TWN Info Service on WTO and Trade Issues (Oct19/02)
3 October 2019
Third World Network

E-com duties moratorium “asymmetrical” for South

Published in SUNS #8989 dated 3 October 2019

Geneva, 2 Oct (D. Ravi Kanth) – South Africa and India said on Tuesday that the current WTO moratorium for not levying customs duties on electronic transmissions is “asymmetrical” for developing countries due to its negative fiscal consequences and on digital industrialization, trade envoys told the SUNS.

At an informal WTO General Council (GC) meeting on Tuesday (1 October), South Africa and India argued persuasively 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 asked not to be quoted.

In response to their powerful 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 trade envoys, who preferred not to be identified.

The current moratorium for not levying customs duties, which came into existence in 1998, will end in December 2019 unless WTO members extend it for another two years.

In what seems to be a response to the UNCTAD study, the Brussels-based European Centre for International Political Economy (ECIPE) and the Paris-based International Chamber of Commerce (ICC) had presented diametrically opposing views in calling for a permanent moratorium on e-commerce transmissions.

While the developed countries, especially the US, said they would embrace the findings of the ECIPE study that calls for a permanent moratorium for not levying customs duties, they fiercely opposed the UNCTAD study as endorsed by the Trade and Development Report of 2019, 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 e-commerce moratorium before it comes to an end in December 2019.

The US, however, opposed India’s call for a workshop by the WTO Secretariat, 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, who are all members of the informal plurilateral Joint Statement Initiative (JSI) group, are privately lobbying for a permanent moratorium to be announced at the General Council meeting later this month, said a trade envoy, who asked not to be quoted.

In effect, the developed countries led by the US are again resorting to the same “stonewalling” and “diversionary” tactics for extending the e-commerce moratorium, as they did for the permanent agreement on food security before the WTO’s tenth ministerial conference in Nairobi in December 2015, said another trade envoy, who asked not to be quoted.

At the informal GC meeting, South Africa’s trade envoy Ambassador Xolelwa Mlumbi-Peter said “our (South Africa and India) submissions of July 2018 and June 2019” for examining the implications of the moratorium suggests 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 points out that “developing countries would be bearing the brunt of losses of revenue due to the moratorium.”

Ambassador Xolelwa said “while some 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 digitalisation, [and] finding the right balance between innovation and regulation is crucial in harnessing the benefits of digital trade,” the South African trade envoy maintained.

Further, the UNCTAD TDR of 2019 confirms “a loss in fiscal revenue of more than $10 billion globally as a result of the moratorium… (and) 95 per cent of which was borne by developing countries.”

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” that could further multiply the foregone 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 said the UNCTAD 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.”

Ambassador Xolelwa challenged the EU’s arguments against the UNCTAD study by saying that customized growth rates have been used to estimate on-line imports for each of the 91 countries during the period 2011-2017.

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, she said “the assumptions and basis for its conclusions raise concerns, including the definition of ET.”

As regards the ICC paper on “The Business Case for a permanent prohibition on customs duties on ETs”, she said the ICC made 6 recommendations for extending the moratorium based on the ECIPE study.

Ambassador Xolelwa cited a third joint publication by the UNECA (United Nations Economic Commission for Africa), FES and UNHRC 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.”

More disturbingly, the digital trade policy proposals that “call for a permanent ban on customs duties on ET” fail to acknowledge the reality that developing countries cannot alter their existing tariff dependent fiscal strategies overnight, she said.

Little wonder that “agreeing to a permanent ban on customs duties on ET 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,” the South African trade envoy maintained.

As regards the “technical feasibility of imposing customs duties on ET (electronic transmissions)”, she said many WTO members, including France, have started successfully levying GST 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,” Ambassador Xolelwa emphasized.

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 routed in structural and historical imbalances in the global economy which must be addressed to ensure no one is left behind,” the South African envoy 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 findings of the UNCTAD’s TDR 2019 report 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 are not ready to engage in a serious debate on all three studies, the envoy said.

In his closing intervention, India’s trade envoy Ambassador J S Deepak highlighted the key issues since the moratorium was adopted in 1998.

He said the UNCTAD 2019 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 past studies, including the one by the WTO in 2016, estimated the impact of the moratorium on the basis of “physical trade” in digitizable products,” he said.

Ambassador Deepak of India said “the UNCTAD 2019 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.”

“An unbridled duty-free access for all imported products that can be digitized and traded as ETs!”, he maintained.

In effect, the e-commerce moratorium will amount to unprecedented level of free market access in developing countries and without any price, according to an African trade envoy, who asked not to be quoted.

After reviewing the findings of the ECIPE study, Ambassador Deepak said the ECIPE study is “flawed” in its conceptual understanding of “Electronic Transmissions or ET as well as the methodology”.

The Indian envoy said the ECIPE study 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 were so far never ever conceptualized in the world of Services or under the GATS!,” the Indian trade envoy emphasized.

“We believe, it is very dangerous to identify services as ET because that will take away the GATS flexibilities associated with services,” Ambassador Deepak told members at the informal GC meeting.

“Moratorium on custom 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,” he cautioned.

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, he said.

“ET has been understood as “on-line” 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 on-line,” Ambassador Deepak maintained, suggesting that the digitisable 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,” Ambassador Deepak maintained.

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 Computable General Equilibrium (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 GAAFAM; (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.”

Consequently, the ECIPE study, due to its unrealistic assumptions, “defy economic logic,” he said.

Without naming the US, which has used tariffs as a tool for protecting domestic industries since the past two years, the Indian trade envoy said “for instance, 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,” Ambassador Deepak argued.

“The ICC brief, to which some members have alluded to, 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,” he repeatedly warned.