As the digital revolution unfolds, more products are leaving their physical carriers and being traded online.
For example, movies and music are being traded digitally rather than through CDs, CD-ROMs or DVDs. Similarly, books are being traded as e-books and video games are being downloaded or played online.
While customs duties were applied on the physical imports of these digitalized products, their online imports escape customs duties, thanks to a World Trade Organization (WTO) e-commerce moratorium, which bans countries from applying customs duties on electronic transmissions.
It dates back to 1998 when a few products were digitally traded and a couple of countries had the capacity to collect customs duties on intangible imports. Further, no one had anticipated the onset of a digital revolution.
Developing countries fast losing revenues
The moratorium has continued since 1998. However, with rising product digitalization, developing countries, the net importers of digitalized products, are fast losing tariff revenues due to the moratorium.
UNCTAD estimated that the potential tariff revenue loss to developing countries due to the moratorium was $10 billion in 2017.
In March, India and South Africa outlined the adverse implications of the moratorium for developing countries. These include the loss of policy space together with potential tariff revenues and the possible impact of digital technologies like 3D printing on manufacturing.
A decision on continuing with the moratorium or not will be taken at the 12th WTO Ministerial Conference in 2021.
COVID-19 worsens effects of the moratorium
COVID-19 and the subsequent prolonged lockdowns have led to an exponential rise in imports of digitalized luxury items like movies, music, video games and printed matter.
While the crisis is expected to push millions of people in developing countries to extreme poverty, precious domestic financial resources are being spent on imports of these luxury items.
Estimating the potential revenue dent
The WTO identified digitizable products under five categories: sound recordings, audiovisual works, video games, computer software and literary works.
It identified 30 digitizable products with their Harmonized System (HS) codes and associated tariffs, estimating that the physical trade of these products has been falling at an annual rate of -2.7% since 2000.
It concluded that the falling physical imports are associated with reducing tariff revenues, therefore the estimated tariff revenue loss due to the moratorium is not significant.
However, UNCTAD highlighted that the moratorium applies to online imports, not the physical ones. It was the first study to estimate online imports of digitizable products for 91 countries.
The study found that the actual global physical imports of the identified 49 digitizable products in 2017 were worth $116 billion, while the estimated physical imports were valued at $255 billion.
The global imports of these digitizable products via electronic transmissions were therefore estimated at $139 billion.
The study further estimated that due to the WTO moratorium, the potential tariff revenue loss to developing countries was $10 billion in 2017.
The potential tariff revenue loss to the least developed countries was estimated at $1.5 billion while sub-Saharan African countries lost about $2.6 billion.
High-income countries experienced a tariff revenue loss of only $289 million, as their average bound duties are pegged at 0.2%.
Developing countries can, therefore, generate forty times more tariff revenue every year compared with developed countries by imposing customs duties on electronic transmissions.
Shifting goalposts on the scope of the moratorium
While the potential tariff revenue loss from the moratorium has been estimated using imports and customs duties of digitizable products, there seems to be no emerging consensus on the scope of the moratorium.
A study conducted by the European Centre for International Political Economy in 2019 estimated the impact of the moratorium on potential tariff revenues by including online services under the scope of the moratorium.
The OECD further extended the scope of the moratorium by highlighting that electronic transmissions are ‘digital deliveries’ and include all foreign business services that are electronically traded.
To address the issue of the widening scope of the moratorium, UNCTAD’s research paper, entitled Moratorium on Electronic Transmissions: Fiscal Implications and Way Forward, provides strong evidence, supported by economic literature and legal judgements, on the difference between ‘intangibles’ and ‘services.’ It argues that trade in intangibles should be treated as trade in goods, which is different from trade in services.
The paper estimates that the trade coverage of the moratorium with an extended scope increases from $80 billion (imports of digitizable products) to $705 billion (including digital imports of services, i.e., via Mode 1) for developing countries.
This estimates the extent to which unregulated imports will be allowed if the extended scope of the moratorium is used.
The COVID-19 pandemic has revealed the importance of preserving policy space in trade agreements. In these times of crisis, it’s extremely important for developing countries to regulate their luxury imports of movies, music and video games. Removal of the moratorium will provide this policy space to governments.