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Most Favoured Nation: Whither the WTO Moratorium on Customs Duties for Electronic Transmissions?
Guest post by George Riddell
Welcome to the 109th edition of Most Favoured Nation. This week’s edition is free for all to read. If you enjoy reading Most Favoured Nation, please consider becoming a paid subscriber.
This week, I, George Riddell (an occasional contributor to Most Favoured Nation), am taking the reigns as Sam gallivants around the UAE [Ed: mainly a heavily air-conditioned hotel and mall] at the Economist’s Global Trade and Supply Chain Summit.
Last week was the WTO’s Public Forum, which is a wonderful opportunity to bump into a lot of lovely trade policy folk and drink far too much coffee. The tagline of this year’s event was “It Is Time for Action” – representing either deep irony or naïve sincerity for the slow-moving Geneva organisation.
I’d like to focus on a topic that, despite not being on the formal programme of the Public Forum, was raised by nearly every private sector representative that I spoke to in Geneva: the WTO Moratorium on Customs Duties for Electronic Transmissions.
[Full disclosure – this isn’t surprising as I was participating as part of the Global Services Coalition, which brings together services industry representatives from around the world. We don’t always agree with each other, but mostly do when it comes to the WTO.]
What is the WTO Moratorium on Customs Duties for Electronic Transmissions?
Back in 1998, WTO Members didn’t really understand what the internet meant for international trade. So, they established a Work Programme on Electronic Commerce to “look at all trade-related issues arising from electronic commerce”. Little did they expect that pretty much all trade would depend on it.
They also agreed not to impose customs duties on electronic transmissions (or what we would today call data flows). Unhelpfully, the moratorium is only valid until the next WTO Ministerial, so it has been renewed every two or so years since 1998.
Isn’t extending the moratorium automatic?
No. Previously, there was always a bit of horse-trading between WTO Members and a couple of other regular extensions. However, at the Twelfth WTO Ministerial Conference (MC12), which took place in Geneva in July 2022, three Members (India, Indonesia and South Africa) hardened their positions against extending the moratorium.
Eventually, they did agree to extend it until the next MC (or March 2024), which is going to take place in February 2024 in Abu Dhabi.
There was a material risk that the moratorium was not going to be renewed, which alarmed many services and digital companies that could have theoretically faced a whole new raft of customs duties where none had previously been levied. This was reflected in industry rhetoric at the time – a good example was DIGITALEUROPE’s position ahead of MC12:
What’s going to happen this time around?
One of the main criticisms levied by those opposed to extending the moratorium is that not enough attention and resources have been directed at moving the e-commerce Work Programme forward.
That is largely because many WTO Members have instead spent their time negotiating the Joint Statement Initiative on E-Commerce, which moratorium critics India and South Africa are not participating in because they claim that plurilateral negotiations undermine the WTO. (It doesn’t, but that’s a conversation for another day.)
Over the past twelve months, no one can accuse the Work Programme of lacking in activity, with a marked uptick in the number of reports and meetings held. In July 2023, Canada, on behalf of several WTO Members put forward a new proposal under the Work Programme, which looks to improve the understanding of the scope and definition of the moratorium.
However, this hasn’t changed India, Indonesia and South Africa’s position. Earlier this week, on 19 September, the three countries convened an informal meeting in the WTO saying that the moratorium has impeded the development of their own digital industries and denies them necessary policy space.
What happens if it isn’t extended?
If the moratorium isn’t extended, then there are a number of implications that need to be considered.
Public perception matters – if you’re subscribed to this substack, then you know international trade cooperation ain’t in a great space at the moment. Failure to extend the moratorium would signal that the WTO and its Members are moving backwards, and in the context of a non-functioning dispute settlement system and faltering negotiations, isn’t a great move.
Customs duties on electronic transmissions aren’t effective at raising revenue – according to the IMF’s latest work with their snappily titled ‘Fiscal Revenue Mobilization and Digitally Traded Products: Taxing at the Border or Behind It?’, if you’re going to tax digitally traded products, VAT is much more effective than a tariff. VAT is totally allowed under the moratorium.
Customs duties would negatively impact SMEs – a growing body of research from India and Indonesia has highlighted the huge value of traded digital services for the economic growth of SMEs and promoting inclusion. A summary of that research has been collated here.
Practical challenges of implementing a customs duty on electronic transmissions – there are serious questions as to whether governments are equipped to tax electronic transmissions crossing their borders. Currently, only Indonesia has passed legislation that theoretically allows them to collect it – although how it is actually done remains an open question.
Lots of countries already have commitments not to tax cross-border data flows in their FTAs – it has become standard practice for most countries to have commitments through their Free Trade Agreements, normally in the Digital Trade chapters, to not impose customs duties on electronic transmissions. Amazingly, even India has committed to it in the recent India-UAE FTA:
The moratorium doesn’t impact policy space – if anyone’s seen the amount of digital regulation that the EU has been pursuing in the past couple of years, they haven’t been slowed down at all by the moratorium. There are plenty of other geopolitical and domestic issues that have, but an agreement in Geneva not to implement customs duties isn’t one of them.
So where do we go from here?
Industry will continue to push for a permanent moratorium. But, if I’m honest, having this conversation every two years is a bit tedious, if necessary.
The negotiating dynamics will continue to intensify in the run-up to the next WTO Ministerial but there is a risk that the negotiating price for extending the moratorium being asked by India, Indonesia and South Africa is too high for the other WTO Members to pay.
As one delegate from a country that will remained unnamed last week, “Why should we pay for a country not to implement a measure that would harm their own domestic industry?”
A suboptimal outcome would be a commitment from everyone minus those objecting to the extension, but getting 161 countries to proactively sign up to an extension will mean a lot more work and risks more drift in the future.
Lots of fun ahead …
(Sam will return next week)