TWN Info Service on WTO and Trade Issues (Jul20/05)
3 July 2020
Third World Network

Battle-lines being drawn at WTO over moratorium on e-com duties
Published in SUNS #9152 dated 3 July 2020

Geneva, 2 Jul (D. Ravi Kanth) – The battle-lines are being drawn at the World Trade Organization over the moratorium for not levying customs duties on electronic transmissions.

This has come ahead of a crucial informal meeting of the WTO General Council (GC) scheduled to take place on 14 July.

Several developed and some developing countries have now challenged the proposals from India and South Africa that have showed conclusively about the potential loss of government revenue due to the extension of the moratorium.

Ahead of the informal GC meeting, which is being specifically convened to discuss the moratorium, the WTO Secretariat is organizing a workshop on 13 July in which it has mobilized the International Chambers of Commerce, the Paris-based Organization for Economic Cooperation and Development (OECD), and the Brussels-based European Centre for International Political Economy (ECIPE), aimed at promoting the narrative that the moratorium on electronic transmissions should be made permanent on grounds that it would benefit the consumers in the digital age.

At the upcoming workshop on 13 July, the sole representative from the UN Conference on Trade and Development (UNCTAD), Ms Rashmi Banga, is expected to provide UNCTAD’s developing country perspective on why the moratorium should be discontinued, said people familiar with the workshop.

To intensify the debate between the supporters and the opponents of the moratorium, a group of 13 countries has issued its latest proposal that calls 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 latest proposal (WT/GC/W/799/Rev.1) issued on 29 June, the 13 countries – Australia, Canada, Chile, Colombia, Hong Kong-China, Iceland, Korea, New Zealand, Norway, Singapore, Switzerland, Uruguay and Thailand – acknowledged that they recognize the concerns raised by India and South Africa along with many other developing countries about the huge loss of customs revenue to the tune of $11 billion to developing countries because of the moratorium on electronic transmissions.

Surprisingly, the European Union, Japan, and the US did not join the 13 countries, although all three of them are proponents of a permanent moratorium.

The proponents of the proposal asked WTO members to consider the paper issued by the OECD in November 2019 – entitled “Electronic transmissions and international trade” – which suggested that “the overall benefits of duty free electronic transmissions outweigh the potential forgone government revenues due to the E-Commerce Moratorium.”

The 13 countries argued that they strongly “believe” in the relevance of the OECD study in the current discussions on the extension of the moratorium.

The proponents said “by focusing on revenue implications, 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, according to the 13 countries, found 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.”

“Developed economies are not the only ones to benefit from such trends with ICT (Information and Communications Technology) 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.”

The OECD study “notes that the process of digitalization can reduce the overall costs of production and remove transportation of certain products.”

The 13 countries said the OECD study “uses an example of a record company that no longer has to bear the costs of physically producing a physical carrier medium. It notes that a good that was delivered physically, but is now transmitted electronically, no longer incurs transportation costs.”

The OECD study highlighted “work that found, on average, transportation costs can represent between 20 to 30% of total trade costs.”

“Given the fact that developing economies generally incur higher transportation costs, such reductions could contribute to levelling the playing field,” the OECD study suggested, according to the 13 countries.

Further, the OECD study cites 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” while the “digitally deliverable services enhance export competitiveness of all firms, including SMEs.”

Furthermore, the 13 countries touted the gains as highlighted by the OECD study. The OECD study “highlights the effect that digitization and the adoption of digital technologies can have in enabling an increasing number of firms, including SMEs, to export,” they said.

The 13 countries claimed that the OECD study’s “welfare analysis” of electronic transmissions has provided “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 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,” the OECD study pointed out, according to the 13 countries.

The OECD study suggested that “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 13 countries praised the OECD study for being “unambiguous” in that the overall impact to the economy is “positive and large”.

The 13 countries cautioned the opponents to the moratorium that the OECD study has clearly showed “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.”

According to the 13 countries, the OECD study’s emphasis on “the application of internal non-discriminatory taxes as an alternative to (customs) tariffs” is a better approach for the digital economy.

The OECD study notes that “tariffs increase the price of a product to the domestic consumer” and “the extent to which the domestic price increases is dependent on the tariff pass-through, which ranges from full pass-through to none.”

The OECD study highlights other means for governments to generate revenue instead of levying customs duties on electronic transmissions, suggesting that “the use of consumption taxes, such as value added taxes (VAT) or goods and services taxes (GST) could represent a better alternative.”

Lastly, the OECD study has argued 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.”

The 13 countries said “the OECD study indicates 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 in consumer welfare and export competitiveness.”

Surprisingly, the OECD study did not comment on the widening digital divide in many African and least developed countries which was brought to light during the Covid-19 pandemic.

It has also remained silent on how the global digital trade is dominated by a few digital behemoths such as Google, Amazon, Facebook, Apple, Microsoft, Alibaba, and Tencent among others – who have seemingly colonized the digital trade.

The proposal from the 13 countries “to not let governments apply customs duties on imports of electronic transmissions (which includes mainly luxury items like movies, music and video games) comes at the time when developing countries are struggling to generate domestic financial resources to revive their economies hit by COVID-19,” said a digital trade analyst, who asked not to be quoted.

Given the fact that “most of the developing countries are net importers of electronic transmissions, while their exporters are struggling to survive, they are still facing customs duties. But this proposal wants the big digital firms to keep exporting without facing any customs duties,” the analyst said.

“During the first quarter of 2020 (during the period of the COVID-19 pandemic), Amazon recorded a growth of 26% in its revenues to USD 75.5 billion while Microsoft recorded a 15% growth in its revenues to USD 35 billion,” the analyst said.

At a time when the World Bank has estimated that “Covid-19 will push 49 million people into extreme poverty, of which 39 million are projected to be in Africa and South Asia,” developing countries “are struggling to regulate their imports so as to save precious domestic financial resources.”

It has been well established that “customs duties have proved to be simple and most effective tools in the hands of the governments for regulating their luxury imports, especially at times of crisis, while (maintaining the moratorium) takes away this much needed policy space,” the analyst said.

Last week, an UNCTAD Research Paper (No.47) has suggested that using conservative estimates, developing countries can generate more than USD 10 billion in revenues every year if the moratorium is removed.

But if the moratorium continues, then “the scope of the moratorium will expand and developing countries will lose their flexibilities to regulate imports of many services which are delivered electronically,” the analyst argued.