Electronic commerce in the WTO

The proposal by the US and the developed countries that electronic-commerce transactions should be duty-free will only benefit the developed countries. The proposal has serious implications which clearly require careful study. This study was written before the WTO Ministerial Conference.

by Bhagirath Lal Das

YET another new subject, electronic commerce, is to be added to join the array of new subjects at the World Trade Organisation. The studies on subjects identified at the Singapore Ministerial Conference in December 1996 have not even been completed and already we have a new subject vying for priority.

Developing countries need to give serious consideration to the implications of the proposal before they are hurried into commitments, as happened in Singapore in respect of the agreement on information technology products.

These days, a lot of trade, particularly in the developed countries, is done through the electronic medium. But, as explained below, this is not covered by the current proposal.

The process of trade in goods and services consists of scanning the various possible sources of supply, deciding on the supplier, placing the order for supply, the supply of the product and finally making the payment.

Almost all of this process can be conducted through the electronic medium, except the supply of the tangible product, which has to move physically from the supplier's place to the consumer.

In such a case, the tangible product will cross the border in an international trade transaction; and normal rules of customs clearance, duty, etc will be applicable.

However, there may be some transactions where it is possible to send the 'product' itself through the electronic medium. In such cases, the entire chain of transactions are conducted through the electronic medium. Some examples are: architectural designs of buildings, engineering designs of machines, plans and layouts, some types of financial services, advisory services in various areas, music, films, etc.

Serious adverse implications

The current proposal is that such transactions which are entirely conducted through the electronic medium, i.e. where even the supply of the 'product' is made through the electronic medium, should be free of 'customs duty'. Since there is no identification of the physical point of crossing the boundary by the 'product', perhaps the term 'customs duty (or tariff)' may not be appropriate; one may call it an 'import tax' for the sake of convenience and avoid confusion by use of other terms.

The proposal which a major developed country (USA) has made is that countries should make a commitment in the WTO that they will not impose an 'import tax' on such electronic commerce in future. At present, no country applies any such 'tax'; hence the proposal is to obtain a commitment of binding the current situation, something like binding the tariff on goods.

This request for binding the 'import tax' at zero rate has serious adverse implications for developing countries. They gain nothing, but lose a lot. Some of the implications are explained below.

1. In the electronic commerce covered by the proposal, the exporters are generally the developed countries, whereas the developing countries are generally the importers. Save for a few developing countries, they hardly have much prospect for export in this area. Hence, they should not apprehend any adverse effect of other countries imposing a tax in this area.

In such a situation, a pragmatic trade policy in a developing country will be more in favour of levying a tax, rather than giving up the option of a tax altogether, as called for in the current proposal.

Even the few developing countries which have any prospect of exports in this area, will perhaps not suffer from the 'import tax' being imposed in other countries, as their cost of production on such items is generally very low compared to that of the major exporters, i.e. the developed countries. In spite of the import tax in other countries, they will generally remain competitive compared to suppliers from the developed countries. Hence, they too do not have to apprehend any adverse impact from such a tax in other countries.

2. There is also an important aspect of revenue for the state. This is a vastly growing activity, as is evident from the anxiety shown by the main proponent to get an agreement. And taxing this type of transaction can bring considerable resources to the government in a developing country. Committing the country to a zero tax will foreclose all future options to raise revenue from this source, and it will be a huge potential loss to the state coffers. Developing countries generally have problems of limited resources and foreclosing such an option will be harmful.

3. Taxing such a type of transaction is also fully rational and desirable from the angle of equity, particularly in developing countries. The users of such transactions are likely to be those in higher income brackets, and as such, it will appear to be totally iniquitous to make a multilateral commitment not to impose a tax on them for such transactions. It is very likely that serious questions - political, economic and social - on grounds of equity may be raised in those developing countries that make such a commitment.

4. And finally, there is a systemic question too. This proposal for zero duty constitutes a discipline on a particular mode of transaction, and not on goods or services. Agreeing to this will open a totally new chapter in the WTO. The systemic implications of this need careful study.

The most rational approach will be not to let the WTO system spend any time on it, as it is not in the interest of a large number of its members, and in fact has adverse effects on them. It appears irrational to devote time to it when so many existing issues in the system need priority attention.

Further, it is a peculiar proposal in the contractual context of the GATT/WTO. It is devoid of all elements of reciprocity, as far as the developing countries are concerned. Practically all the benefits of this proposal will go to the proponent country and other developed countries. The developing countries have nothing to gain.

Special, differential treatment

The proposal not only negates all principles of reciprocity, which the major developed countries have always tried to hold high in their perception, but is an example of the special and differential treatment in reverse. It seeks special and differential treatment from developing countries for the developed countries, in the sense that the developed countries will be total gainers and the developing countries will be almost total losers.

Similar was the case with the agreements on information technology goods and on telecommunications and financial services. These agreements have mostly brought benefits to the developed countries without giving any benefits in return to the developing countries. And a similar approach is being tried once again in the current proposal on electronic commerce. It is time that developing countries call a halt to this iniquitous approach.

If, however, the main proponent signifies extremely keen interest on the grounds of national priority, and developing countries feel convinced that they have to take note of it, a rational approach will be to treat it as a case of tariff negotiations. The situation is that developing countries are being asked by a major developed country to give the concession of a zero-tariff commitment on a particular type of transaction, which it considers important in its national interest. Hence, the developing countries should rationally expect a simultaneous offer of tariff concessions to them by this proponent country on products of interest to the developing countries.

The tariffs on products of interest to a large number of developing countries are very high in the USA. Some examples are: orange juice (31%), fruit juice (10%), coffee preparations (27%), tea preparations (91%), tomato ketchup (21%), peanut butter (132%), suitcases of plastics and textiles (20%), raw cotton (70%), textile products (15-32%), footwear (10-58%), ceramic tableware (28%), drinking glasses (29%), glassware for kitchen (38%), etc.

Developing countries will be justified in seeking an offer of zero duty on these products by the US, as a proponent of the proposal for zero duty on electronic transactions.

Some reports indicate that electronic commerce in the USA may assume a level of $100 billion in a couple of years. It is not known if this figure exactly relates to the transactions under consideration. But the fact is that electronic commerce has a vast potential of export for the developed countries. Perhaps it may assume a much higher level than the exports of products mentioned above from the developing countries. Hence, perhaps an offer of zero duty for these products side by side with the request for zero duty on electronic commerce may reasonably provide a ground for engagement in serious negotiations.

Disturbing trends are being set in the WTO Ministerial meetings.

At Singapore, developing countries were suddenly saddled with the proposal for an agreement in the telecommunications sector and it was agreed. Now, for the 1998 Ministerial meeting, another agreement for zero duty on electronic commerce is being pushed.

And as mentioned above, all this is in the interest of major developed countries. There is no perceived gain for the developing countries. In fact, in some cases, as in the current case, there may be a loss for them.

Ministerial meetings of the WTO may be milestones in the passage of the WTO. But each one of them should not be allowed to put a millstone around the neck of developing countries. (Third World Resurgence No. 95, July 1998)

Bhagirath Lal Das is a former Director of UNCTAD's Trade Programme and India's Representative before the GATT. The above article was published in the South-North Development Monitor (SUNS) on 5 May 1998, and is based on the author's presentation at a TWN-organised seminar on 'Current Issues on Trade, the WTO and Developing Countries' on 29-30 April 1998 in Geneva.