Repost: Impeding collapse of a key digital trade rule

This moratorium, described in more detail below, has been under threat for so long that most have stopped paying attention. This is a serious mistake. The loss of the moratorium could affect a wide range of digital trade activities and, as always, the burden will fall most heavily on the smallest firms.

This post originally appeared on November 18, 2021.

Repost:

At the end of November, the 164 members of the World Trade Organization (WTO) will meet. [Updated dates are June 12-15, 2022] In what was originally billed as an every-other-year obligation but has been less smooth in practice, trade ministers will be gathering in Geneva for MC12. 

There are a number of outcomes that are meant to flow from the session, including something on the apparently endless negotiations over fisheries subsidies, a few bits and bobs that might be pulled from various plurilateral initiatives, and maybe an announcement on trade and health.  (Stay tuned for the Talking Trade update in the wake of MC12.)

But what has not been noticed is that 2021 [2022] is likely to spell the end to a critically important digital trade rule. 

It goes by the innocuous name of the “customs moratorium on electronic transmissions.” 

It may be that the bland and unfamiliar phrasing has not captured imaginations.  Or it may be that this provision has seemed to be under threat for so long that most have forgotten about it.  Covid disruptions have not helped anyone focus on much.  But now odds are high that the moratorium will actually fall at MC12.

Companies and consumers will have an unexpected and potentially rude awakening to this apparently minor rule that did not ever get the support it needed.

The WTO has famously few provisions that directly apply to digital trade.  After all, the organization was launched in 1995 at the dawn of the internet era.  Subsequent efforts to negotiate new rules for the institution have mostly foundered. 

However, in 1998, members recognized the growing importance, even at these relatively early stages, of the internet.  Members agreed to start a working program on electronic commerce.  Their efforts did not go far and the initiative has been largely dormant until a subset of members started what goes by the equally bland term of the Joint Statement Initiative on Electronic Commerce.  (We may get some early harvest statement from this JSI at MC12.)

In any case, the one important outcome of the work program was a commitment of members to avoid imposing customs duties or tariffs on electronic transmissions.  At the time, members could see that some formerly physical goods, like music or software or books, could be transferred electronically in the future.  As products transitioned from being clearly “goods” crossing borders and potentially eligible for tariffs to online delivered items, it could be challenging to handle the customs implications of, for example, software crossing a border on a floppy disk as opposed to via some other digital mechanism. 

The deliberately vague term “electronic transmissions” was chosen because many members were not keen to spend negotiating time clearly defining what was included and what might not be captured by a definition.  It was still early days of the digital revolution and members wanted to maintain flexibility to see how the process might unfold.

Members were unclear about how, exactly, customs duties could be imposed on such transmissions.  But many saw the risks of trying to replicate customs procedures for a new digital era.  Hence, the solution was to impose a moratorium on the imposition of any tariffs on a temporary basis.  The provision has had to be reaffirmed or extended at every WTO Ministerial Conference or it dies. The WTO operates by consensus so all 164 members have to agree on an extension.

At the outset, renewal was nearly automatic.  But, as time has unfolded, some members have grown increasingly concerned about a possible loss of revenue from cross-border digital trade and the potential for collecting duties on some volume of transactions.

No matter that customs officials are not in a position to collect such duties now any more than they were in 1999.  If the rules got changed, some argue, customs could figure out a solution.

Why is the moratorium at greater risk now?  The scale of cross-border trade in digital has ballooned, particularly under covid.  Cash-strapped governments, especially, are keen to tap on what appears to be a juicy revenue target.  Second, many governments do not seem to think that imposing customs duties will have implications for their own economy.  Any tariff collection will simply hit large foreign firms who are already assumed to have a wide range of unfair trade advantages. 

Members that have growing concerns about revenue loss have been using a flawed study from UNCTAD to support their claims that the moratorium is now causing more harm than good.  A careful investigation, however, shows some of the methodological issues with the UNCTAD study that dramatically understates the risks, especially to developing countries, and overstates the potential economic benefits of changing customs procedures.

In practice, when the moratorium falls, it will mean that governments can start imposing customs tariffs on cross-border digital services.  Firms will need to think about trade in services as if they were physical goods and prepare to pay tariffs, fill out required customs paperwork (and probably also pay domestic taxes).

Of course, not all (or even many) governments will be interested or able to implement these procedures.  Many governments are parties to trade agreements that include a permanent customs moratorium, so no matter what happens in Geneva, they have promised not to impose such policies.

However, other governments may open tariff lines for the collection of digital duties.  Firms should be braced for requests to deliver customs revenue and follow new customs procedures.  Those that fail to comply could easily be subject to fines and penalties—now and retroactively.

The real shame is that most of the burden of the collapse of the moratorium will fall, as always, on those least able to manage additional costs.  This includes a wide range of smaller firms that could suddenly have to pay significantly more for imported services or find key markets serviced by their platform providers becoming more expensive to access. 

As a final insult, while concerns about revenue are not misguided, there are other ways to address these worries, including some of the tax policies being driven by the OECD, which would be more trade facilitating and likely less damaging to developing countries and smaller firms.