Info Service on WTO and Trade Issues (Jun20/20)
Geneva, 25 Jun (D. Ravi Kanth) – The developing countries are facing fresh threats to their existing catalogue of “development challenges” due to the Covid-19 pandemic, including the threat of an “exponential rise in imports of electronic transmissions” due to the WTO’s 1998 moratorium on customs duties on electronic transmissions, two senior officials from the UN Conference on Trade and Development (UNCTAD) have said.
In a 23-page research paper, titled “Moratorium on Electronic Transmissions: Fiscal Implications and Way Forward,” Mr Richard Kozul-Wright and Ms Rashmi Banga of the UNCTAD Division on Globalization and Development Strategies said that imports of electronic transmissions include luxury items such as movies, music, video games and printed matter that are not being subjected to any customs duties because of the continuing WTO’s 1998 moratorium.
[For the full paper see: https://unctad.org/en/PublicationsLibrary/ser-rp-2020d6_en.pdf]
In their research paper (No. 47), released on 24 June, Mr Kozul-Wright and Ms Banga argued that “while the profits and revenues of the digital players (Google, Amazon, Facebook, Apple, and Microsoft) are rising steadily, the ability of the governments to check these conspicuous imports and generate additional tariff revenues” are being severely limited because of the moratorium on customs duties during this heightened period of the Covid-19 pandemic.
The authors of the paper said pointedly that “the moratorium was agreed in 1998 with no consensus on the scope of the moratorium, no clarity on how electronic transmissions are being classified or what they covered, and no notion of how the digital revolution will unfold.”
While the participants of the plurilateral Joint Statement Initiative group on e-commerce, led by the US, the European Union, Japan, Australia, and Singapore among others, are demanding that the moratorium be made permanent, Mr Kozul-Wright and Ms Banga have showed that the fiscal and other losses suffered by developing countries, including the possibility of pursuing digital industrialization policies to overcome the digital gap, will further multiply in the coming years.
“Since most of the developing countries are net importers of ET [electronic transmissions], with the rising digitalization, these countries are losing customs duties as well as their ability to regulate imports of luxury items,” Mr Kozul-Wright and Ms Banga argued.
Given the lack of clarity on the scope of the moratorium, which depends on how ETs are classified, Mr Kozul- Wright and Ms Banga proposed a basis for deciding the scope of the moratorium by using the trichotomy of “goods”, “intangible goods” and “services”.
Further, they said, such an approach of trichotomy “provides justification for treating electronic transmissions as “intangibles” which are classified as “goods” and are significantly different from services.”
The authors argued that “developing countries need to retain the flexibility of regulating their imports, especially imports of luxury items, and to generate tariff revenues when needed.”
But the “moratorium on customs duties on electronic transmissions takes away this important flexibility from the governments and that too in a growing area of imports which includes mainly luxury items,” Mr Kozul-Wright and Ms Banga pointed out.
At present, “while there is growing awareness that with advancing digital technologies, the scope of the moratorium is expanding and many more goods are being electronically transmitted, limited attempts are being made to classify ET and thereby agree on the scope of the moratorium,” the authors argued.
Moreover, in a digital era with advancing digital technologies, “trade in electronic transmissions will grow manifolds, expanding the scope of the moratorium and thereby adversely impacting customs tariff revenues of the developing countries.”
According to the research paper, using different classifications of ET, the tariff revenue implications of the moratorium have been estimated by a number of studies.
For example, when the decision on the moratorium on ET was taken, the scope of ET was identified as “digitized products” and “digitizable” products (WTO 2003, WTO 2006).
These digitized products were identified as those products which were electronically transmitted.
Accordingly, five categories of digitized products were identified, namely, sound recordings, audiovisual works, video games, computer software and literary works.
But there was no clarity provided on the classification of Electronic Transmissions.
In 2017, after discussions with the WTO Secretariat, Indonesia made a statement which included a footnote: “- it is understood that such moratorium shall not apply to electronically transmitted goods”.
Accordingly, Indonesia added a new HS Chapter 99 for electronically transmitted goods like e-books.
However, said the authors, this identified and commonly understood scope of ET was extended by ECIPE (the European Centre for International Political Economy), which identified ET as “digitizable products and services” under the scope of the moratorium.
Four broad categories of services were identified as ET:
* wholesale and retail trading services (trd) – include all retail sales, wholesale trade and commission trade, hotels and restaurants, repairs of motor vehicles and personal and household goods and retail sale of automotive fuel;
* recreational and other services (ros) – recreational, cultural and sporting activities, other service activities and private households with employed persons (servants);
* communications (cms) – include post and telecommunications services;
* business services n.e.c (obs) – real estate, renting and business activities.
According to the UNCTAD research paper, the Paris-based Organization for Economic Cooperation and Development (OECD) further extended the scope of ET and identified ET as “digital deliveries” which cover along with digitizable products, digitally delivered business services.
“This expanded scope of ET changed the goalpost for developing countries as adding these services to the scope of ET completely alters the development implications of the moratorium,” Mr Kozul-Wright and Ms Banga argued.
“To provide a way forward to developing countries in this debate, UNCTAD’s Research Paper 47 delves into the existing economic literature and legal judgements to address the classification issue with respect to ET,” the UNCTAD officials said.
This paper (No. 47) “highlights the consensus reached in the economic literature on the need to have trichotomy categorizing “goods”, “intangible goods” and “services” where “intangible goods” are different from services.”
Advancing technologies have the potential to convert physical goods into intangible goods, which are very different from traditional goods (disciplined under GATT) and traditional services (disciplined under GATS).
However, even without an agreed definition of ET, the revenue implications of the moratorium can be estimated based on different scenarios of the scope of the moratorium, the authors argued.
“The current paper estimates customs revenue implications of the moratorium if only “online” imports of digitizable goods are considered by the moratorium and secondly, it estimates the impact of the moratorium if services which are electronically transmitted under Mode 1 are considered as ET (as per OECD 2019),” Mr Kozul-Wright and Ms Banga pointed out.
The potential tariff revenue loss to the developing countries will be $10 billion per annum, and the “potential tariff revenue loss to WTO LDCs is estimated at $1.5 billion while sub-Saharan African countries’ loss is estimated to be around $2.6 billion”.
WTO high-income countries experience a tariff revenue loss of only $289 million, as their average bound duties are at 0.2%, the authors pointed out.
“But this impact of the moratorium will increase manifolds if electronically transmitted services are also included under the scope of the moratorium” and “using WTO’s TISMOS database, the total imports of services under Mode 1 for developing countries (excluding LDCs) is estimated as USD 705 billion as compared to USD 80 billion of digitizable products,” the authors emphasized.
“The imports of services under Mode 1 are found to be more than 10 times higher than the imports of digitizable products for Sub Saharan Africa as well as for Middle East and North Africa, while they are 20 times more in the case of WTO LDC members,” the authors argued.
More disturbingly, “the implications of the moratorium on customs duties on ET goes much beyond customs tariff revenue losses for developing countries due to the advancement of new digital technologies like 3D printing.”
“These emerging digital technologies have the potential to exponentially expand the trade in ET,” according to the authors.
“The on-going trend shows that the use of 3D printing is growing very fast and the industry has expanded by 62% in 2019 since 2017. 3D printing has adversely impacted the export competitiveness of the labour abundant countries, shifting the comparative advantages towards capital abundant countries.”
Consequently, “it is urgent for developing countries to support the removal of the moratorium in order to preserve their policy space for regulating the imports of luxury items and generating tariff revenues at the time of crisis.”
More importantly, “this will also assist their digital advancement by providing a level playing field to their budding digital industry,” Mr Kozul-Wright and Ms Banga argued persuasively.