Moratorium on Digitisable Products: Impact on Developing Countries

Dr Dinesh Kumar, Research Associate, RIS  

With the acceleration of digitalization of the global economy, more and more digitisable products are leaving their tangible forms and are being traded online. This technology-enabled trade in digitisable products, particularly electronic transmission, got significant expansion even during the ongoing COVID19 pandemic. Given the way new technologies such as 3D printing (Remote Additive Manufacturing), robotics, artificial intelligence (AI) etc, are unfolding around the world economy, more and more products are being traded digitally. The current practice of moratorium on electronic transmission i.e., not imposing custom tariffs, has considerable implications for developing countries in relation to custom revenue; fiscal and policy space for protecting and providing level-playing field to domestic producers; and export competitiveness. The final decision on whether or not the moratorium should continue would be taken at the 12th WTO Ministerial Conference (MC12) [1] which was originally scheduled for June 2020 but, due to COVID 19, it has been tentatively postponed to June 2021[2].

As per existing studies like UNCTAD (2000), WTO (2016-JOB/GC/114), etc., the electronic transmissions mainly comprise digitisable products, namely, movies, music, video games and printed matter which fall under the category of luxury items [3]. Interestingly, these electronic transmissions are largely exported by the developed countries and mainly imported by developing countries. Tangible form of these products was assigned HS codes but, now, most of these products are being traded electronically. With the technological advancement, the tangible form of some of these products are further transformed into digital services and are being made available to consumers through ‘on-line streaming’ mode. Even during the COVID19 lockdown, the exporters of these electronic transmissions, such as Amazon Prime Video (the US), Netflix (US), Ninetendo (Japan), Rockstar (US), recorded considerable amplification in their sales and profits [4]. For instance, the sale of Chinese mobile games uncreased by 32 per cent in the first week of February, 2020 when compared with the previous year. Likewise, the stock markets across the world economy were plummeted as a result of COVID19 while Netflix stock (NASDAQ: NFLX) experienced surge [5].

The imposition of custom tariffs on these luxury products could have provided additional helping hand to the developing countries which faced and has been facing, huge financial crunch during the ongoing COVID19 pandemic. But existing rules and regulation in the World Trade Organisation (WTO) restrict the fiscal and policy space of financially constraint developing economies to impose tariffs on electronic transmission [6]. The current practice of moratorium on electronic transmission i.e., not imposing custom tariffs, was decided at the second WTO Ministerial Conference in May 1998 by the ministers while adopting the Declaration on Global Electronic Commerce [7]. The work programme on Global Electronic Commerce [8] assigned to four WTO bodies: the Council for Trade in Services; the Council for Trade in Goods; the Council for TRIPS; and the Committee on Trade and Development. On the regular basis ministers have reviewed the Work Programme on Electronic Commerce at various WTO Ministerial Conferences, namely, Geneva 1998; Doha 2001; Hong Kong 2005; Geneva 2009; Geneva 2011; Bali 2013; Nairobi 2015; and Buenos Aires 2017, and also agreed to continue with the current practice of moratorium on electronic transmissions until the next Ministerial Conference i.e., 12th Ministerial Conference (MC12) [9].

From the available literature, such as Andrenelli & González (2019) [10], Lee-Makiyama, Hosuk; Narayanan (2019) [11], Kozul-Wright & Banga (2020) [12], James (2019), [13], Banga (2019) [14]  etc. it is emerging that most of the developed countries in the favour of permanent moratorium on electronic transmission while developing countries are against it. The argument in favour of permanent moratorium is that the loss (consumer welfare, higher prices, lower consumption) of the developing countries would much more comparison to gains these would attain by imposing of custom tariff on electronic transmission. Additionally, these studies highlighted the relevance of uninterrupted amplification in the digital economy in developing countries for mitigating their economic slowdown resulted due to COVID 19 and subsequent prolonged lockdown, abetting well-being and ramping-up recovery. On the other hand, the argument against the moratorium is that for financially deficient developing countries custom tariffs are very crucial for their infrastructure ridden economies and accomplishing social and Sustainable Development Goals (SDGs). These studies also underscored the fiscal and policy space to impose custom tariff for protecting, nurturing, providing level-playing field to domestic producers in these areas. Due to moratorium, the developing countries lost $ 10 billion worth of potential tariff revenue in 2017 [15].

Further, emerging in new digital technologies, like 3D printing, (Remote Additive Manufacturing), Robotics, AI have dire consequences for developing countries as its scope goes much beyond affecting their custom revenues. The 3D printing carries the ability to shift the export competitiveness of labour abundant countries to capital abundant countries [16]. Some of the literature dwelling on this subject matter, also questions the technical feasibility of imposing customs duties on electronic transmissions [17]. Countries, such as India, EU, Australia, New Zealand and a few other, imposed indirect taxes like GST and VAT for some time on intangible imports of digital products[18]. On some digital transactions, India imposes an equalisation levy while a direct tax on digital services has been implemented by the France. Since last three years, Bangladesh has start collecting custom duties on the electronic downloads of software [19]. On streaming services, the governments can impose custom duties via identifying the HS codes of the corresponding physical products [20].

Undoubtedly, the developing countries encounters huge shortage of resources for accomplishing their various developmental goals and custom duties have been remained one of their major sources of government revenue to finance them. Any change in the revenue base due to digital revolution would further worsen the situation of these already vulnerable economies [21]. The experience gained by the developing countries during COVID19, especially in relation to financial shortages, highlighted the relevance of safeguarding policy space in international trade agreements and importance of preserving the freedom to regulate imports via custom duties.

 

References

[1]https://www.wto.org/english/thewto_e/minist_e/mc12_e/mc12_e.htm

[2]https://sdg.iisd.org/news/wto-members-highlight-benefits-and-drawbacks-of-e-commerce-moratorium/#:~:text=A%20decision%20on%20whether%20or,tentatively%20postponed%20until%20June%202021.

[3]https://www.thehindubusinessline.com/opinion/wto-restriction-on-imposing-custom-duties-on-electronic-transmissions-is-hurting/article31499002.ece

[4] Ibid.

[5] Ibid.

[6] Kozul-Wright, R., & Banga, R. (2020). Moratorium on Electronic Transmissions: Fiscal Implications and Way Forward (United Nations Conference on Trade and Development (UNCTAD) Research Paper no. 47).

[7]https://www.wto.org/english/tratop_e/ecom_e/ecom_e.htm

[8] Electronic Commerce: “Exclusively for the purposes of the work programme, and without prejudice to its outcome the term "electronic commerce" is understood to mean the production, distribution, marketing, sale or delivery of goods and services by electronic means”. For more detail see https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/L/274.pdf&Open=True

[9] Ibid.

[10] Andrenelli, A., & González, J. L. (2019). Electronic transmissions and international trade - shedding new light on the moratorium debate, Organisation for Economic Co-operation and Development (OECD) Trade Policy Papers, 233.

[11] Lee-Makiyama, Hosuk; Narayanan, B. (2019). The economic losses from ending the WTO moratorium on electronic transmissions, European Centre for International Political Economy (ECIPE) Policy Brief no: 3.

[12] Kozul-Wright, R., & Banga, R. (2020). Moratorium on Electronic Transmissions: Fiscal Implications and Way Forward (UNCTAD Research Paper no. 47).

[13] James, D. (2019). Anti-development Impacts of Tax-Related Provisions in Proposed Rules on Digital Trade in the WTO. Development (Basingstoke), 62(1–4), 58–65. https://doi.org/10.1057/s41301-019-00205-4

[14] Banga, R. (2019). Growing Trade in Electronic Transmission: Implications for Global South (UNCTAD Research Paper no. 29).

[15] Ibid.

[16] Kozul-Wright, R., & Banga, R. (2020). Moratorium on Electronic Transmissions: Fiscal Implications and Way Forward (UNCTAD Research Paper no. 47).

[17]https://home.kpmg/in/en/blogs/home/posts/2020/05/electronic-transmissions-end-of-the-road-for-the-wto-moratorium.html

[18] Ibid.

[19] Ibid.

[20]https://www.thehindubusinessline.com/opinion/wto-restriction-on-imposing-custom-duties-on-electronic-transmissions-is-hurting/article31499002.ece

[21] Jones, R., & Basu, S. (2002). Taxation of Electronic Commerce: A Developing Problem. International Review of Law, Computers & Technology, 16(1), 35–51. https://doi.org/10.1080/13600860220136093