E-com duties moratorium “asymmetrical” for South

South Africa and India have argued in the WTO against maintaining the current halt to customs duties on electronic transmissions, saying that the freeze is eroding public revenues in developing countries and hurting their digital industrialization prospects.

by D. Ravi Kanth

GENEVA: South Africa and India have said that the current WTO moratorium on levying customs duties on electronic transmissions is “asymmetrical” for developing countries due to its negative consequences on fiscal space and on digital industrialization.

At an informal WTO General Council meeting on 1 October, South Africa and India argued that the United Nations Conference on Trade and Development (UNCTAD) in its Trade and Development Report 2019 had endorsed the view that developing countries suffer huge revenue losses and face “severe negative impact” in their efforts to protect their domestic industries, said trade envoys who preferred not to be identified.

In response to their case against continuing with the moratorium, major developed countries, particularly the United States and the European Union, resorted to stonewalling tactics, refusing to engage in any serious debate over the implications arising from the moratorium, said the trade envoys.

The current moratorium, which came into existence in 1998, will end in December 2019 unless WTO members extend it.

In contrast to the UNCTAD study, the Brussels-based European Centre for International Political Economy (ECIPE) and the Paris-based International Chamber of Commerce (ICC) have called for a permanent moratorium on customs levies on electronic transmissions.

While the developed countries, especially the US, said they would embrace the findings of the ECIPE study, they fiercely opposed the UNCTAD study, said several trade envoys who asked not to be quoted.

In an attempt to deepen the discussion on the three studies by calling the leading researchers and experts from these three organizations for an open debate about the implications arising from the moratorium, India urged the WTO secretariat to organize a workshop on the moratorium before it comes to an end in December.

The US, however, opposed India's call, saying there is no need to hold another workshop at this juncture, said a trade envoy who asked not to be quoted.

Further, the US along with other developed and several developing countries which are all members of the informal plurilateral Joint Statement Initiative (JSI) group on electronic commerce, are privately lobbying for a permanent moratorium to be announced at the General Council later in October, said a trade envoy.

At the 1 October General Council meeting, South African Ambassador to the WTO Xolelwa Mlumbi-Peter said South Africa and India’s July 2018 and June 2019 submissions tabled at the WTO, which called for examining the implications of the moratorium, suggested that there are both fiscal and digital-industrialization effects.

With the rapidly evolving e-commerce trade, particularly the advent of Industry 4.0 and 3D printing technologies, she said, “the moratorium will erode the existing GATT bound rates which are typically higher in developing countries.”

According to the South African trade envoy, all the existing literature and research point out that “developing countries would be bearing the brunt of losses of revenue due to the moratorium.”

She said that “while some [WTO] members express doubts regarding the methodology and findings of the UNCTAD 2019 study, it cannot be disputed that there are negative consequences of the moratorium and loss of policy space for developing countries.”

“Data and software are key in digitalization, [and] finding the right balance between innovation and regulation is crucial in harnessing the benefits of digital trade,” Mlumbi-Peter maintained.

She cited the UNCTAD report as confirming “a loss in fiscal revenue of more than $10 billion globally as a result of the moratorium ... 95% of which was borne by developing countries.”  Further, she said, the UNCTAD study is based on only a small number of products, arguing that “digitalization is rapidly affecting an increasing number of products”, which could multiply the forgone fiscal revenue due to the moratorium.

Moreover, the UNCTAD study has provided realistic estimates of “electronic transmission” or “online trade” in digitizable products and not just physical trade in digitizable products, the South African envoy said.

She added that study “is also conservative in the estimation of revenue loss as it has only taken a growth rate of 8% for import of digitizable products against the average growth rate of global revenue of around 30% for services like Netflix and video games during the reference period from 2011-17.”

Referring to the ECIPE paper that looks at the implications of imposing customs duties for developing countries, with focus on China, India, Indonesia and South Africa, Mlumbi-Peter said “the assumptions and basis for its conclusions raise concerns”, including the definition of electronic transmissions. As regards the ICC paper on “The business case for a permanent prohibition on customs duties on electronic transmissions”, she said the ICC made six recommendations for extending the moratorium based on the ECIPE study.

She cited another publication, released jointly by the UN Economic Commission for Africa, the Office of the UN High Commissioner for Human Rights and Friedrich Ebert Stiftung on digital trade in Africa, which categorically states that "developing countries are the worst affected by corporate malpractice estimated at $114 billion in lost annual tax revenues."

Given the limited structural capacity to build an efficient tax base, the South African envoy said “tariffs have been a significant source for public investment needs.” The digital trade policy proposals that call for a permanent ban on customs duties on electronic transmissions fail to acknowledge the reality that developing countries cannot alter their existing tariff-dependent fiscal strategies overnight, she said.

Mlumbi-Peter said agreeing to a permanent ban would “foreclose a future source of public revenue for economies of the Global South as the share of electronically transmitted additive manufacturing products in global trade increases over time”.

As regards the technical feasibility of imposing customs duties on electronic transmissions, she said many WTO members, including France, have started successfully levying taxes on intangible imports.

“Some WTO members are exploring mechanisms of imposing customs duties, including preserving policy space to do so in the context of a digital industrial policy,” she said.

In short, “the decision on desirability of imposing customs duties should therefore rest with sovereign governments as a policy tool for their own development”, emphasized the South African envoy.

She said “while there are benefits to digital trade, its gains are not automatic and the digital economy also presents immense challenges for developing countries in the context of the digital divide.”

“Owing to the concentration of digital technologies mainly in developed countries and the skills-biased nature of digitalization, digital trade, if not consciously pursued in an inclusive manner, risks increasing inequality and further marginalization of developing countries in global trade,” she warned.

“Furthermore, the digital divide is rooted in structural and historical imbalances in the global economy which must be addressed to ensure no one is left behind,” she maintained.

Major developed countries, including the US and the EU, rejected the views advanced by the South African trade envoy.

The US said that it would go by the findings of the ECIPE study, while the EU rejected the UNCTAD findings without offering any convincing evidence or arguments, said a trade envoy who asked not to be quoted. The US, the EU and other developed countries seemed ready to treat the ECIPE study as the “holy grail” for making the moratorium permanent, but were not ready to engage in a serious debate on all three studies, the envoy said.

Diverging studies

In his intervention at the General Council meeting, India's Ambassador to the WTO J.S. Deepak said the UNCTAD study is “unique in so far as capturing the revenue implications of the moratorium is concerned, as it is the first study which estimates ‘electronic transmission’ or ‘online trade’ in digitizable products.” All previous studies, including one by the WTO in 2016, estimated the impact of the moratorium on the basis of “physical trade” in digitizable products, he said.

Deepak said the UNCTAD study is also “a very timely reminder to the developing countries that if they agree to the moratorium, then with increased digitization of goods due to technologies like digital printing, their tariff schedules under the GATT will erode and they will not be able to protect their domestic industry as they will no longer be able to impose customs duties even up to their bound rates.”

He said this could effectively constitute “unbridled duty-free access for all imported products that can be digitized and traded” as electronic transmissions.

Deepak said the ECIPE study is “flawed” in its conceptual understanding of electronic transmissions as well as the methodology. It is based on a “specific type of Computable General Equilibrium (CGE) model”, while “the analysis applies [to] ‘imaginary’ and ‘arbitrary’ tariffs on four broad services sectors and presents the results as economic impact of removal of the moratorium.”

“I say ‘imaginary’ and ‘arbitrary’ tariffs as the application of tariffs on service sectors [was] so far never ever conceptualized in the world of services or under the GATS [WTO’s General Agreement on Trade in Services]!” the Indian trade envoy emphasized.

“We believe it is very dangerous to identify services as ET [electronic transmissions] because that will take away the GATS flexibilities associated with services,” he said. “Moratorium on customs duties on ET may encourage developed countries to identify more and more services as ET, which will take away the right of developing countries to regulate the imports of these services.”

Moreover, "taking some services sectors, at random, as a proxy for ‘electronic transmissions’, which the ECIPE study does, is highly misleading for policymakers," he warned.

The ECIPE study turns the meaning of ET upside down and its findings are contrary to the study by the WTO in 2016, said Deepak.

“ET has been understood as ‘online’ deliveries of ‘digitizable products’ where digitizable products are defined as those products which, because of technological advancement, can be traded across borders both in physical form as well as online,” Deepak said, suggesting that such products would include music and film CDs, e-books, software, video games, etc.

Referring to the UNCTAD 2019 study, the Indian envoy said it “identifies 49 HS-6-digit products as ET and includes only those products under ET which have corresponding physical analogs and HS codes.”

“It is important to note that none of these 49 identified digitizable products in the UNCTAD study are services,” Deepak pointed out.

While computer software is included as ET in the UNCTAD study, software services are excluded from the list of ET as these are covered under GATS in the WTO, he said.

He said the ECIPE study is replete with "methodological flaws" due to the CGE modelling technique and it includes “unrealistic assumptions such as: (i) perfect competition, whereas the digital world is driven by monopolistic giants such as the GAFAM; (ii) absence of perfect substitutes or that imported services cannot be substituted by like domestic services, implying thereby that any tariffs would lead to a decline in the use of the services which in turn will lead to decline in GDP, employment, welfare etc.”

Due to its unrealistic assumptions, the ECIPE study “def[ies] economic logic”, he said.

Deepak said “it is a time-tested finding that tariffs applied to protect domestic industries do increase domestic production and tariffs have been effectively used by many developed countries in the past and even now to stimulate domestic production.”

“In short, we believe the ECIPE study is based on a completely incorrect understanding of ET, use of unrealistic assumptions of a CGE model and flawed simulations in the absence of disaggregated data set,” he said.

“The ICC brief, to which some members have alluded, putting forth the case of a permanent moratorium, is based on the ECIPE study”, and it “doesn't appear to have strong legs to stand upon”. (SUNS8989)                       

Third World Economics, Issue No. 687, 16-30 April 2019, p10-12