WTO’s Customs Duties Moratorium: Implications for E-Commerce in the Asia-Pacific Region

Background
The World Trade Organization (WTO) agreed to a moratorium on customs duties on “electronic transmissions” in 1998, following a proposal by the United States. The moratorium has been extended several times over the past 20 years at biannual WTO Ministerial Conferences, but the lack of consensus over the definition of “electronic transmissions” has prevented a permanent solution from being reached. With the rapid growth of new technology fields such as cross-border e-commerce and cloud-based services, reaching a consensus on the definition has become even more challenging.

While WTO members have sought to make the moratorium a permanent agreement, several developing economies have vocally opposed such efforts. For instance, India and South Africa have made multiple joint submissions to highlight the moratorium’s apparent negative effects on developing countries – including the loss of revenue generation opportunities from customs duties, as well as sovereignty over their respective policy environments.

On-going opposition to a long-term moratorium increases the possibility that key cross-border data flows, such as music streaming and financial transactions, could be hit with tariffs – thereby threatening the cohesiveness of the global digital economy. In light of such risks, 108 tech company associations, including groups from India and Indonesia, petitioned WTO members on the sidelines of the 12th Ministerial Conference in June 2022 to extend the moratorium. The moratorium has since been extended yet again until the next Ministerial Conference, likely in 2023.

Effect of Moratorium on APAC Economies
An end to the WTO moratorium would likely threaten the digital competitiveness of developing economies worldwide, which have witnessed a new wave of innovation and prosperity enabled by freer global data flows. At its current pace, India’s digital economy is expected to multiply by a factor of 10x between 2020 and 2030 – rising from US$85-90 billion annually to US$800 billion. Meanwhile, Indonesia’s digital economy is expected to double in market value from US$70 billion in 2021 to US$146 billion by 2025.

Consequently, ending the moratorium would sever a vital global link for small businesses and entrepreneurs in developing economies, which have found resilience through the digital economy. Customs tariffs would introduce new administrative and financial burdens for such businesses, and jeopardize the meteoric growth of the digital economy worldwide.

According to research by the European Centre for International Political Economy (ECIPE), any potential increase in tariff revenues caused by the termination of the moratorium would be significantly offset by higher prices for digital economy products and services – thereby leading to lower consumption, slower GDP growth, and ultimately smaller consumption tax revenues. If faced with reciprocal tariffs, India and Indonesia would lose nearly 49 and 160 times in GDP respectively what they would potentially generate from new tariff revenues. Moreover, tax revenues in India and Indonesia would lose 51 and 23 times respectively more in tax revenues than they would gain through tariff revenues. Additionally, implementing the new tariff regime alone would entail significant enforcement and monitoring costs for governments.

Arguments For and Against Moratorium Removal
Governments have generally relied on three key arguments to make the case for removing the ‘electronic transmissions’ moratorium: (i) loss of significant tariff revenue; (ii) loss of control over regulatory power, and; (iii) lack of domestic readiness for new technologies. We detail such arguments below, and provide counter-arguments for the points raised.

(i) Lost tariff revenue
Developing countries such as India and South Africa argue that they will be uniquely disadvantaged by a permanent moratorium on ‘electronic transmission’ tariffs. A study by the South Centre claims that as global online imports of such transmissions have increased from US$139 billion in 2017 to US$204 billion in 2020, this translates to US$48 billion and US$8 billion in lost tariff revenue for developing countries and least developed countries (LDCs) respectively. Moreover, it also claims that if the moratorium is not lifted by 2025, developing countries and LDCs will continue to lose US$25 billion and US$5.3 billion annually in potential tariff revenue from 2025 onwards.

Additionally, commentators have claimed that such lost tariff earnings are not insignificant relative to total government revenue – with customs and import duties forming over 40% of government tax revenue in many LDCs (e.g., Somalia, Central African Republic), and forming over 10% of tax revenue in 40 countries worldwide. Moreover, some commentators remark that rapid digitalization brought on by the COVID-19 pandemic has also further exacerbated the scale of lost tariff collection potential by developing countries and LDCs, which has further disadvantaged such governments and their ability to develop capabilities to effectively compete in the global digital economy.

Rebuttal
Several research papers by the OECD and ECIPE find that the overall benefits of the ‘electronic transmissions’ still outweigh any lost tax revenue potential experienced by governments. It has been widely established that the burden of such tariffs largely falls on consumers within the tariff-imposing country – resulting in decreased consumer spending, national GDP, and domestic tax collection.

Moreover, the St Gallen Endowment has calculated that such tariffs would ultimately only represent small shares of national tax revenues in developing countries and LDCs. For instance, forgone tariff revenues in India, Indonesia and South Africa would amount to merely 0.2% of domestic tax revenue in those countries. It also finds that forgone revenues in LDCs (e.g., those in Sub-Saharan Africa) would have only financed less than 5 days’ worth of government spending in those countries. It also argues that potential tariff revenue losses are largely concentrated in a relatively small number of LDCs, and that the issue of lost tariff revenue is not a globally uniform one.

Given the economically deleterious effects of ‘electronic transmission’ tariffs and their relatively small contribution to overall tax revenue, governments should instead seek to increase their revenue through value added or goods and services taxes, which are less distortive on trade and apply equally to domestically-produced and imported goods and services. In conjunction with efforts to stimulate participation in the global digital economy, such taxes would help governments fulfill their need for greater tax revenue.

(ii) Loss of control over regulatory power
Developing countries argue that the moratorium has reduced their ability to effectively control their policy spaces for technology, or regulate imports of ‘electronic transmissions’. They claim that the moratorium goes against the spirit of the 1995 General Agreement on Trade in Services (GATS), which spells out the ability of countries to liberalize trade in services at a pace and in sectors of their choosing. Moreover, some commentators argue that the increasingly digitalized nature of modern economies and the potentially expansive interpretation of ‘electronic transmissions’ could further exacerbate the loss of regulatory control in developing countries. They worry that the moratorium could chip away the ability of such governments to fortify their own digital economies through effective regulation.

Rebuttal
Such concerns overlook the fact that, even with a moratorium, governments still have multiple policy tools at their disposal to regulate the pace and breadth of technological innovation in their own countries. For instance, data privacy, consumer protection, and online content regulations already serve as key instruments for ensuring that the provision of digital services does not run contrary to government objectives or public welfare. Additionally, the relative lack of harmonization of digital trade rules and standards among developing countries is in itself a potent ‘non-tariff barrier’ to trade, and demonstrates that governments are in fact far from encountering an erosion of control over their technology spaces.

Moreover, in spite of the potentially expansive scope of ‘electronic transmissions’, WTO members have demonstrated in WTO Ministerial Conferences and Joint Statement Initiatives they are amenable to considering narrower interpretations of the term. This is reflected in how statements by South Africa, India and Indonesia have received significant discussion in various WTO channels. In short, the willingness of WTO members to accept a narrower definition cannot simply be precluded in light of recent discussions.

(iii) Lack of domestic readiness for new technologies
Developing countries have argued that removing the moratorium could open the floodgates to the influx of new technologies into their economies, despite not having comparative domestic capabilities to compete in such areas. In March 2020, India and South Africa issued a statement which argued that the moratorium essentially served to grant advanced countries “duty-free access” to their markets for advanced technologies. They worry that this could exacerbate global inequalities between technology ‘haves’ and ‘have nots’, and permanently put developing countries at a disadvantage in advanced technology development. In the long run, developing countries fear that they will gradually lose their trade competitiveness and domestic digital industries if they become dependent on digital imports from advanced economies.

Rebuttal
On the contrary, a removal of the moratorium would arguably harm the development of advanced industries in developing countries to an even greater extent. Cutting-edge innovations – such as Internet-of-Things solutions, connected manufacturing, and real-time analytics, depend on the reliable and uninterrupted flow of data across borders. The imposition of tariffs would only serve to harm the competitiveness of new solutions being developed in developing economies, and would likewise also impede reasonable levels of technology transfer and R&D originating from advanced economies. With fewer opportunities for collaboration across borders, this will result in a lose-lose situation for all economies.