Head of new globalisation at Economist Impact, John Ferguson, sat down with Jane Drake-Brockman, director, Australian Services Roundtable, co-convenor, Global Services Coalition, and visiting fellow, Institute for International Trade, University of Adelaide, and Hildegunn Kyvik Nordås, senior associate, Council on Economic Policies, Zurich, and visiting professor, Örebro University, to ask why a deal on e-commerce at the MC13 is a must-have.

JF:
The World Trade Organisation (WTO) moratorium on the imposition of customs duties on electronic transmissions has been in place since 1998 and has widely been seen—in the absence of multilateral rules—as a mechanism for providing businesses with certainty and as an enabler of trade. We've seen many businesses and membership bodies releasing statements in support of extending the moratorium, which would continue to prevent members from implementing customs duties on digital services. However, there are also a number of WTO members who are pushing to see it come to an end, citing it as a barrier to digital trade development through lost customs-duties revenue. Is the moratorium taking away from developing countries the opportunity to effectively leverage and benefit from digital services in the global market? Why/why not?

Hildegunn:
The exact wording of the moratorium is: “Members will continue their current practice of not imposing customs duties on electronic transmissions.”  

As eloquently explained by the OECD, continuing current practice means not imposing duties where there were no duties before. Customs duties mean that other taxes, such as (non-discriminatory) sales taxes or VAT, are outside the scope of the moratorium. The sticking-point is what is meant by “electronic transmission”.

Is it just the transmission and not the content, as suggested by some? If so, to the best of my knowledge, nobody has come up with a practical way of making the distinction between content and transmission for customs-valuation purposes. No- tariffs-on-electronic-transmission are included in 100 regional trade agreements and counting—and no agreement so far has used this definition.

Assuming content is within the scope of the moratorium, are electronic transmissions goods or services?   If services, the General Agreement on Trade in Services (GATS) should apply, and tariffs are alien to the GATS. Many rightly see imposing tariffs on services as contradicting the overall objective of the WTO and GATS, which is gradual trade liberalisation, not imposing trade restrictions in new areas. If goods, the continue current practice language is helpful. Nobody suggests that the moratorium should apply to a pair of shoes, for example, just because it has been ordered electronically over e-commerce platforms.

Then we are left with products that have been transformed from material to digital, or products that were born digital. Books, films, music, software, design etc. are examples. Statistical agencies mostly agree that these should be considered services. In any case, such products constitute a huge challenge for customs valuation because of their market structure: all-you-can-eat subscription services where content from all over the world is bundled; multi-sided markets where one side, typically advertising, pays and the other(s) do not pay or pay at a considerable discount; and identification of origin and destination of a transaction may not be straightforward.

Jane:
Absolutely not.  On the contrary, the moratorium is a mechanism oriented to maximising the benefits, especially for developing countries, and especially for small businesses, from digital services trade.  There is no real debate about the development opportunities from digital trade—all the global economic institutions, including the World Bank, the WTO Secretariat, UNCTAD, International Trade Centre, have shown as much.  The concerns expressed by a handful, at most, of WTO members are better understood as (1) misplaced concerns about potential declines in government revenue-raising as “goods” transition online not just for sale but also for digital delivery as “services”, and (2) actively protectionist approaches to digital industrial policy.

Since the IMF added its voice to the discussion last October, publishing an authoritative study on the matter, there has been no further real attempt by any economy to assert the government revenue line. The IMF has shown definitively, for those economies worried about this issue, that more government revenue can be raised by non-discriminatory value-added taxes/goods-and-services taxes than any discriminatory tariff at the border.  The IMF study was a game-changer. The Indian government has effectively dropped that argument, and the others know they have no real leg to stand on. That concern has been proven to be misplaced.

The second concern, the desire for policy space to impose new protectionist measures in support of local digital industries, has similarly been shown in the economic development policy literature to be misplaced. The Asian Development Bank and UN-ESCAP had both led major research undertakings on this issue, looking at the policy drivers of digital-services development, and shown very clearly that openness at the border and non-discrimination in domestic regulatory settings are both critical essential enablers, not deterrents of digitalisation.  This is one area where I have personally contributed to the literature, especially in the Asia-Pacific region, including in APEC, and it is my strong view there is no economic case to be made for a protectionist approach.

As we edge closer to MC13, it becomes clearer by the day that the moratorium is now  simply being used by a tiny minority for political leverage in the context of the overall MC13 package. There is no negative case to be made on the merits of the moratorium. There are no demerits.

At MC12, a statement in support of the moratorium was issued by 100 business associations.  Since MC13, there have been 14 additional economic studies undertaken by international organisations highlighting the merits of the moratorium. I personally worked with a team of Indonesian and Indian economists on a quantitative study which showed, for example, that every 1% increase in imported digital inputs by Indonesian micro, small and medium-sized enterprises (MSMEs) generated an increase of 0.96% in MSME output, an increase of 0.85% in MSME labour productivity (defined as MSME output per employee), and MSME employment also grew by 0.42%.

Given the overwhelming new evidence base assembled in the last two years, in support of discussions in the WTO’s e-commerce work programme, for MC13, the same statement now has 198 signatories. Last week, the statement was signed by Business Unity South Africa (BUSA) and Business Leadership South Africa (BLSA).

JF:
Against this backdrop, does the moratorium—or constraints on imposing customs duties on digital products—take away from  developing countries from the opportunity to effectively leverage and benefit from digital services in the global market?

Hildegunn:
No. This is because digital services are different. They feed on and produce data and many are inherently global. For a start, imposing tariffs on digital transactions requires the transaction to be routed through central servers to which the government has some sort of access or control. This alone undermines the structure of the internet as a decentralised, extremely resilient network of networks which developing countries rely on. Connectivity is key to effectively leverage and benefit from digital services in the global market. Developing countries need to focus on building the physical and legal infrastructure to stay connected; not spend resources on trying to force digital services into a dated trade and regulatory framework.

As the African Union points out, developing countries may have few legacy challenges and may be in a good position to leapfrog into digital solutions, including AI (as they did previously for mobile solutions). For them, keeping the integrity of the internet intact is essential. Developing countries also need to build trust in their regulatory framework such that domestic companies qualify for processing data from the EU, for example. Otherwise, their market access in digital services is illusory.

Studies of sufficient rigour that assess what duties on electronic transmissions mean find that the foregone customs revenue from the moratorium is less than 1% of customs revenue. VAT or sales taxes may be imposed as countries see fit.

JF:
The WTO's Joint Statement Initiative (JSI) on E-Commerce is a plurilateral agreement aiming to address the gap in digital-trade rules. Any progress towards finding a more concrete solution for the imposition of customs duties on e-commerce would be negotiated through it. What do you think needs to happen at MC13 in order to make good progress here?

Jane:
If MC13 sees the extension of the WTO moratorium, then negotiators and the business community can sigh temporarily with relief as the JSI would safely have a month or at most two more to finish its work after MC13, with no “early harvest” announcement at ministerial level at MC13. If the WTO fails to extend the multilateral moratorium, in my opinion, JSI participants will have no choice but to act immediately and announce a plurilateral deal on a moratorium.  If they don’t, the JSI will fall into disrepute on February 29th, just like the WTO.

Moratorium aside, what else has to happen on the JSI on E-Commerce at MC13? The issue isn’t on the official agenda.  No public side events are planned by the co-convenors. No plurilateral side get-togethers of ministers have been announced.  Largely, I think this is because it is judged, rightly or wrongly, to be in the interests of the multilateral moratorium and the multilateral system generally, to first give the multilateral system its best chance of delivering a positive outcome in Abu Dhabi.

But there must be a statement by the co-convenors at MC13.  It should, in my view, be at the ministerial level but at least at the ambassadorial level. It must be a very strong, clear statement setting out both the progress which has been made (preferably with actual text circulated on provisions which are effectively parked as already agreed), and a timeline and deadline for completion within months.  The statement must also, now, include wording which reassures the business community that cross-border data flows are not off even the JSI agenda for the future. Cross-border data flows, data localisation and protection of source code must be announced as being on the future agenda, via an agreed mechanism such as a review mechanism. This is because, without some resolve on a way forward on these fundamental issues, the anticipated JSI on E-Commerce outcome will be facilitative of trade, but will not turn back the tide of digital regulatory disconnect and fragmentation so clearly under way.  All by itself, this will damage business confidence in the digital economy—with all the global economic consequences which typically follow from a generalised decline in business confidence.

JF:
Should progress fail to be made on both the JSI and the moratorium, what do you think this would mean for the WTO as a forum for liberalising and regulating trade?

Jane:
I am hopeful that sanity will prevail on the moratorium. But it will be a painful process right up until the last second in Abu Dhabi.  If sanity does not prevail, if the moratorium is not extended, WTO ministers will have presided over a deliberate decision to allow the introduction of new tariff restrictions. This would be contrary to the WTO mission and function. There would be a strongly negative immediate walk-away response from the business community everywhere.

Only one thing could mitigate the global business response. It might not be enough to save the WTO, but it would be enough on its own to sustain business confidence in continued growth in global digital trade for at least a short period. It might carry certain risks, but the risks would be worth taking. It would have to happen very fast.

There would have to be a concerted plurilateral ministerial announcement by the participants in the JSI, preferably immediately following the WTO Ministerial Conference and no more than a day or two afterwards, announcing a permanent extension (on a reciprocal basis) of the ban on customs duties on e-transmissions, effective immediately. 

JF:
Should businesses be preparing for the worst-case scenario? What should they be doing to prepare?

Jane:
The worst-case scenario has two aspects: (1) the Moratorium is not extended and (2) some governments act to introduce new customs duties.  A third aspect relates to potential retaliation by trading partners.

Business is already steeling itself for the worst-case scenario. Sadly governments are not. For MSMEs, there is very little they can do apart from band together rapidly for advocacy purposes with their domestic authorities to ensure they can escape any potential new customs duties.  If they can't, all the digital aspects of their business models will be jeopardised, they will lose international clients and need to hunker down domestically. Most will go out of business. This is the scenario facing MSMEs in the handful of naysaying WTO members.

For larger firms, everywhere, it will get much harder to find workarounds the fragmenting digital market.  Digital supply chains will face major global disruption.

International digital trade and investment will trend downwards instead of upwards and global economic growth and development prospects will diminish.

I am relieved to see so many business associations everywhere wake up to the full reality this year and band together to sign the multi-association letter.

JF:
Hildegunn, any last thoughts?

Hildegunn:
Let me just emphasise that for developing countries in particular cross-border data flows are essential for their digital transformation and to benefit from AI. To avoid having to deal with a multitude of different regulations across different jurisdictions, a concrete path towards common principles, and in due course, standards, need to be set for the JSI on E-Commerce at the MC13. To avoid a collapse, one could agree on the low-hanging fruits and put on a brave face and argue that in light of recent developments in AI, provisions on privacy, cyber-security and source code need some more reflection.

If progress fails to materialise, the WTO will continue its slide into irrelevance. My take is that businesses have already stopped relying on the WTO and instead focus on free-trade agreements (FTAs) and digital-economy agreements. As noted, there are 100 agreements that already include a prohibition of tariffs on electronic transitions. The losers will be businesses in developing countries not party to such agreements.

JF:
Jane, a last word from you?

Jane:
A last comment on Hildegunn’s points about the scope and definition of the Moratorium. The current draft co-convenor text of the JSI on E-Commerce is understood to contain a provision on a plurilateral moratorium that would be permanent and drafted to cover both the carrier medium (the bits and bytes) and the content. 

I think the OECD has pretty definitively shown that it doesn’t make sense to interpret the moratorium as applying only to e-transmission itself, and the OECD has also documented the definitions in all the bilateral agreements that contain a moratorium (and make it permanent), and there are none which specifically limit the definition to the transmission alone and not the content.