TWN Info Service on WTO and Trade Issues (Jul20/21)
28 July 2020
Third World Network

Reconsider WTO e-com duties moratorium, say two scholars
Pulished in SUNS #9169 dated 28 July 2020

Geneva, 27 Jul (D. Ravi Kanth) – India and South Africa have accelerated their efforts at the World Trade Organization to bring about a fundamental “rethink” on the moratorium on customs duties on electronic transmissions, particularly on the unresolved issues of the scope and coverage of the moratorium in the 1998 e-commerce work program.

With the loss of billions of dollars of revenue due to the moratorium and the growing adverse impacts on developing countries, India and South Africa have called for stepping up the pace of discussions at the WTO’s General Council (GC) for making progress on this issue by the WTO’s 12th ministerial conference (MC12) next year, trade envoys told the SUNS.

At the WTO’s General Council meeting on 22 July, India and South Africa highlighted the fiscal and industrial damage created by the current moratorium on developing countries based on successive United Nations Conference on Trade and Development (UNCTAD) studies.

The strong statements by India and South Africa at the GC meeting last week, following the discussions at the workshop on the e-commerce moratorium conducted by the WTO on 13 July, seem to have brought a material change in the discussions on the moratorium, said a trade envoy, who asked not to be quoted. (See SUNS #9160 dated 15 July 2020 and #9161 dated 16 July 2020).

At the workshop on 13 July, the Paris-based Organization for Economic Cooperation and Development (OECD) seemingly failed, as it was unable to defend the findings in its study in the face of strong evidence provided by an UNCTAD expert, said people who took part in these two meetings.

Against this backdrop, a recently published study by Manuel Montes and Jane Kelsey on “The Moratorium on Tariffs on Electronic Transmissions” has further bolstered the arguments advanced by India and South Africa on the loss of fiscal revenue due to the moratorium and the non-tariff impacts on development.

Manuel Montes is Senior Advisor of the Society for International Development and Jane Kelsey is a Professor of Law at the University of Auckland, New Zealand where she specializes in international economic regulation.

In their study, Montes and Kelsey supported the findings of successive studies done by UNCTAD on the adverse impacts of the moratorium on tariff revenues and future digital industrialization in developing countries.

While the UNCTAD 2019 study arrived at a total potential tariff revenue loss of $10 billion for developing countries, with $4.4 billion tariff revenue loss from “online” imports of 49 digitizable products, Montes and Kelsey estimated the potential tariff revenue loss from “online” imports to be around $4.38 billion.

More importantly, the study by Montes and Kelsey has placed greater emphasis on the adverse impacts on development stemming from the moratorium.

The authors have highlighted the following adverse effects:

(i) The impact of the moratorium on developing countries is much greater than on the developed countries, since developing countries are more dependent on trade tariffs than developed countries;

(ii) Significantly, the dependence of the US and Japan (who are leading proponents of making the moratorium permanent) on customs duties in their total tax revenue is 1% and 0.9% respectively.

(iii) Many developing countries are up to 30 times more dependent on customs revenues than the US or Japan. For example, Bangladesh is 29 times more dependent than the US, the Philippines 19 times and India 13 times more dependent than the US.

(iv) There is considerable ambiguity in the scope of the current moratorium, especially the nature of what is being traded internationally, which gives rise to uncertainty and contest over its scope.

(v) Assuming the moratorium applies to “digitized products”, the growth rate for this type of “good” has been and will continue to be massive.

(vi) Further, although existing estimates of losses of tariff revenue from the moratorium appear to be relatively small at the present time, there is potential for explosive growth in the future.

(vii) Contrary estimates from developed country analysts that there would be net losses from not continuing the moratorium use different methodologies that are laden with problematic assumptions (like the OECD study based on CGE (computational general equilibrium) model that assumes a competitive framework while the global digital trade is based on a monopoly framework with Google, Amazon, Facebook, Apple, Microsoft, Alibaba, Tencent among others having dominated the market).

(viii) Non-tariff impacts on development, especially on the policy space for developing countries to diversify their economies into sectors that are facilitated by digital technology, are not adequately factored into current assessments.

(ix) A huge range in the estimated impacts of a moratorium on a country-by-country basis across the global South, and an unclear trend in the future, reinforces the importance of retaining policy space; and

(x) Claims that it is technically problematic to levy customs duties are overstated, as evidence from some countries shows.

The study by Montes and Kelsey discussed the much-contested scope of the moratorium and supports UNCTAD’s assessment that the scope of the moratorium is limited to “digitizable goods” and does not include electronically delivered services.

According to the study, “Two issues of interpretation are especially problematic. First, some commentators have sought to interpret the potential scope of the moratorium broadly to include the digital delivery of services, not just of digitised products. That would expand the potential scope of the moratorium far beyond its original intention. While the 1998 Work Programme defined electronic commerce in terms of goods and services, the moratorium applied to “the current practice of not applying customs duties on electronic transmissions”. The current practice was to apply customs duties to specified categories of goods described by HS codes that were bound under the GATT, subject to special and differential treatment.”

It further argues that: “Services transactions between foreign suppliers and domestic consumers are governed by regulatory disciplines under the GATS, whose rules do not address the liberalisation of customs duties. Technically, there is an area of cross-over between the two agreements: the supply of computer services, including consultancy, development and implementation of software, is classified as a service, whereas software in hard copy or digital form is a good, with an HS classification. WTO rules on customs duties apply to the latter. To extend the scope of the moratorium beyond that would impose obligations on Members that they never anticipated at the time it was adopted … It is important to recall that developing countries insisted on the use of request and offer negotiations and positive list scheduling as a means to limit the scope of their GATS obligations. It would be unreasonable and inequitable to extend coverage of the moratorium to services on the basis that such duties might have been possible in 1998.”

The study also pointed out that there is a second disagreement on scope. Some developing countries have insisted that the scope of the moratorium is limited to the vehicle or medium of transmission and does not include the content being transmitted.

At the WTO’s eleventh ministerial conference in Buenos Aires, Argentina, in December 2017, Indonesia had sought the insertion of a footnote to clarify that electronic transmissions do not include digital books, films, music etc.

The study has raised another important issue concerning the treatment of the moratorium in FTAs (Free Trade Agreements) which are being negotiated.

The European Union, in its recent FTA negotiations, states that “Parties agree that electronic transmissions are the supply of services under the cross-border services chapter and neither party may impose customs duties on electronic transmissions”.

Drawing evidence from several RTAs (Regional Trade Agreements) like the TPPA (Trans-Pacific Partnership Agreement)/CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), the authors showed that the moratorium was made permanent for parties to those agreements.

Many others have rejected the permanent moratorium like in the 16-country Regional Comprehensive Economic Partnership (RCEP) and reiterated the parties’ commitment to the WTO temporary moratorium, with any future adjustments to that position depending on outcomes within the 1998 WTO Work Programme on Electronic Commerce. Further, the entire RCEP e-commerce chapter is unenforceable.

Therefore, the study emphasized that these questions of scope and interpretation are fundamental and will remain contested as digital technologies have evolved rapidly and digital products have substituted for traditional commodities.

The study suggests that prior agreement on which products are implicated by electronic transmission at the level of HS system codes should be a pre-requisite for discussion of the future of the moratorium, with provision for renegotiating the list in the future.

Without such clarity, developing countries would be surrendering tax policy, in a very important part of the tax toolkit.

The study also criticized the methodologies adopted in the studies on the impact of the moratorium conducted by the European Centre for International Political Economy (ECIPE) and the OECD, both published in 2019.

It pointed out that “there are important flaws in the ECIPE methodology and its implementation. The study applies the method of computable general equilibrium modelling (CGE) to estimate the economic impact. It uses a data set common to CGE trade modelling known as GTAP (Global Trade Analysis Project), which does not have the actual electronically transmitted products broken out separately as specific products… It does not reflect the possibility that higher tariffs on imports could stimulate domestic production, which generates new employment opportunities and additional incomes. The typical CGE model considers such effects to be outside the model and treats them with skepticism.”

Further, Montes and Kelsey showed that, “The OECD’s analysis draws on two recent studies that use US trade data to evaluate protectionism provoked by recent US policies to impose tariffs. These studies find that the costs of these policies are borne by domestic consumers, with harmful impacts on productivity, employment, and balance of payments. That methodology and its related policy arguments may well be applicable to developed countries, although it is notable that they can be disregarded in relation to specific sectors whose expansion these countries are themselves prioritising. They are much less applicable to developing countries, which might be more willing to accept the estimated welfare losses generated from higher prices for specific HS products with the aim of creating new domestic enterprises in these sectors.”

As regards the non-tariff impacts of the moratorium on development, the authors have succinctly argued that in order to achieve structural transformation, developing countries must transit from being consumers of imported products to being producers.

Several scholars like Ha-Joon Chang and successive UNCTAD Trade and Development Reports have underscored the need for the state taking a proactive role in industrialization in developing countries.

Interestingly, even the US Trade Representative Ambassador Robert Lighthizer has highlighted the need to build robust domestic supply chains in crucial sectors.

Historically, because new activities are not commercially profitable for domestic enterprises, successful efforts to introduce new economic activities require governments to subsidize investment and protect the activities from import competition until they can match their counterpart foreign products in cost and quality.

A permanent moratorium would vastly reduce the policy space of developing countries to address rapidly growing, and poorly defined, trade in digitised goods, the authors concluded in their study.

As there are currently no bound tariffs for digitizable products which move online, developing and developed countries could raise them for domestic policy reasons in the absence of a moratorium, they argued.

This means the actual potential tariff revenue loss could be higher than projected by both the UNCTAD study and this report. At present, the temporary moratorium mainly benefits large digitalized companies, almost all of which are US companies, and provides these companies with first-mover advantages to the disadvantage of all other countries.

Even European countries remain concerned about their inability to obtain sufficient tax revenue from their operations. The European companies would be potentially disadvantaged in the same way as developing countries if the moratorium is made permanent.

In a similar vein, a recent study by Dutt and Thrasher (2020) of Boston University on “Growing Share of Online Trade Undercuts Government Ability to Pull in Revenue” used the methodology adopted by UNCTAD and estimated that a cumulative amount of USD 1,612.57 billion of “online” trade has escaped potential trade taxation by governments in the period 1998-2018.

More crucially, the Boston University study has argued that this lost revenue can never be recovered by the developing countries by using internal taxes as there exists a large informal sector which is out of the tax net.