TWN Info Service on WTO and Trade Issues (Nov19/17)
27 November 2019
Third World Network

US offers quid pro quo on e-commerce moratorium
Published in SUNS #9023 dated 20 November 2019

Geneva, 19 Nov (D. Ravi Kanth) - The United States has offered a quid pro quo for extending the e-commerce moratorium by six months until the World Trade Organization's twelfth ministerial conference (MC12) in Nur Sultan, Kazakhstan, in June 2020.

In return, the US will agree to convene a workshop early next year, as demanded by India and South Africa, for assessing the scope and potential revenue implications of electronic transmissions, trade envoys told the SUNS.

Earlier, the US had vehemently blocked a proposal from India and South Africa for convening a workshop with experts drawn from the United Nations Conference on Trade and Development (UNCTAD) and the Brussels- based European Center for International Political Economy (ECIPE) to present their conflicting assessments on what would constitute the e-commerce transmissions and their potential revenue implications.

At an informal General Council (GC) meeting on Monday (18 November), the US offered, for the first time, a quid pro quo on the e-commerce moratorium by suggesting that it would agree to convening a workshop as demanded by India and South Africa in January or February 2020 provided the two developing countries agree to extending the e-commerce moratorium until June 2020, said trade envoys, who asked not to be quoted.

The e-commerce moratorium for not levying customs duties on e-commerce transmissions will expire next month unless WTO members agree to extend it.

The US and other major developed countries seem to be panicking over the tough stand adopted by India and South Africa, demanding a "rethink" of the existing moratorium due to lack of clarity on what would constitute electronic transmissions and their potential revenue implications, said participants, who asked not to be quoted.

The US argued that because of the unforeseen delay in holding the 12th ministerial conference at Nur Sultan, it is logical to extend the e-commerce moratorium by six months.

Intervening at the end of the informal GC meeting, the US said that it can agree to convening a workshop on the scope and potential implications of electronic transmissions provided India and South Africa agree to extending the moratorium by six more months.

The US along with the European Union and several other countries said that they would prefer a permanent moratorium for not imposing customs duties on electronic transmissions.

Switzerland and 15 other countries circulated their draft General Council decision for extending the moratorium on e-commerce transmissions by six more months until the twelfth ministerial conference in Kazakhstan.

In response to the demand from the 16 countries for extending the moratorium, India's trade envoy, Ambassador J S Deepak said the "most critical issues relating to the definition and scope of electronic transmissions" remain unaddressed.

"Despite a recent spate of research papers on this issue, the latest being a report by the OECD released last week, there is still no common understanding amongst the membership," Ambassador Deepak said.

He provided an account of various developments on definition and scope of e-transmissions since 2003. The developments include:

1. A 2003 WTO Background Note identified ET (electronic transmissions) as "digitized" products. The products covered as ET consisted principally of sound recordings, audiovisual works, video games, computer software and literary works.

2. A number of subsequent studies, including a study by UNCTAD in 2019, estimated the implications of the moratorium with this definition.

3. However, in the 2016 WTO Note, ET was defined as "Digitizable Products" and the study identified 30 such digitizable products.

4. In 2017, in a proposal for MC11 (the WTO's eleventh ministerial conference in Buenos Aires, in December 2017), Indonesia noted that, "...it is our understanding that such moratorium shall not apply to electronically transmitted goods and services. In other words, the extension of the moratorium applies only to the electronic transmissions and not to products or contents which are submitted electronically."

5. In February 2019, using the WTO definition of "digitizable products", an UNCTAD study (2019) identified 49 6-digit HS codes as digitizable products and estimated tariff revenue losses for developing countries. The study estimated a per annum loss in fiscal revenue of more than $10 billion globally, 95 per cent of which was borne by developing countries, only on these 49 product lines. These estimates were also confirmed by the UNCTAD Trade and Development Report of 2019.

6. In August 2019, the ECIPE (European Center for International Political Economy) study, which was endorsed by the ICC (International Chamber of Commerce), identified 4 broad categories of services as ET, namely: wholesale and retail trading services; recreational and other services; communications; and business services. Arbitrary tariffs were applied on these services and, assuming that domestic services in developing countries cannot substitute imported services, GDP losses and employment losses were estimated.

7. Finally, last week, we had the OECD study which describes the scope of ET as "digitally delivered trade" and covers services like business services. Interestingly, though, when they estimate tariff revenue losses, they do not include tariff revenue losses from forgone tariffs on services! Neither do they include services when they estimate the share of digitizable trade in total trade.

Against this backdrop, the Indian envoy asked, "whether ET includes only digitized products or digitizable products or whether it includes services as well, and if services are to be part of ET, which services should be covered or whether all services should be treated as ET?"

Clearly, the WTO members need to "come to a common understanding on the definition and scope of ET," Ambassador Deepak emphasized.

Members need to know the impact of "digital technologies like 3D printing, robotics and artificial intelligence" on their tariff schedules and built-in GATS flexibilities, he argued.

India said it cannot "agree with the OECD assessment that technologies such as 3D printing are unlikely to have far-reaching implications on trade in the near term."

"To the contrary, it is estimated by other studies that if current growth of investments in 3D printing continues, 50% of the manufactured goods will be "printed" in 2060 and if investments in 3D printing doubles, this target will be achieved in 2040," Ambassador Deepak said.

Effectively, the new developments in the digital world "will wipe out almost 40% of cross-border physical global trade," he added.

Further, due to the moratorium on ET, "foreign firms will be able to export duty-free any software to developing countries to 3D print the currently manufactured products, which will severely affect sectors [that] will include textiles and clothing, footwear, auto-components, toys, mechanical appliances and hand tools, etc. that generate large scale employment for low skilled workers in most developing countries," he argued.

Ambassador Deepak questioned the flawed assumption that exporters from developing countries are required to import digitizable products like software for improving their production and exports of many products and services.

"Customs duties on digitizable products will increase the costs of the software," the Indian trade envoy said.

"However, (the) removal of Moratorium in no way means that Members will necessarily impose customs duties across the board," he suggested.

"The key is policy space and to use such policy space appropriately for domestic digital industrialization and generation of local jobs in the era of Industry 4.0," India said.

Ambassador Deepak also challenged the findings of the ECIPE and the OECD that tariffs will be "deadweight loss".

"However, it is a time-tested finding that tariffs have been effectively used by many developed countries in the past and even now to stimulate domestic production," the Indian envoy said.

Without naming the US, which had imposed unilateral tariffs on steel and aluminum last year to revive its domestic production, the Indian envoy said that "one major developed country believes in the over-riding effectiveness of this instrument!"

He argued that "the key requirement which remains for taking a decision on the moratorium is clarity on the definition and scope of electronic transmissions, as many have pointed out."

"Only a clear understanding of these (issues) and an appreciation of its impact on policy space for digital industrialization and sacrifice of revenue would help Ministers take a well-considered and wise decision on the Moratorium at MC12," India concluded.

"And this understanding will come by accelerating the 1998 Work Programme in the next six months up to June 2020," Ambassador Deepak said.

In her intervention, South Africa's trade envoy Ambassador Xolelwa Mlumbi-Peter said the decision on the e-commerce moratorium "should be driven by concrete facts and analysis as it has profound implications for the WTO membership."

"The loss of tariff revenue due to rapidly increasing products digitalization has been one of the main reasons we have argued for the need to rethink further the extension of the Moratorium and thoroughly examine the implications of the moratorium under the Work Programme," she argued.

Besides, Ambassador Xolelwa argued, "the scope of the Moratorium remains undecided and Members have different views on what the moratorium is applicable to: is it to the transmission or is it also applicable to the content, is it applicable to goods or services."

Therefore, "a conclusive analysis of the implications" arising from the e-commerce moratorium are difficult to assess, she pointed out.

The South African envoy suggested that there is a constant attempt at shifting the goal posts on the scope of electronic transmissions, including the recently published OECD study.

"More importantly, the development implications of the Moratorium in the digital era remains unclear," she said.

Ambassador Xolelwa said "in 1998, when the decision on Moratorium on ET was taken, the scope of ET was identified as "digitized products" (WTO, 2003)."

"Accordingly, five categories of digitized products were identified, namely, sound recordings, audiovisual works, video games, computer software and literary works."

With the digital revolution, the scope of ET was widened and the WTO Note of 2016 identified ET as "digitizable products," she said.

"Digitizable products were identified as those products which are traded both in the physical form as well as "online" i.e., downloaded from the internet," she said.

In 2019, the Brussels-based ECIPE identified ET as "digitizable products and services," covering four broad categories of services as ET. They include: wholesale and retail trading services (trd); recreational and other services; communications (cmn); and business services.

Early this month, the OECD has further extended the scope of ET by identifying ET as "digital deliveries" which covers along with digitizable products, digitally delivered business services.

Therefore, said Ambassador Xolelwa, "it is clearly in the interest of the Membership to engage in a structured discussion within the work programme and clarify the definition and scope of ET to enable Members to fully assess the implications and to enable decision making."

India and South Africa, she said, "have called for the membership to examine the implications of the moratorium not just from a revenue perspective but also its impact on digital industrialization in developing countries and LDCs."

More disturbingly, "while the studies may differ on the quantum of revenue implications, they all reflect that the E-Commerce Moratorium is asymmetrical for developing countries."

"This is because developing countries are mainly net importers of ET and have higher tariffs compared to developed countries and thus bear the brunt of the moratorium," she emphasized.

Ambassador Xolelwa said the "UNCTAD TDR of 2019 showed a loss in fiscal revenue of more than $10 billion globally as a result of the moratorium, 95 per cent of which was borne by developing countries".

"Since this estimate is based on only a small number of products and digitalization is rapidly affecting an increasing number of products, this estimate of foregone fiscal revenue could rapidly multiply," she argued.

Members need to "take a long-term view as we engage on the implications of the moratorium, including how we create a level playing field in a market of digital products that is characterized by concentration, abuse of market dominance, tax avoidance and unfair competition," she emphasized.

"The moratorium on ET with growth of 3D printing may have implications for negotiated tariffs on industrial products under GATT which cannot be taken lightly for countries already struggling to effectively participate in global trade and are at a lower-end of the value chain," the South African envoy said.

Moreover, "the protection given by developing countries to some of their services sectors under GATS may also be lost," she cautioned.

In short, "it is increasingly difficult to agree to the extension of the moratorium when there is no agreement on what the E-commerce moratorium covers and what it does not," she said.

"Most importantly, we continue to ask ourselves what the impact of the extension will be, will it result in winner takes most markets and what would this mean for the long-term development trajectory of our economies," she added.

There are also different views on the technical feasibility of levying customs duties on ET. An extension without a structured discussion and approach to resolve these important issues postpones the problem and will not result in predictability in trade.

Therefore, "the scope and definition of ET is the most urgent issue that needs to be resolved," she said, suggesting that "more understanding is required amongst Members to engage on policy responses on other trade-related aspects of e-commerce."

Ambassador Xolelwa said "there is a need to continue the work under the Work Programme on Electronic Commerce based on the existing mandate and guidelines" and examine the revenue implications of the moratorium on customs duties on electronic transmissions in more detail given the different perspectives on this issue.

Sri Lanka also demanded more clarity on the scope of electronic transmissions, while Indonesia raised several issues concerning the moratorium.

It appears that the tough stand adopted by India and South Africa seems to have forced the US and other developed countries to come to the negotiating table on addressing the e-commerce moratorium.