As the digital revolution unfolds, more products are leaving their physical channels and being marketed online.
For example, movies and music are sold digitally rather than on CDs, CD-ROMs, or DVDs. Similarly, books and video games are sold in electronic formats that are downloaded or played online.
While customs duties were levied on physical imports of these digitized products, their online purchases escape such taxes, thanks to a World Trade Organization e-commerce moratorium (WTO), which prohibits countries from charging customs duties on electronic transmissions.
The measure dates back to 1998 when some products were marketed digitally and some countries had the capacity to levy customs duties on intangible imports. On the other hand, no one had anticipated the start of a digital revolution.
Developing countries lose income
The moratorium has been in place since 1998. However, with the increasing digitalisation of products, developing countries, net importers of these goods, are rapidly losing tariff revenue due to the decision.
UNCTAD estimated that the potential loss of tariff revenue for developing countries due to the moratorium was $ 10 billion in 2017.
In March, India and South Africa They outlined the adverse implications of the moratorium for developing countries. These include the loss of policy space along with potential tariff revenues and the potential impact of digital technologies such as 3D printing on manufacturing.
The decision on whether to continue the moratorium or not will be taken at the 12th WTO Ministerial Conference in 2021..
COVID-19 and the effects of the moratorium
COVID-19 and the subsequent prolonged lockdowns have led to an exponential increase in imports of digitized luxury goods such as movies, music, video games and printed materials.
While the crisis is expected to push millions of people in developing countries into extreme poverty, precious domestic financial resources are being spent on imports of these luxury items.
Estimate of possible abolition of income
The WTO identified digitizable products in five categories: sound recordings, audiovisual works, video games, computer programs and literary works.
The Agency identified 30 digitalisable products with their Harmonized System (HS) codes and associated tariffs, estimating that physical trade in these products has been falling at an annual rate of -2.7% since 2000.
The agency concluded that the drop in physical imports is associated with the reduction in tariff revenues, therefore the estimated loss of tariff revenues due to the moratorium is not significant.
However, the UNCTAD He noted that the moratorium applies to online imports, not physical ones. It was the first study to estimate online purchases of digitalizable products for 91 countries.
The study found that actual global physical imports of the 49 identified digitalisable products in 2017 were worth $116 billion, while estimated physical imports were valued at $255 billion.
Therefore, global imports of these digitizable products through electronic transmissions were estimated at $139 billion.
Furthermore, the study estimated that due to the WTO moratorium, the potential loss of tariff revenue for developing countries was $10 billion in 2017.
The potential loss of tariff revenue for least developed countries was estimated at $1.5 billion, while sub-Saharan African countries lost around $2.6 billion.
High-income countries experienced a loss of tariff revenue of just $289 million, as their average bound duties are set at 0.2%.
Developing countries can therefore generate forty times more tariff revenue each year compared to developed countries by imposing customs duties on electronic transmissions.
Positions on the scope of the moratorium
While the potential loss of tariff revenue from the moratorium has been estimated using imports and customs duties on digitalisable products, There seems to be no consensus emerging on the scope of the moratorium.
Un study made by the European Centre for International Political Economy In 2019, it estimated the impact of the moratorium on potential tariff revenues by including online services within the scope of the moratorium.
La OECD broad further broadens the scope of the moratorium by highlighting that electronic transmissions are “digital deliveries” and include all foreign commercial services that are traded electronically.
To address the issue of the ever-expanding scope of the moratorium, the research paper of the UNCTAD, Titulado Moratorium on electronic transmissions: tax implications and way forward, provides compelling evidence, supported by economic literature and legal judgments, on the difference between 'intangibles' and 'services.' It argues that trade in intangibles should be treated like trade in goods, which is different from trade in services.
The paper estimates that the trade coverage of the moratorium with extended scope increases from $80 billion (imports of digitalisable products) to $705 billion (including digital imports of services, i.e. through Mode 1) for developing countries.
This shows the extent to which unregulated imports will be allowed if the extended scope of the moratorium is used.
Way forward
The COVID-19 pandemic has revealed the importance of preserving policy space in trade agreements. In these times of crisis, it is extremely important for developing countries to regulate their imports of films, music and video games. The removal of the moratorium will provide this policy space to governments.
Rashmi Banga, Senior Economic Affairs Officer, UNCTAD
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