Digital trade growth underscores need to evolve trade rules

The renewable WTO moratorium on electronic transmissions – which prohibits WTO members from assessing customs duties on cross-border digital transmissions — awaits an uncertain fate at the end of the year. Failure to renew the moratorium could result in tariffs being applied to currently duty-free transactions ranging from software downloads to digital music.

Trade means more than just physical goods

Traditionally, when we’ve talked about “trade” we’ve primarily been referring to trade in physical goods: machinery, clothing, commodities, etc., and all the other various products that fill massive cargo ships, railway cars, and long-haul trucks. But today, trade is less about physical goods, and more about digital transactions. In fact, the McKinsey Global Institute estimates that cross border data flows now contribute more to global GDP growth than trade in physical goods – a truly remarkable commentary.

Compelling reasons to maintain moratorium?

On its face, the argument in favor of maintaining the moratorium appears compelling. Digitally delivered products spur innovation and productivity by facilitating access to technology and data. This boosts both business and national competitiveness.  Micro, small, and medium sized enterprises (MSMEs) are especially well positioned to benefit, as the digital economy allows them to compete globally at substantially lower cost than would otherwise be the case. This has empowered an entire category of small entrepreneurs who were previously locked out of the game. And consumers are able to more easily and affordably access recreational, entertainment, and social networking content. Applying tariffs to such transmissions and transactions would only slow and reduce access to the substantial benefits they deliver.

On top of that, it is entirely unclear if applying tariffs to transmissions is even technologically or logistically feasible. A live-streamed sporting event or musical performance might entail millions of electronic transmissions across a multitude of servers in dozens of countries. How would relevant officials even begin to determine, assess, and collect tariffs?

Strong arguments against the moratorium?

At the same time however it’s hard to entirely dismiss the logic of those who call for an end to the moratorium. If it is perfectly acceptable under existing WTO rules to assess duties on a given hardback book, why is it unacceptable to assess duties on the very same book when it is digitally delivered? And as an increasing portion of book sales transition from physical to digital, the amount of potential tariff revenue involved also increases.

The debate is further complicated by an unfortunate developmental divide: the most competitive digital companies that stand to benefit from extending the moratorium are from developed countries, whereas less developed countries are the ones that will suffer the highest revenue losses if the tariff moratorium is extended, according to a recent UNCTAD report. 

Yet, research by the OECD suggests that the actual amount of foregone tariff revenue – as a percentage of overall government revenue – is extremely modest for developing countries: somewhere in the range of 0.08 percent and 0.23 percent.

But irrespective of the amount of revenue involved, there is a deeper conundrum here that needs to be thought through. WTO tariff schedules are delicately balanced, negotiated agreements. Digital technologies are moving an increasing portion of trade from the dutiable to non-dutiable category (at least as long as the moratorium remains in place). In a sense, it could therefore be argued that technology is forcing countries to involuntarily provide tariff concessions beyond those they agreed to in the WTO.

The early stages should include a recognition of three principles:

• We can’t function without precise definitions: There is currently no universally accepted definition of “digital trade” or “electronic transmissions” or other similar basic concepts. It will be impossible to adequately and fairly govern trade in these areas until we know exactly what we are talking about. We have already seen that differing interpretations over what is covered under the moratorium have caused complications and stilted progress.
• Technology should not be permitted to shift the balance of negotiated concessions/benefits: It’s unclear whether there will ultimately be an overwhelming rationale for maintaining duty-free electronic transmissions. But if so, no country should feel that the “bargain” they struck with the WTO has been significantly reconfigured as a result of technological advances beyond their control. That would only further undermine confidence in the WTO and heighten perceptions that the rules of trade are set up to benefit developed countries.
• Avoid back-door protectionism:  Tariffs and other “at the border” barriers will likely prove to be less relevant in restricting cross-border electronic transmissions than they are for physical goods. As “at the border” barriers have become less relevant in other sectors, we’ve seen that bureaucracies can become extremely creative in fashioning opaque regulatory or market requirements that restrict foreign access or favor domestic providers. The nature of electronic transmissions potentially provides an even wider playing field for such mischief. Any new WTO rules or guidelines for digital transactions should include bulwarks against disguised, behind the border protectionism. We should not permit old forms of protectionism to be transposed into new digitally-enabled modes of trade.

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