TWN Info Service on WTO and Trade Issues (Nov18/20)
30 November 2018
Third World Network

India, South Africa challenge continuing moratorium on e-com duties
Published in SUNS #8806 dated 29 November 2018

Geneva, 28 Nov (D. Ravi Kanth) - India and South Africa on Tuesday challenged the global e-commerce giants - the United States, China, and the European Union among others - at the World Trade Organization for continuing the moratorium on customs duties on electronic transmissions. The moratorium, they pointed out, has adverse fiscal implications and deleterious effects on the digital industrialization of developing and least-developed countries, trade envoys told SUNS.

But the major e-commerce beneficiaries - the US, China, the EU, and a couple of other countries - stuck to their dogmatic positions that any attempt to discontinue the moratorium for not levying customs duties on electronic transmissions could cause disruption and prove to be self-defeating for the consumers.

Significantly, the demandeurs of the permanent moratorium on customs duties on electronic commerce failed to provide any credible evidence, including technical or empirical evidence, to justify their opposition to discontinuing the moratorium on electronic transmissions, said trade envoys, who asked not to be quoted.

At a meeting convened by the WTO General Council (GC) Chair Ambassador Junichi Ihara of Japan, India and South Africa made detailed presentations backed with technical data as to why the time has come for a serious re-think about the moratorium from all aspects.

The GC chair has suggested that the continuation of the current moratorium, which will come up for review at the WTO's 12th ministerial conference in Astana, Kazakhstan, in June 2020, must be based on concrete facts and statistics.

India's trade envoy J S Deepak said the joint proposal by India and South Africa, which was first circulated at the GC meeting on 26 July 2018, has called for examination of the "impact of the moratorium" because of significant changes in the e-commerce since 1998.

WTO Members had agreed to the temporary moratorium on customs duties on electronic transmissions for the first time in 1998.

Ambassador Deepak said that digital trade has rapidly transformed over the past 20 years, with significant fiscal implications for developing and least-developed countries.

"Also, looking from the larger development perspective, we need to analyse how the moratorium is impacting the efforts of developing countries and LDCs, to industrialize digitally," Ambassador Deepak emphasized.

He said the proponents of the e-commerce want the moratorium to be continued on the basis of the findings of the WTO study entitled "Fiscal implications of the customs moratorium on electronic transmissions: the case of digitisable goods".

The WTO study, issued on 20 December 2016, however, failed to address all the issues comprehensively, India underscored.

According to India, as per the WTO's explanation, digitisable goods are physical goods which have the potential to be electronically transmitted.

"In other words, these are physical goods, currently being traded physically across borders on which the WTO members can apply their bound customs duties," India maintained.

Surprisingly, "digitisable physical goods obviously are not the subject of the e-commerce moratorium," India said, pointing out that "the e-commerce moratorium applies to electronic transmissions (ET) which is online, cross- border trade in these products."

The WTO failed to capture these differences in its study, India said. Citing the example of one digitisable product - book - India said the WTO study concluded that "trade in books in physical form is low and if they were to be traded exclusively in electronic form the loss of revenue would be small."

"But what the [WTO] study does not tell us is that a large and growing proportion of books are already being traded in electronic form and because of the moratorium, Members are unable to impose tariffs on these e-books, even though this is technically feasible," India maintained.

Furthermore, there is no assessment of the "burgeoning online trade in video games, e-books, music and video downloads and software," India maintained.

Clearly, "there would be reasonable ways to estimate such trade," India said, arguing that the WTO study "completely failed to capture the revenue loss that has occurred since 1998."

"Another major shortcoming of the WTO study is that it lacks comprehensive coverage of digitisable goods," India argued, pointing out that the study " seems to have excluded some important tariff lines, such as photographic films and software, whose global imports by developing countries have been substantial."

Also, the WTO study - which is based on applied rates of customs duties for various products - is not a proper gauge for the loss of revenue since it does not take into account the bound rates, which Members have the flexibility of applying anytime, and in this era of protectionism, are increasingly resorting to, India said.

Consequently, the WTO study which is quoted by the e-commerce moratorium supporters "grossly underestimates the tariff revenue loss on account of the moratorium," India said.

"It is, therefore, erroneous to claim on the basis of a study done on physical trade of products that the moratorium on ET has a minimal negative impact on custom revenues of developing countries," India pointed out.

Worse still, the developing and least-developed countries are unable to impose "internal charges" due to online trade.

Since all products imported into a country are subjected to "internal duties such as manufacturing tax or sales tax or value added tax (VAT) or goods and services tax (GST)," governments find it difficult to levy such taxes on electronic transmissions.

At a time when e-commerce is dominated by super platforms such as Amazon and Alibaba among others, the developing and least-developed countries find it difficult to tax these super platforms.

India cited several OECD studies that focussed on tax challenges of the digital economy, including the concept of "Base Erosion and Profit Shifting" (BEPS) which refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

Ambassador Deepak quoted the case of Facebook, saying that it "generates huge profits from its India operation where almost 20% of its global users are located, but pays an abysmal 0.06% of its total tax outgo to the Indian government."

Therefore, he said, "the moratorium deprives developing countries & LDCs, which are large recipients of online traded goods or ET and have higher tariff rates bound at the WTO, of huge customs revenue."

Against this backdrop, "as online cross-border trade is exploding, the loss in revenue is also cascading steeply," India said.

More disturbingly, the loss in customs revenue "is augmented by the additional loss of domestic taxes, making digital trade a huge revenue loss-making proposition for most developing countries & LDCs," India argued.

The moratorium, according to India, is replete with negative impacts on "the efforts of many developing countries, which are laggards as far as digital industrialization is concerned, to industrialize digitally."

Without naming the US which is levying additional duties to protect its domestic steel, aluminum and other industries, India said members "know how tariffs play an important role in protecting infant industries from older and established overseas competitors until they have attained some economies of scale."

Small wonder that "custom-free imports of digital products will hinder the growth of the infant digital industry in developing countries," India said.

Ambassador Deepak said that the moratorium has a "ruinous impact of digitization on SMEs [small and medium enterprises] in developing countries & LDCs."

According to a United Nations Conference on Trade and Development (UNCTAD) study of 2017, "three countries, namely, China, USA and UK have captured around 70% of the cross-border e-commerce market."

Such a concentration of e-commerce has harmed SMEs in other developing countries.

"Given low levels of broadband penetration and the fact that only 5% [of] people in developing countries use e-commerce platforms, the probability of domestic e-commerce to grow in the developing countries and benefit their SMEs appears to be low," India argued.

"The monopoly pricing powers of behemoths that run platforms can force sub-optimal contracts on SMEs. Thus, in these countries digital trade or ETs is harming rather than helping the cause of SMEs, contrary to what some would want us to believe," India maintained.

Moreover, "with the advent of Industry 4.0, propelled by internet of things and new technologies like 3D printing and artificial intelligence, the number of products which can be transmitted electronically will increase exponentially," India said.

In effect, "the GATT tariff commitment of Members - the bound rates - of these digitized products will get undermined as more and more trade moves online," India cautioned.

At a time when "virtually all non-agricultural manufacturing products can be digitized and, therefore, transmitted electronically, the moratorium on application of customs duties on ET will be akin to reducing bound rates to zero on all manufactured products!" India said.

"In other words, the e-commerce moratorium will render meaningless the existing GATT bound rates, which are typically higher in developing countries and for which they have made payments in the Uruguay Round," India said.

Ambassador Deepak said there is "an urgent need for the developing countries and LDCs to develop their digital capacities for facing the growing challenge of digital trade" - which will "require developing national digital industrial policies which match the level and pace of their digital development."

"For designing such policies it is extremely important for developing countries to preserve policy and regulatory space in the WTO," India argued.

Given the huge size of the online markets which runs into trillions of dollars, "even if 10% of this is cross-border ETs, as broad estimates show, the moratorium is preventing the levy of tariffs on more than a 100 billion US dollars of trade", with the developing countries and LDCs being the victims, India maintained.

The moratorium will result in "serious harm to infant digital industry and SMEs" in developing and poorest countries.

In short, the time has come for revisiting "the key issues identified by the Members in the context of the e-commerce moratorium," India said.

South Africa said the moratorium which is temporary in nature provides the space for Members to consider the revenue implications against the backdrop of unfolding technological developments.

The rapid digital transformation which is evolving unevenly across the global economy "poses a range of challenges to governments across the world in diverse areas including those affecting policies for industry, trade, employment, taxation, and market competition, amongst other things," South Africa said.

South Africa's trade envoy Ambassador Xavier Carim said "while technological advances hold out the promise of a wide range of benefits and solutions to problems in the economy and in society, such benefits are not automatic and deliberate policy is needed both to secure their possible benefits and to respond to the disruptive challenges that they already pose."

Ambassador Carim said that important "measures should be located in an overall policy framework that is developmental and inclusive if we [members] are to reverse or at least attenuate the current trend of growing inequality and exclusion within and between countries."

Citing the 2017 UNCTAD Information Economy Report, Ambassador Carim said "a defining characteristic of the digital transformation, at this stage, is its degree of "concentration", and this is manifest in many ways."

"The total value of global e-commerce was estimated at around $25 trillion in 2015, of which around 50% was accounted for by just four countries [according to the UNCTAD study]," he said, suggesting that "business to consumer e-commerce was estimated at $2.9 trillion, of which cross-border business-to-consumer e-commerce was $189 billion."

"On a wider definition, the 2017 UNCTAD paper "Rising Product Digitalization and Losing Trade Competitiveness" observes that with the exception of China, almost all developing countries are net importers of electronic transmissions," he said, arguing that "three countries account for around 70% of the total cross-border e-commerce market."

He said even the WTO study admitted that "there are serious gaps in the data as it relates to the amount of trade in goods that have already moved online."

"As a result, the [WTO] Note does not - and cannot - account for goods already digitalized that would have otherwise attracted duties," he said.

"The key point is that if all digitalized products that are traded were included [in the WTO study], the figures would increase dramatically," said Ambassador Carim.

"In short, the revenue implications of digitized trade, which to our understanding means electronic transmissions, has not been properly measured [in the WTO study]," he maintained.

South Africa said that the WTO Secretariat Note also failed to take into consideration the bound duties for calculating the revenue losses.

Ambassador Carim said "the UNCTAD 2017 study observes that trade in electronic transmissions continues to grow and it suggests that revenue losses could fall disproportionately on those developing countries that remain net importers."

The UNCTAD study "also provides interesting insights on growth trends for additive manufacturing. It suggests that the 3D printing market has grown by 30% per annum since 2012 and that developed countries account for 68% of revenue from that market," he said.

"More importantly, this trend will shift competitive advantages away from high volume, low cost centers to those who own customer networks with serious employment and manufacturing implications for many countries," Ambassador Carim maintained.

If the moratorium covers this trade, custom revenue losses will also grow considerably. Clearly this is an area that is going to require further research.

The e-commerce proponents suggested that the moratorium has encouraged e-commerce growth without mentioning the significant government support to the development of digital capabilities in major economies, over many years.

"The central lesson" stemming from the government support, according to South Africa, "is the critical importance of an appropriately configured digital industrial policy."

He urged the WTO Secretariat to collaborate "with other multilateral organisations and competent institutions, to continue to work to fill gaps in the data."

Ambassador Carim said "our [India and South Africa's] call is not about ending or extending the moratorium, either on a temporary or permanent basis... It is about the need to have more accurate data and statistics that enable us to make more informed policy decisions in future."

Several developed countries, including the US and Japan, as well as China opposed any re-think on the moratorium, saying it would harm the global e-commerce.

In conclusion, it is clear that the developed countries and China want to turn a deaf ear to the glaring asymmetries and inequalities stemming from e-commerce to continue their monopoly grip on digital trade, said trade envoys, who asked not to be quoted.