TWN Info Service on WTO and Trade Issues (Jul20/11)
16 July 2020
Third World Network

“Robust” debate over damage caused by e-com duties moratorium
Published in SUNS #9161 dated 16 July 2020

Geneva, 15 Jul (D. Ravi Kanth) – Many developing countries have finally succeeded in drawing the proponents of the permanent moratorium on customs duties on electronic transmissions into a “robust” debate at the World Trade Organization over the damages caused by the moratorium in pursuing digital industrialization policies, as well as in widening the digital divide, participants told the SUNS.

At a virtual informal General Council (GC) meeting on 14 July, the developed countries led by the United States and their developing country allies adopted defensive postures on the need to continue the moratorium, cautioning that custom duties on electronic transmissions could have serious adverse consequences in the global digital ecosystem, said a participant, who asked not to be quoted.

In the face of growing opposition from developing countries who marshalled substantial evidence based on UNCTAD’s Research Paper No. 47 against the continuation of the moratorium, a trade official from the United States, speaking from Washington, argued that tariffs (both customs and domestic tariffs) are not a proper mechanism to be used in the global digital economy, said a person from South America, who took part in the meeting.

The US maintained that, unlike the use of tariffs to promote infant industrialization, tariffs are not relevant in the current global digital ecosystem, the person said.

The US official suggested that the global digital trade is a multi-layered and inter-connected system in which tariffs could have a huge negative impact, the person said.

“The way the digital economy is multi-layered, so is the digital divide,” said a digital trade analyst, who preferred not to be quoted.

“There is an ICT infrastructure divide, data divide, digital skills divide and digital technology divide,” the analyst said, pointing out that “these divides can be bridged only by a comprehensive digital industrial policy.”

The analyst said that “tariffs are an important policy tool in the hands of the governments which can provide a level playing field to the domestic digital industry, create jobs and build digital skills.”

Developing countries will need the policy space to also develop their digital technologies, said representatives from developing countries during their interventions at the GC meeting.

The US along with several other developed countries have repeatedly called for a permanent moratorium on customs duties on digital goods and services, on grounds that it would provide certainty in the global digital trade.

Switzerland and several industrialized and some developing countries, who had relied heavily on a study conducted by the Paris-based Organization for Economic Cooperation and Development (OECD), acknowledged that there would be a revenue impact for developing and least developed countries.

Switzerland and Mexico argued that the impact of the revenue loss is insignificant, if the loss of revenue were to be measured on the basis of applied customs tariffs instead of bound duties.

The proponents claimed that the UNCTAD study is not correct about the revenue losses as it did not estimate the loss of tariff revenue on the basis of applied tariffs.

However, the proponents’ argument is “false” as the UNCTAD study showed the losses arising from both applied duties and bound duties.

“All WTO negotiations take place at the bound levels and bound duties show how much cuts each country is asked to take,” said another participant, arguing that “the tariff “water” is much higher for developing countries than developed countries who are currently having duties well below 5%”.

“With less than 1% bound duties, developed countries are not taking any substantial cuts because of the moratorium, unlike developing countries,” the person said.

“Further, bound duties show how much potential tariff revenue countries can generate while being compliant with WTO rules,” the person argued.

“The UNCTAD study estimates that USD 5 billion could be generated by the developing countries in 2017. By the end of 2020, developing countries have lost at least USD 20 billion and using bound duties, USD 40 billion,” the person told the SUNS.

“So, every year, developing countries are losing tariff revenue due to the moratorium,” the person argued.

Switzerland said the removal of the moratorium could undermine the MSMEs (micro, small, and medium enterprises) which are inter-connected and depend on digital services, the person added.

Many developing countries – India, South Africa, Sri Lanka, Turkey, the African Group, Jamaica on behalf of the ACP (Africa, Caribbean, and Pacific) group, St Lucia on behalf of the Caribbean countries, and the least developed countries (LDCs) – defended UNCTAD’s findings, saying that the seemingly flawed study by the OECD has confounded the digital trade by expanding the scope of the digital goods and services, the person said.

“The current moratorium on customs duties on ET [Electronic Transmissions] will not only negatively impact the efforts of many developing countries to industrialize digitally but could also undermine their existing industries,” South Africa said at the GC meeting, suggesting that “the benefits go to digitized products in which many developing countries are net importers thus creating an un-level playing field.”

South Africa argued that “the growing share of online trade undercuts Government ability to pull in revenues … the revenue losses are particularly problematic if countries cannot make up for the lost revenue by imposing other taxes.”

“Indeed, countries with a higher value of online trade share are associated with a decline in trade tax revenue and an increase in government debt,” South Africa said.

“If governments decided to tax trade in certain goods, they should be able to do so even if the form in which those goods are traded has changed,” South Africa said, arguing that “tariffs play an important role in protecting infant domestic industries from more established overseas competitors until they have attained competitiveness and economies of scale.”

Worse still, “a moratorium in the WTO forecloses any policy choices in this regard and disproportionately benefits the net exporters in an area where there is great potential for economic growth,” South Africa said.

Commenting on the role played by the data, South Africa said that there is “growing preference of countries to regulate data flows which needs to be reconciled with the essential role of data in the digital economy is warranted to avoid a winner-takes-most scenario.”

South Africa underscored the need for data governance frameworks and an appropriate development-oriented trade policy in an increasingly digital-driven economy.

“The dismissal of legitimate concerns of the disruptive effects of e-commerce is counter-productive,” South Africa argued, suggesting that “no one can ignore that digital trade is beneficial but is evolving in an imbalanced manner.”

South Africa called for “global cooperation that ensures that the opportunities from emerging technologies enable inclusive growth, development and economic resilience while managing its disruptive effects.”

In sharp response to the Swiss question on the need to raise “the issue of taxation in relation to electronic platforms,” South Africa said “this is because bricks and mortar companies pay tax while the electronic platforms do not contribute to Government revenue of countries in which they derive the most benefit whether through Value Added Taxes, income tax, or corporate taxation.”

More disturbingly, the exporters operating from electronic platforms “have significant economic presence but no physical presence, as a result they escape internal taxes.”

“Developing countries also do not have the capacity to levy taxes on their incomes and profits,” South Africa argued.

In response to the OECD study’s reliance on the assumption that digitally deliverable services enhance export competitiveness of all firms, including SMEs,” South Africa said that “this is when there is no consensus that digitally delivered services are electronic transmissions and this therefore expands the scope of the moratorium.”

Speaking on the 3D printing market, which is set to double in size every three years with the annual growth forecasted varying between 18.2 to 27.2 percent, South Africa cautioned that “if the moratorium is maintained or made permanent, developing countries would be giving duty free, quota free access to an increasing number of products which has the potential to wipe out their manufacturing capacity.”

South Africa suggested the following implications for the Work Program. They include:

* There is no agreed definition and scope of e-commerce. It is critical that we conclude this before the MC12 to enable Members to assess the implications and take an informed decision in the Ministerial Conference. Understanding the scope will facilitate a better understanding of the implications, especially for developing countries.

* The commitments made by Members under GATT and GATS remain important legal frameworks from which the rights and obligations of Members should be preserved. We disagree with attempts to redefine Computer and Related Services (CRS) and promote technological neutrality.

* The relevant WTO bodies should work on issues assigned to them and report to the GC, including issues of classifications of e-commerce as entailed in the Work Programme are crucial.

* The TRIPS Agreement is also highly relevant to digital commerce; as e-commerce transactions can involve digital products with copyright-protected content that contributes to its value, like e-books.

* More importantly, COVID-19 has emphasized the importance of the developmental aspects of the Work Programme and highlighted the urgent need to address the digital divide.

It is therefore important to examine the development implication of e-commerce, including, the effects of e- commerce on the trade and economic prospects of developing countries, SMEs, implications for developing countries of the impact of e-commerce on the traditional means of distribution of physical goods and the revenue implications of electronic commerce for developing countries.

The African Group said its submission in document JOB/GC/133 of 21 July 2017 has stated the following issues.

They include:

* The digital divide is not getting smaller, and is in fact likely to persist;

* Policy space is paramount for Members who want to develop their digital industrial policy;

* A thorough assessment is required, particularly for developing countries, to assess the opportunities and threats that digital transformation will bring;

* The asymmetrical nature in the global digital economy points to a need to focus on equity and not only efficiency if inclusive and sustainable growth is to be achieved;

* The implications of the Fourth Industrial Revolution will be far-reaching, and it is critical to consider all policy options for countries that are striving to industrialize.

The African Group said that much of the above statement remains true today, emphasizing “the need to engage positively on the 1998 Work Programme and to this end, will contribute to it by drawing out the developmental dimension of electronic commerce with an emphasis on building an inclusive digital economy where developing countries are able to capture a greater part of digital value chains in the production of digital goods and services.”

“Addressing the digital divide remains a paramount concern to enable the realization of the 2030 Sustainable Development Goals and Agenda 2063: The Africa we want!” the African Group argued.

In its intervention, the ACP (Africa, Caribbean, and Pacific) group said that “while we recognize that there is a dilemma over whether we could ever see benefits to collect tariffs on goods that are no longer traded physically, we do not want to be left behind in terms of advancements in technology.”

The ACP group argued that “data is a key component of digital inclusion as data is at the centre of the digital economy. Data ownership, access to technologies to analyze and utilize data for digital industrialization is at the core of effective participation in the digital economy. ”

“Multilateral cooperation to promote technology transfer is therefore critical,” the ACP group emphasized.

“The work of the WTO on the cross-cutting issues, on e-commerce under the auspices of the General Council in this regard must be to identify areas of cooperation that will result in inclusive digital industrialization,” the ACP group said.

More importantly, “there is a need to level the playing field, particularly in areas where we are manufacturing traditional physical goods,” the ACP group argued.

While acknowledging the importance of e-commerce, Indonesia said that it is also important to take into consideration that the Covid-19 pandemic has underscored the need for developing Members to exercise their policy space in order to save their people’s lives and stabilize the economy.

Indonesia said it did not support the permanent moratorium on customs duties on ETs.

China said it attaches considerable importance to the global digital trade but emphasized that the moratorium must remain in place for two years to be renewed at the biennial ministerial meeting.

At the informal GC meeting, there was no consensus on what would constitute the scope of ETs – whether they would cover all digitized goods and services as argued by the US and Canada, or merely services as argued by the European Union in the past, or only intangible goods that can be checked in their HS codes as suggested by UNCTAD, said participants, who asked not to be quoted.

Members also differed on the growing 3D printing market which is quadrupling at a rapid pace and its negative impact on GATT tariff commitments and the GATS (General Agreement on Trade in Services), the person said.

The proponents of the moratorium on customs duties on ETs supported the use of domestic tariffs such as VAT (value-added tax) or GST (goods and services tax), but developing countries said that the use of domestic taxes cannot be a substitute to customs duties, the person added.