India’s rhetoric of safeguarding the country’s digital trade interests faces a litmus test at an upcoming summit. So far, the track record of the Narendra Modi government in standing firm against the Global North, particularly Washington, on e-commerce moratorium has been anything but beneficial for the country’s nascent digital industry.
In June 2022, when the US and the G7 allies were almost isolated at the World Trade Organisation’s 12th ministerial conference in Geneva, there was a real opportunity to terminate the moratorium. However, India took a U-turn on its position and informed other countries that it has agreed to extend the moratorium on electronic transmissions for another two years.
If India had remained firm on its proposal, developing countries would not have lost billions of dollars in foregone revenues through customs duties on digital transmissions. That revenue could have been used to finance the much-delayed digital industrialisation.
As the WTO’s 13th ministerial conference starts in Abu Dhabi in just about 10 days, powerful digital trade lobbyists would be seen in every nook and corner of the conference hall. The US Senate Finance Committee has already issued a letter to the United States Trade Representative (USTR) to ensure the continuation of the moratorium. Last week, the G7 trade ministers called for a permanent moratorium.
Will India betray the interests of the Global South again?
The double standards of the US and its G7 allies are seemingly exposed against imposing e-commerce tariffs. While they maintain that “tariffs are a legitimate tool in the trade toolbox,” as stated by Katherine Tai, US trade representative, when it comes to tariffs on e-commerce, they want countries to surrender that policy tool.
In 2000, the United Nations Conference on Trade and Development’s (UNCTAD) trade division had published a paper, titled ‘Tariffs, taxes and electronic commerce: revenue implications for developing countries’, which estimated the impact of the moratorium on developing countries, in terms of the potential tariff revenue losses.
The paper concluded that “the fiscal impact of international e-commerce is likely to be felt more strongly in the developing countries: they will face higher losses from customs duties, which make up higher shares in their national budgets compared with the developed countries. They will have less flexibility to replace those losses by shifting to other revenue sources, such as income taxes or social security contributions. In the short to medium term, developing countries will be net importers of e-commerce and hence will run a greater risk of losing tariff and tax revenues if traditional imports are replaced by online delivery. Therefore, the development of efficient tax collection systems for e-commerce should be a priority for all developing countries.”
Also read: Why Removing WTO Moratorium on E-commerce Will Aid Developing World’s Post-COVID Recovery
UNCTAD’s view on moratorium has remained the same over the years. In its publications in 2017, 2019, and 2020, and also in its various Trade and Development Reports, UNCTAD has fiercely argued for the removal of the WTO moratorium on electronic transmissions. UNCTAD, in the past five years, has produced three papers on moratorium and its flagship report, ‘Trade and Development (2019)’, provided estimates of potential tariff revenue losses to the developing countries of $10 billion every year.
However, with the new management in UNCTAD since 2021, under the leadership of Rebeca Grynspan Mayufis, there has been an attempt to steer UNCTAD’s stance on moratorium towards that of the advanced countries like the EU.
In fact, in 2023, UNCTAD joined hands with the International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD), World Bank, and WTO to publish a report on ‘Digital Trade for Development’, which considerably shifts UNCTAD’s position on the moratorium towards that of the advanced countries.
Interestingly, the divisions which collaborated on this report from UNCTAD were not the ones which have been producing papers on the moratorium. This clearly shows the biases which are now taking roots within the organisation.
The joint report of UNCTAD on ‘Digital Trade for Development’ supports continuation of the moratorium on the basis that the revenue collected will be small (0.33% of overall government revenue on average); VAT could be a better way for taxing digital imports; and customs duties will adversely impact MSMEs and women. However, these arguments have been made before by the advanced countries in the EU in their various statements and communications. But these arguments are flawed.
The 0.33% on average is based on total government revenue of all countries, which include developed and developing countries.
The correct estimate should be on the total tariff revenue collected by the governments in the developing countries as developed countries’ tariff revenue collection on this is near zero, as their bound duties are almost zero. All potential tariff revenue losses are borne by the developing and least developed countries.
Further, using ‘all revenue collected by all government’ as the denominator is a gross underestimation of the potential tariff revenue collected from imports of electronic transmission, as the total revenue will include corporate taxes, individual taxes, as well as revenue collected by the government from other sources. For example, only one country, i.e., the US’s federal government collected $4 trillion as revenue in 2023.
Moreover, several questions remain unanswered, which could have benefitted developing countries.
For example, why should exporters of digital goods (primarily big tech firms) be exempted from paying customs duties, while exporters of physical goods pay both domestic taxes and customs duties?
If services trade via Mode 1 is included into the scope of the moratorium, do developing countries lose out on their GATS flexibilities, where they have the right to decide whether to apply discriminatory taxes or not? Why should developing countries not apply customs duties on imports of luxury items like video games, when they want to discourage these imports, especially in the face of food, fertilizer and energy crises?
In future, as more and more products leave their physical carriers while crossing borders, how significant will the tariff revenue loss become? How can governments in developing countries provide a level playing field for their domestic producers, if they do not use non-discriminatory tariffs and only use VAT?
Also read: Why WTO Is Not an Appropriate Forum for Negotiating E-commerce Rules
As countries are lagging on their Sustainable Development Goals (SDG), and only 12% of SDGs are on track, it is important that countries explore all the possible sources of generating revenues to enable them to close the funding gap. As more and more goods become digitalised, removal of the moratorium will provide the governments with a continuously growing source of revenue, which can be used to build their digital infrastructure, and progress on their Agenda 2030.
The revenue which is generated from the removal of the moratorium can help the governments to bridge their growing gender digital divide. The gender digital divide has been found to be rising steadily in developing countries and within developing countries, especially in Africa.
Further, the small and medium-sized enterprises (SMEs) are exporters of mostly tangible goods in all countries. It is important to provide them a level playing field with the big exporters of digital products. Customs duties have always been used as a policy tool for protecting and nourishing infant industries in developing countries. Digital sector, especially MSMEs inthe digital sector, need the protection and level playing field, which can be provided to them only with the removal of the moratorium.
More importantly, as awareness on the possible adverse impacts of AI is growing, advanced countries are making efforts to put in place regulations around the use of AI, but developing and least developed countries lack the capacities to regulate AI, which may enter their countries as electronic transmissions. Developing countries, therefore, need to start regulating and monitoring the imports of electronic transmissions. Removal of the moratorium will help in this process.
Moratorium on electronic transmissions has benefitted a handful of digital giants, such as Apple and Amazon, to increase their profits exponentially. Removal of the moratorium will help governments in all countries, including advanced member states, to gain regulatory space and track sales and profits of digital giants. As the digital revolution is still unfolding and the digital technologies are still evolving, making binding commitments for not regulating imports of electronic transmissions in future may have adverse consequences for digital transformation of countries, including in many developed member states.
In a nutshell, there is too much at stake for developing countries to allow the continuation of the moratorium. It is to be seen whether India will stick to its stand on terminating the moratorium at Abu Dhabi or allow its continuation as sought by the Biden Administration.
