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THIRD WORLD ECONOMICS

India, South Africa stress on policy space over e-commerce duties moratorium

India and South Africa have urged a rethink of the current halt to customs duties on electronic transmissions, saying it impairs developing countries’ tariff revenues and impedes their digital industrialization prospects, but their call has met with opposition led by the developed countries.

by D. Ravi Kanth

GENEVA: India and South Africa on 17 June stood their ground at the WTO on their central demand for preserving “policy and regulatory space” by reconsidering the existing moratorium on levying customs duties on electronic transmissions, which is set to expire at the end of this year.

The Indian and South African delegates were speaking at a dedicated WTO General Council meeting specifically convened to discuss their joint proposal for revisiting the current moratorium.

The moratorium is renewed biennially by WTO Ministerial Conferences and is expected to be on the agenda of the next Ministerial Conference at Nur-Sultan, Kazakhstan, in June 2020.

The Indian and South African joint proposal has been fiercely opposed by the United States and other developed and some developing countries. Despite the opposition, India and South Africa have stressed the importance of a reassessment of the moratorium in light of developing countries’ revenue losses and their need for policy space to develop their digital economies.

Revenue loss

Introducing the joint proposal at the General Council meeting, Indian Ambassador to the WTO J.S. Deepak said the magnitude of the “potential tariff revenue loss” due to the moratorium is around $10 billion for developing countries, as against only $300 million for the high-income WTO members.

The developing countries, he said, “have the opportunity to generate 40 times more tariff revenue by imposing customs duties on ET [electronic transmissions] as compared to the developed countries, many of which have almost zero bound duties on physical imports of digitizable products.”

The least-developed countries (LDCs) and the Sub-Saharan African countries would suffer annual revenue loss to the tune of $1.5 billion and $2.6 billion respectively because of the existing moratorium, the Indian envoy said, according to trade envoys who took part in the meeting.

Citing a study by the United Nations Conference on Trade and Development (UNCTAD), Deepak said that “95% of world’s total tariff revenue loss due to the moratorium will be borne by the developing countries.”

“Why should the bulk of sacrifice of revenue fall disproportionately on the poorer Members of the WTO?” he asked.

The Indian envoy challenged the claim advanced by several developed countries that tariff revenue loss due to the moratorium can be balanced by imposing other taxes and internal charges. In reality, he said, “it is very difficult to tax the digital giants operating in our countries without physical presence”.

A global digital behemoth like Facebook, said Deepak, “generates huge profits from its India operations where a significant number of its global users are located, but pays abysmally low taxes to the Indian government.” He said “similar patterns of behaviour by technology firms are emerging in all parts of the developing world, especially Africa.”

Commenting on the scope of the moratorium and what is covered under the definition of electronic transmission, the Indian envoy referred to Indonesia’s statement at the WTO Ministerial Conference in Buenos Aires in 2017 that “the moratorium doesn’t apply to ... products or contents which are submitted electronically...”

Even Brazil, an active member of the plurilateral Joint Statement group on e-commerce, has suggested that the moratorium should apply only to “electronic transmissions” and not to “content transmitted electronically”.

Commenting on the claimed difficulties involved in imposing customs duties on ETs, Deepak drew attention to taxing of  “ETs and intangibles, including digital products”, by many WTO members.

According to the World Customs Organization, it is technically feasible to impose customs duties on ETs, he said. He urged the WTO secretariat to “disseminate to the membership, the policies and strategies adopted by member countries such as the EU, Australia, New Zealand, Indonesia, India, etc for taxing intangible imports”.

Broader impact

Further, the Indian envoy asked his counterparts to consider the “broader impact of the moratorium on trade and industrialization of developing countries”, which he said would be negatively impacted on several grounds:

(i) Tariffs play an important role in protecting infant domestic industries from more established overseas competitors until they have attained competitiveness and economies of scale. Therefore, customs-duty-free imports of digital products will hinder the growth of the infant digital industry in developing countries.

(ii) There is evidence of huge concentration in the digital space, such as the existing market power of global digital platforms. Coupled with “network effects”, big is getting bigger, making it virtually impossible for new entities, incumbents and small and medium-sized enterprises to enter. Even if they do manage to enter, the monopolistic, anti-competitive practices of existing behemoths do not let them survive.

(iii) There is the erosion of existing GATT bound tariff rates with increasing digitization and the advent of Industry 4.0 propelled by the Internet of Things and new technologies like 3D printing. It is predicted that with the current growth in investments in 3D printing, 50% of manufactured products will be printed by 2060. This makes the e-commerce moratorium nothing short of “duty-free, quota-free” access for the digital products of the digitally industrialized WTO members to the markets of the rest of the membership.

Against this backdrop, said Deepak, there is “an urgent need for the developing countries and LDCs to develop their digital capacities for facing the growing challenge of digital trade.”

Consequently, for designing  and developing national digital industrial policies which match the level and pace of their digital development, “it is extremely important for developing countries to preserve policy and regulatory space in the WTO”, he emphasized.

With six months left before the expiry of the e-commerce moratorium, he said, “our call is not about ending or extending the moratorium.” “It is about the need to deliberate upon the above key issues in detail and with the utmost urgency to enable us to make more informed policy decisions in future.”

Beneficial

In sharp opposition to the arguments presented by Deepak, several developed countries led by the US stuck to their stand that the moratorium has been beneficial for all WTO members.

In lengthy statements, the US, Canada, New Zealand, Switzerland, Norway, Mexico and Chile among others maintained that the potential revenue loss due to the moratorium is insignificant. They argued that the issue should not be looked from a narrow perspective, and claimed that the UNCTAD study has overestimated the revenue implications.

Contrary to the WTO secretariat’s ambiguous position on what constitute electronic transmissions, the US and other developed countries said the scope of the original 1998 moratorium decision was very clear on what would constitute content. They said that content is very much part of the original decision, suggesting that without content, the decision is meaningless.

The developed countries said that it is not technically feasible to impose customs duties, adding that it would prove to be costly and burdensome. Further, it would create new bureaucracies for imposing customs duties.

On the larger developmental issue arising from the moratorium, the US and other developed countries claimed that the moratorium would help e-commerce by providing stability and generating employment.

Consequently, the developed countries demanded a permanent moratorium instead of the current two-year extensions of the moratorium.

China, which is one of the biggest beneficiaries of the moratorium, said it would prefer a two-year extension until 2021.

Brazil, which is an active player in the plurilateral e-commerce negotiations, said it doesn’t want a permanent moratorium, unlike other participants in the talks.

Incorrect

Responding to the criticisms and opposition from the developed countries, South Africa’s Ambassador Xolelwa Mlumbi-Peter said that it is incorrect to estimate revenue losses by using effective applied tariffs instead of bound tariffs. “In our experience, it is always advisable to develop any cross-country analysis using bound rates, which prescribe the ceiling up to which a member can legally increase its tariffs,” she said. If the analysis uses effective applied rates, the analysis will no longer remain consistent if one or a few members raise their applied tariffs anywhere up to their respective bound rates.

Even by using effective applied duties instead of bound rates, “developing countries stand to lose more than 20 times of tariff revenue as compared to the developed countries”, she said.

Mlumbi-Peter defended the UNCTAD study and suggested that the estimate of $10 billion per annum of potential tariff revenue loss suffered by developing countries is “conservative” for a number of reasons.

Firstly, the estimated potential tariff revenue losses does not include additional revenue losses accruing from loss of customs surcharges and additional duties.

Secondly, it was assumed in the UNCTAD study that import of digitizable products grew at a rate of only 8% during the reference period (2011-17), as against the average growth rate of global revenue of around 30% from music streaming, Netflix, video games, e-books, revenue of Microsoft, etc during the same period (2011-17).

Most importantly, increasing digitization and the advent of Industry 4.0 and new technologies like 3D printing is expected to wipe out almost 40% of cross-border physical global trade. If virtually all non-agricultural manufacturing products can be digitized and therefore transmitted electronically, the revenue losses are only going to mount in geometric progression.

“You may recall that the UNCTAD 2019 study estimates the potential tariff revenue losses using a list of only 49 digitizable products,” the South African envoy pointed out.

The $10 billion of revenues lost could be used for development and for bridging the digital divide, she said.

“As regards the issue that the UNCTAD 2019 study represents the views of the author, and not those of the United Nations, and that it had not been ‘formally edited’, as mentioned by a few members today, we understand that this is a standard disclaimer which all similar UNCTAD research papers carry,” she said.

On technical feasibility, Mlumbi-Peter noted that “many members have stated confidently that it is very difficult, if not impossible, to apply duties to electronic transmissions.”

“As we understand it, the ability to distinguish between a domestic and foreign service provider is exactly the same as to whether you apply domestic taxes or customs duties,” she argued, pointing out that the representative from the World Customs Organization had said that imposing customs duties on ETs is technically feasible.

Mlumbi-Peter said the implications of the moratorium on industrial policy and development, labour, productivity, competition and the necessary policy space to develop digital capabilities should all be explored.

She urged the General Council chair to convene dedicated sessions on thematic areas such as “revenue implications of the moratorium on electronic transmissions”, “scope and definition of electronic transmissions”, “technical feasibility of imposing customs duties on electronic transmissions”, and “broader impact of the moratorium on trade and industrialization” and any other issue with respect to the moratorium. (SUNS8928)                                          

Third World Economics, Issue No. 683, 16-28 February 2019, pp12-13


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