At the 13th WTO Ministerial Conference in Abu Dhabi, the WTO e-commerce moratorium was renewed once again, but not without difficulty. This column explores the different issues around the moratorium debate. It argues that the potential foregone customs revenue implications of the moratorium are small and that losses can largely be offset by rising revenue from consumption taxes applied to digital services imports. Lifting the moratorium would also imply losses in competitiveness and increased trade costs, hitting low-income countries and small and medium-sized enterprises most.
The last two decades have seen momentous shifts in globalisation as a result of digital transformation (Baldwin 2019, Winters and Borchert 2021, Savona 2020). During this time, the WTO moratorium on applying customs duties on electronic transmissions, the only WTO provision that applies explicitly to digital trade, has underpinned a stable, predictable, and duty-free environment for digital trade to thrive (IMF et al. 2023). At the last WTO Ministerial Conference, after difficult negotiations, the moratorium was renewed, and WTO members agreed to continue discussions on its scope, definition, and impact.
The WTO e-commerce moratorium is a commitment to continue the current practice of not applying customs duties (i.e. tariffs) on electronic transmissions. However, since ‘electronic transmissions’ were never defined, there is room for interpretation about the precise scope of the commitment.
Recently, several WTO members have raised questions about the opportunity costs of the moratorium. 1 Chief among their concerns is the potential loss of ‘policy space’ in the context of rapid technological change and potential losses in customs revenue due to the ‘dematerialisation’ of goods trade. For these WTO members, the lack of clarity on issues of scope and definition makes it difficult to understand the potential value, or opportunity cost of the moratorium.
In a recent paper (Andrenelli and López-González 2023), we review regional trade agreement provisions related to the electronic transmissions, provide new estimates of the potential foregone revenue implications of the moratorium, and explore some of the potential impacts of not renewing the moratorium on trade and competitiveness.
Some WTO members question whether the moratorium applies to the ‘content’ of the transmission (that is, the actual movies or e-books downloaded) or its ‘carrier medium’ (the bits and bytes that carry the content). 2 Questions have also been raised about whether the Moratorium affects the ability of countries to apply other, internal, taxes beyond customs duties, or if the Moratorium erodes other commitments made in the WTO.
Much can be learnt about the potential scope of the moratorium by looking at how countries have approached customs duties on electronic transmissions in their trade agreements. Analysis using the Trade Agreement Provisions on Electronic Commerce and Data (TAPED) database (Burri et al. 2022) shows that, of the 105 regional trade agreements (RTAs) with an e-commerce chapter (by end of 2022), 100 included a provision on the non-imposition of customs duties on electronic transmissions (NICDET provision for short). More detailed analysis of these provisions reveals that (Figure 1):
Figure 1 Non-imposition of customs duties on electronic transmissions (NICDET) commitments in regional trade agreements can provide useful guidance on the interpretation of the potential scope and definition of the moratorium
Number of countries adopting a particular addition or clarification in at least one of their trade agreements
Some countries define electronic transmissions as “digital products” which include computer programmes, text, video, images, sound recordings, and other products that are digitally encoded. Others clarify that “deliveries by electronic means shall be considered as the provision of services”. Others just use the term “electronic transmissions”, without any further clarifications. However, differences in definitions have not prevented the conclusion of NICDET provisions between countries with different definitions. 3 While for some the lack of a precise definition might be considered a challenge, for others it is a way of enabling a variety of views to coexist.
Some WTO members worry that not imposing customs duties on electronic transmissions may lead to foregone customs revenue. That is, a country importing a movie via an electronic transmission foregoes the tariff revenue associated with its import via a physical carrier medium, such as through a DVD. They argue that the rapid pace of digitalisation increases the scale of the problem, especially for developing countries, which tend to charge higher tariffs on these items.
However, imports of ‘digitisable goods’, which are physical goods that can be digitised and subsequently sent across borders digitally (e.g. CDs, books, calendars, videotapes), have generally been growing over the last decade, especially in developing countries (Figure 2), continuing to generate tariff revenue.
Figure 2 Imports of digitisable goods have been growing, particularly in low-income countries
Average yearly change in physical imports of digitisable goods in 2008-2019, by income group
Accurately assessing the potential foregone revenue implications of the moratorium is not easy given uncertainties about scope and definition. However, we argue that existing empirical studies (Banga 2022, 2019) have not addressed three important issues that bias current estimates upwards. The first is that existing commitments and practices, such as NICDET provisions or other preferences granted in regional trade agreements, limit the ability of countries to raise tariffs on digitisable goods and electronic transmissions, even in the absence of the e-commerce moratorium. The second is that not all trade that can be electronically transmitted will be (as seen above, imports of digitisable goods have actually been increasing for many countries). The third is that assessments need to consider the potential offsetting effects of VATs/GSTs applied on growing digital imports.
We find that the foregone customs revenue that can be attributed to the moratorium is small – on average 0.68% of total customs revenue or 0.1% of overall government revenue. Given higher tariffs and lower levels of commitments, impacts are on average higher for low-income countries (0.33% of government revenue), and lower for high income country (0.01%). That said, for 77 of 106 countries analysed, standard VAT/GST taxes applied on digital services imports which are ‘born digital’ completely offset the customs revenue effects of the moratorium. 4
These findings underscore the potential to find fiscal solutions, based on consumption taxes, to collect revenue on immaterial imports based on widely adopted and internationally accepted standards (OECD 2017). These taxes are efficient and have a demonstrated capacity of increasing tax revenues (Hanappi et al. 2024). In addition, since single rates tend to apply, there is no need to spend resources identifying how to classify products into detailed nomenclatures or to determine their origin. These taxes also target final, instead of intermediate consumption, which, as we will show below, is important.
We find that tariffs on electronic transmissions have the potential to hit low-income country trade most. If existing tariffs on digitisable goods were to be applied to digital services (which is where electronic transmissions are measured in existing trade statistics) imports of low-income countries would fall by 32% and exports would fall by 2.5%. This is because more than 80% of digital services exports of low-income countries are to middle income countries which have more scope to increase tariffs. For middle-income countries, losses would be of 6% and 0.4% and for high-income countries of 0.04% and 0.5%, respectively.
Evidence also shows that the use of foreign digital inputs and digitisable goods contributes to domestic competitiveness, measured as changes in the domestic value added in final consumption (Figure 3). This suggests that trade cost increases arising from the termination of the Moratorium would lead to losses in domestic competitiveness. Therefore, there is a self-interest argument for maintaining a duty-free environment for electronic transmissions.
Figure 3 Digital inputs are key determinants of domestic competitiveness
Figures show the impact of increasing use of foreign digital inputs by one standard deviation on domestic value added
The impact of greater barriers on electronic transmissions is also likely to be asymmetric, affecting small and medium-sized enterprises (SMEs) most. Analysis using the World Bank Enterprise Survey (WBES) suggests that being able to deliver trade digitally is associated with higher propensities to export of smaller firms and not larger ones. Since SMEs generally have a lower propensity to export than larger firms, the ability to deliver products digitally may be an important mechanism to reach foreign markets, and this channel may be affected by the Moratorium lapse.
Overall, our analysis suggests that the potential foregone revenue costs of the Moratorium are small and that its lapse would come at the expense of wider gains in the economy.
Source : VOXeu
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