ITA simply requires making sure your information technology products are correctly classified.  The ITA heavy lifting would have occurred in the expansion negotiations.

For background, the ITA provides zero duty rates on information technology products for participating WTO countries (currently 81 countries representing 97% of global trade in IT products according to the WTO).  Beginning in 2012, 33 WTO countries began negotiations on expanding the list of products that fall under the agreement, and on July 28th of this year it was officially announced that 22 countries had reached a consensus.

There are two attachments to the July 28th declaration that spell out the products that are included in the expansion.  The first attachment lists the relevant tariff headings and sub headings, and the second attachment provides a description of products included regardless of where they may be classified.

It would be interesting to consider the political stories behind what products did and did not make the list, but that would be beyond the scope of a blog posting.  A few observations, however, are in order.   Keep in mind that the main goal is the free flow of goods and equipment associated with information technology products.

From the perspective of a person who has worked for a computer manufacturer, one interesting omission from the expanded list is that of rechargeable lithium-ion batteries which, of course, are used in notebook computers among other things.  The existing duty rate for imports into the US stands at 3.4%, and is one of the few computer components on which duties are still being paid.

Data sourced from the International Trade Commission shows that for calendar year 2014, almost $1.5 billion in lithium-ion batteries were imported into the US, of which only about 11% came in duty free under a special program or FTA (mostly Korea-US).  Duties that could have been saved through inclusion in the ITA would have been about $44 million.

Lithium Ion Batteries (HTS 8507600000)

US Imports for Consumption, 2014

In Thousands of Dollars


source: International Trade Commission

To make matters worse for computer manufacturers, a recent action by Customs and Border Protection (CBP) calls for importers who were previously classifying battery pack charging kits and external battery packs as “static converters for telecommunication” under tariff heading 8504 with a Free duty rate to classify those products under subheading 850760 with its 3.4% duty rate beginning on October 5, 2015 (See Customs Bulletin and Decisions, VOL. 49, NO. 31, August 5, 2015).

On the plus side, the expansion of zero duties to fans to cool microprocessors in computers, microphones, speakers, and headsets should make computer sellers happy.  On a global basis where duties may still exist today, they will also be glad to see the inclusion of printers, ink cartridges, and solid state memory.

For a complete look at the above, please see the official WTO declaration found here.

So what should an importer do to make sure they will be taking advantage of the expanded ITA?  First of all, understand that the duty reductions are not in place yet and several conditions among the parties have to be met.  The duty reductions will be staged over three years, beginning no later than July 2016 with the third reduction no later than July 2019 (however the parties are free to accelerate the reductions on their own). Each party has to provide a draft schedule by October 30th of 2015.  The draft schedules have to be approved on a consensus basis that includes “…approximately 90% of world trade covered by this Declaration.” That computation will be determined by the WTO Secretariat and communicated to the parties.

Second, importers/exporters should review the tariff numbers and product descriptions in the WTO’s declaration to see if they relate to their own commodities.  It would also be a good time to take a moment and review existing classifications for correctness, thereby; making sure any duty saving opportunities under the ITA are not missed.

Those importers/exporters that have centralized classification databases with reporting capabilities as part of a Global Trade Management (GTM) solution should have no problem performing a classification analysis.

To learn more about FTA, visit our ONESOURCE for FTA page