The Moratorium on Tariffs on E-commerce Should Stay

| 25 November 2021
Trade, Blog | Tags: Digitalization, Tariffs, WTO

The rise of the digital economy will be hitting the agenda at next week’s Ministerial Conference (MC12) of the World Trade Organization (WTO) in many ways. The continuation of the provisional e-commerce moratorium is one of them – and one that is critical.

The e-commerce moratorium was introduced in 1998 and has been reaffirmed at the WTO Ministerial Conferences ever since. It established that “members will continue their current practice of not imposing customs duties on electronic transmissions,” and thus ensured that during the last two decades the digital economy has grown in a de-facto tariff-free environment.

The moratorium complemented the call to establish a work program which was adopted later that year “to examine all trade-related issues relating to global electronic commerce”, but which did not lead to progress in defining new rules on digital trade.[1] Against this background, in 2017, 71 WTO members launched a plurilateral Joint Statement Initiative (JSI) on e-commerce. By early 2021, the initiative had progressed beyond exploration to actual negotiation and to include 86 WTO members aimed at creating a new rulebook for trade in the digital era on issues such as spam, e-authentication, online consumer protection, and many more.

Within these plurilateral talks, several countries have proposed to make the moratorium permanent, while Indonesia—which joined the JSI in 2019—has opposed this step. Indonesia’s opposition to the moratorium dates back to MC11 in 2017, when it argued that the term “electronic transmissions” pertains only to the carrier (electronic versus physical transmission) and not to the content (the goods being transmitted). Its request to have this understanding introduced to the moratorium as a footnote was not agreed-upon. Nonetheless, Indonesia refrained from unilaterally opposing the moratorium,[2] but introduced a border tariff on intangible goods in early 2018, though keeping the tariff rate at nil.[3]

South Africa and India, both not members to the JSI, have raised Indonesia’s understanding again in 2020 and 2021. They called for the same limitation on the term “electronic transmissions” and to applying the established commitments under GATT and GATS to everything not covered by this definition. They also highlighted concerns, specifically in relation to developing countries, on the current and future revenue forgone due to increasing digitalization, as well as the constraints a broader moratorium may impose on their ability to foster their own digital economy.

Trade and trade rules for the digital economy

E-commerce was a promising but marginal activity in world trade in 1998. The moratorium thus applied to a tiny fraction of global trade. Fast forward to the present, the digital transformation of the economy has reached a point where distinguishing digital trade from trade in general is less meaningful. What is needed now are rules for trade in the digital economy – not rules for digital trade.

The communication by India and South Africa notes that the economy has indeed gone digital and the scope for the moratorium has broadened – to the extent that developing countries have lost their policy space for industrial policy and foregone much needed government revenue, they argue.

Tariffs are imposed for two main purposes: to protect local firms from foreign competition or to generate government revenue. On both accounts tariffs have largely lost their importance. The global applied weighted average stood at 2.5% in 2017 where agriculture, clothing and motor vehicles are the main sectors subject to significant tariffs.[4] The estimated possible revenue forgone for governments due to the moratorium ranges between $280 million and $10 billion per year.[5] Tariff revenue in most countries accounts for a modest to tiny share of government revenue (Figure 1).

Figure 1. Central government revenue by source, 2016

Note: G20 countries for which data are available.  Source: IMF

It is well documented that tariffs mainly fall on the consumer in the tariff-imposing country. For revenue purposes, value added taxes or general service taxes that apply equally to imported and locally produced goods and services have largely replaced tariffs. Goods and services taxes are less distortive, have a broader base, and could replace tariffs as a source of revenue also in countries where tariffs are still important.[6]

The WTO rulebook distinguishes between goods (the GATT) and services (the GATS). While tariffs are a legitimate trade policy instrument for goods, tariffs violate the national treatment principle in the GATS. Digital content comes from both goods producing and services-producing sectors, and it is not clear how digital content should be classified in the goods-services space.

In principle, whether a product is delivered by road, sea, air, or digital networks should not matter for how it is taxed. However, the way products are classified along the goods-services dimension does matter for which trade rules apply. Following the accelerated digital transition during the Covid-19 pandemic, updating the WTO rulebook for a digital global economy is more important than ever. The update should include aligning the rules to economic realities on the ground. In the meantime, the moratorium should stay.

 

[1] Yasmin Ismail. ‘E-Commerce in the World Trade Organization: History and Latest Developments in the Negotiations under the Joint Statement’. Geneva: International Institute for Sustainable Development and CUTS International, January 2020. https://www.iisd.org/system/files/publications/e-commerce-world-trade-organization-.pdf.

[2] Indonesia. ‘Facilitator’s Consultation on Electronic Commerce, MC11 Declaration, and Other Relevant Plenary Sessions’. Communication. Ministerial Conference 11. Buenos Aires, Argentina: WTO, 13 December 2017. https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/MIN17/68.pdf&Open=True.

[3] UNCTAD. What Is at Stake for Developing Countries in Trade Negotiations on E-Commerce?: The Case of the Joint Statement Initiative. UNCTAD/DITC/TNCD/2020/5. Geneva, Switzerland: United Nations, 2021. https://doi.org/10.18356/9789210056366.

[4] Source: World Bank Development Indicators and WTO tariff database

[5] For a fuller view into the debate: a group of JSI members responded to the first communication by India and South Africa by raising topics of the effects of tariffs on GDP, consumer welfare, and proposing alternatives to tariffs (see Australia, Canada, Chile, Colombia, Hong Kong, China, Iceland, et al. ‘Broadening and Deepening the Moratorium on Imposing Customs Duties on Electronic Transmissions’. Communication. Work Programme on Electronic Commerce. Geneva, Switzerland: WTO, 29 June 2020. https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/GC/W799R1.pdf&Open=True.)

[6] See Andrenelli, A. and J. López González (2019), “Electronic transmissions and international trade – shedding new light on the moratorium debate”, OECD Trade Policy Papers, No. 233, OECD Publishing, Paris, https://doi.org/10.1787/57b50a4b-en. Banga, R. (2019). Growing trade in electronic transmissions: Implications for the South. UNCTAD Research Paper, 29. https://unctad.org/system/files/official-document/ser-rp-2019d1_en.pdf  Kozul-Wright, R., & Banga, R. (2020). Moratorium on Electronic Transmissions: Fiscal Implications and Way Forward: UNCTAD Research Paper No. 47.

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