TWN Info Service on WTO and Trade Issues (Mar20/16)
28 March 2020
Third World Network

WTO “Friends of Services” for permanent moratorium on E-transmissions

Geneva, 27 Mar (Ravi Kanth) – Switzerland, along with several countries of an informal coalition of “Friends of Services” (FoS) at the World Trade Organization, have called for “a more holistic approach”, and continue the existing moratorium for not imposing customs duties on electronic transmissions without any disruption, due to “welfare” and “economic benefits” in a wider context.

In doing so, Switzerland and several other members of the FoS coalition have used a study by the Paris-based Organisation for Economic Cooperation and Development (OECD) to claim “welfare” and “economic benefits,” taking into account other relevant factors, their impact on consumers and on export competitiveness, and placing existing empirical evidence into a wider economic context.

This use of the OECD study appears to be an attempt to counter the joint proposal by India and South Africa on 11 March.

In their joint proposal, India and South Africa have commented comprehensively on issues concerning the “scope of the moratorium”, “impact of the moratorium,” “impact on industrialization due to the loss of the use of tariffs as a critical trade policy instrument,” “tariff revenue losses” “loss of other duties and charges,” and whether the developing countries are enjoying the benefits of the digital economy among others.

India and South Africa have also pointed out unambiguously that the 1998 moratorium for not imposing customs duties on electronic transmissions “will be equivalent to developing countries giving the digitally advanced countries duty-free access to our markets” at a time when countries are trying to catch up and would need time for their industries to become competitive before full liberalisation can be optimal.

“To do so whilst industries are still struggling will consign many developing countries to be only consumers” and “this will be catastrophic for economic growth, jobs, and the attainment of SDGs (United Nation Sustainable Development Goals),” the two developing countries argued with clinching evidence.

Against this backdrop, Switzerland, along with members of the FoS such as Australia, Canada, Chile, Colombia, Hong Kong, Iceland, South Korea, New Zealand, Norway, Singapore, and Uruguay, called for adopting a “more holistic approach, by taking into account other relevant factors and their impact on consumers and on export competitiveness, and placing existing empirical evidence into a wider economic context.”

In their four-page proposal (document WT/GC/W/799) issued on 26 March, the FoS used the OECD study on “electronic transmissions and international trade” issued last November.

The OECD study suggested “that the overall benefits of duty free electronic transmissions outweigh the potential forgone government revenues due to the E Commerce Moratorium.”

But the OECD study failed to clarify what would be the scope of electronic transmissions:  whether it covers digital content or only bits and bytes, or whether it covers those goods and services which are digitalized, said an analyst, who asked not to be quoted.

“The scope of the electronic transmission will determine the impact of the moratorium on digital transformation of developing countries,” the analyst argued.

OECD study claims

As regards the “economic benefits of electronic transmissions,” the OECD (the rich country economic club promoting uninterrupted trade liberalization), argued that “by focusing on revenue implications (as per the India and South Africa paper), positive effects that digitalization can bring to the economy have not been included in the discussions that have taken place so far.”

The OECD study argued that “the use of foreign value added is associated with positive economic outcomes such as export, diversification, productivity growth and increased domestic value added in exports.”

It suggested that “developed economies are not the only ones to benefit from such trends with ICT enabled services, like telecommunication services, financial services or other business services, experiencing a growth at an average pace of 10 to 13% between 2005 and 2017 for developing countries.”

According to the OECD study, “the process of digitalization can reduce the overall costs of production and remove transportation of certain products.”  It uses an example of a record company that no longer has to bear the costs of physically producing a physical carrier medium.

Instead, it maintained “that a good that was delivered physically, but is now transmitted electronically, no longer incurs transportation costs.”

The OECD study also argued “that by bringing access to an increasing amount and cheaper types of intermediate goods and services, the digital economy enables firms to reap input benefits and grow their export competitiveness.”

It noted “that digitally deliverable services enhance export competitiveness of all firms, including SMEs (small and medium enterprises).”

The effect of “digitization and the adoption of digital technologies” can enable an increasing number of firms, including SMEs, to export” it argued.

Consequently, the OECD study has observed, “duties applied by other countries on electronic transmissions, and their content, might impair the ability of domestic SMEs to export.”

Moreover, “all the benefits outlined by the study presuppose the non-imposition of tariffs on electronic transmissions. The latter are likely to deliver considerable improvements with respect to providing access to cheaper goods and services as well as enabling businesses to export without facing additional obstacles.”

Emphasizing the OECD study’s “insightful welfare analysis of electronic transmissions,” members of the FoS maintained that it offers “a clear illustration of what is induced by the absence of duties on electronic transmissions in terms of both revenue loss and the welfare surplus for consumers.”

The OECD study said “taking into consideration consumer welfare would bring depth to the discussion and could help move them forward.”

Further, “the welfare analysis outlines that the reduction in production and transportation costs associated with digital deliveries, as well as the removal of the tariff, can lead to a reduction in price.”

Therefore, “In consequence, the increase in demand leads to a rise in imports and an increase in consumer surplus, part of which is associated with redistribution from the domestic producer and part of which is from government revenue to the consumer, the OECD study suggested.”  The FoS proponents maintained that the study is unambiguous: the overall impact to the economy is “positive and large”.

The OECD study, according to the proponents, “finds that the imposition of equivalent duties on electronic transmissions could negate those positive effects by increasing the price of the digital delivery, which shifts some of the consumer welfare back to the domestic producers and the government”

“Governments and producers would recover some of the revenue foregone but the amount recovered would depend on the elasticity of demand,” the OECD study highlighted, arguing that “this would occur at the expense of consumer surplus.”

With the loss of “positive welfare impact”, the price of the digital product increases, the OECD study suggested.

“Consequently, by introducing equivalent duties on electronic transmissions, governments would create a “deadweight loss” to the economy” and “the overall benefits associated with digitization (i.e. lower trade costs) would be reduced and weaker economies would miss an opportunity to overcome their trade cost disadvantages,” the proponents assert.

The thrust of the OECD study is to make a strong case for levying “internal non-discriminatory taxes” as an alternative to [customs] tariffs, arguing that “a clear distinction needs to be drawn between potential and effective trade digitisation, as it is unlikely that all product categories that can be digitized will be fully digitized.”

In crux, the OECD study concluded “that lifting the moratorium would have limited effects on government revenue implications and that it would ultimately come at the expense of gains that are more significant on consumer welfare and export competitiveness.”

Flaws in the OECD study

However, a fundamental flaw of the OECD study, according to expert e-commerce economists, is that it is based on what is called the CGE (computational general equilibrium) model which assumes that perfect competition conditions exist globally.

But the global digital trade is based largely on monopoly as well as oligopoly conditions in which the GAFA (Google, Amazon, Facebook, and Microsoft among others) as well as Ali Baba and Tencent of China have a lion’s share with predatory pricing policies, former South Africa trade minister Rob Davies told the SUNS.

Therefore, the OECD study fails to provide a credible analysis to counter the joint proposal by India and South Africa due to the use of the CGE model and thereby conflates the gains and losses from current unregulated global digital trade, said an economist, who preferred not to be quoted.

Earlier, in a paper titled “Modelling Impact of Moratorium on Electronic Transmissions using CGE – A critique” published by Munich Personal RePEc Archive on 19 August 2019, UNCTAD’s electronic commerce expert Rashmi Banga had argued that “Computable General Equilibrium (CGE) models have been heavily criticized in economic literature because of their unrealistic assumptions of perfect competition (i.e., assumes that monopolies do not exist anywhere in the world), full employment of capital and labour (in all countries in the world), perfect mobility of factors of production across sectors and constantly balanced government budgets.”

She citied Taylor and Armin (2006) as well as Arvind Panagariya and Duttagupta (2001), who had pointed out that “CGE models are designed in such a way that tariff reductions will always lead to increase in ‘overall gains’ while increases in tariffs will always lead to ‘overall losses’ for the countries.”

“Policymakers, who are unaware of these assumptions and associated criticisms, are being persuaded to consider seriously the results arrived at by CGE models for assessing the overall economic impact of tariff reductions/increases,” she said, suggesting that “one such attempt is made by a recent paper by Makiyama and Narayanan (ECIPE, European Centre for International Political Economy, 2019), which estimates the impact of applying tariffs on electronic transmissions on developing countries’ GDP, consumption, employment, investment and welfare.

“The paper (by the ECIPE) not only stretches the use of the CGE model beyond its reasonable limits by imposing tariffs on services sectors but also misinterprets the scope of ‘electronic transmissions,” Rashmi Banga cautioned.

Further, “electronic transmissions are the ‘on-line’ deliveries of ‘digitizable products’ where digitizable products are defined as those products which because of technological advancement can be internationally traded both in physical form as well as on-line, for example music CDs, e-books, software, video games, etc (WTO, 2016),” she said.

“In 1998, member countries in the WTO adopted a Declaration on global electronic commerce which included a two-year moratorium on custom duties on electronic transmissions,” she said.

“Since then this moratorium has been renewed every two years.  However, with rising digitalisation of products and growing trade in electronic transmissions a decision on the moratorium has become important, mainly whether the moratorium should be made permanent, extended or removed,” Rashmi Banga said.+