Understanding the scope, definition and impact of the WTO e-commerce Moratorium (policy brief)

Understanding the scope, definition and impact of the WTO e-commerce Moratorium

October 2023

New

OECD analysis demonstrates the case for renewal of the WTO e-commerce Moratorium at

MC13. The WTO e-commerce Moratorium is up for renewal at the forthcoming WTO Ministerial Conference (MC 13) in early 2024. WTO Members are currently discussing issues around its scope, definition and impact.

The 102 countries that currently have provisions not to impose customs duties on electronic transmissions in their trade agreements tend to do so independently from the multilateral discussions. They also tend to clarify that their commitments do not cover internal taxation and that they largely apply to content.

The potential fiscal implications of the Moratorium are small, representing, on average, around 0.1% of total government revenue or 0.68% of total customs revenue. Foregone customs revenue is also likely to be offset by rising GST/VAT revenue on digital services imports.

Lifting the moratorium would imply losses in competitiveness and increased trade cost that will hit developing countries and smaller actors most, including SMEs and women owned firms.

The WTO Moratorium is up for renewal

For more than two decades, the WTO Moratorium on applying customs duties on electronic transmissions (henceforth the “Moratorium”) has supported a stable, predictable and duty-free environment for digital trade to thrive. During its latest renewal, at the 12th Ministerial Conference in June 2022 (MC12), WTO Members agreed to intensify discussions on the Moratorium, including on its

scope, definition, and impact, underscoring the need for renewed evidence to inform this debate. At the upcoming WTO Ministerial Conference (MC13), to take place in February 2024, WTO Members will, once again, discuss whether or not to renew this Moratorium.

Insights from RTAs on the potential scope and definition of the Moratorium

The scope and definition of the e-commerce Moratorium are among the most highly debated aspects in existing discussions. Some WTO Members question whether the Moratorium applies to the ‘content’ of the transmission (e.g., movies or downloaded e-books) or its ‘carrier-medium’ (i.e., the bits and bytes that carry the content). Some have also questioned whether the Moratorium affects the ability of countries to raise taxes beyond customs duties, or if the Moratorium erodes other commitments made in the WTO.

Identifying how countries have approached customs duties on electronic transmissions in their trade agreements provides useful information about the possible contours of WTO Members’ understanding of the Moratorium. Of the current 105 regional trade agreements (RTAs) with an e-commerce chapter, 100 include a provision on the non-imposition of customs duties on electronic transmissions (NICDET provision for short). A number of key observations emerge from their analysis:

• The majority of NICDET commitments are not tied to the e-commerce Moratorium. This means that a large number of WTO Members – 54 high income and 33 developing countries – would continue not to impose customs duties on electronic transmissions even if the Moratorium were to lapse, at least vis-a-vis Parties in their trade agreements.

• Increasingly, Members have clarified that NICDET commitments apply to the content of electronic transmissions. There are no trade agreements clarifying that NICDET provisions apply to the ‘carrier-medium’.

• The majority of NICDET provisions clarify that internal taxation is outside the scope of commitments. This is the most widespread clarifications included in 54 of the 100 signed trade agreements.

• Digital trade chapters generally reaffirm that measures related to the electronic delivery of services fall within the scope of obligations and exceptions related to services. NICDET provisions hence imply narrow commitments on customs duties with no incidence on the wider regulation of the electronic delivery of services (GATS or RTA commitments and flexibilities remain).

In addition, some Members define electronic transmissions as ‘digital products’, including computer programs, text, video, images, sound recordings and other products that are digitally encoded. Others clarify that “deliveries by electronic means shall be considered as the provision of services”. Such differences in definition, however, have

not prevented the conclusion of NICDET provisions. RTAs between members with different definitions have relied on flexible language to help bridge existing differences. While for some the lack of a precise definition is considered a challenge, for others it is a way of enabling a variety of views to coexist.

Potential fiscal implications of the Moratorium

Some WTO Members worry that not imposing customs duties on electronic transmissions may lead to foregone customs revenue. That is, a country importing a movie via an electronic transmission foregoes the tariff revenue associated with its import via a physical carrier medium, such as through a DVD. They argue that the rapid pace of digitalisation increases the scale of the problem,

especially for developing countries, which tend to charge higher tariffs on these items. However, imports of such “digitisable goods”, which are physical goods that can be digitised and subsequently sent across borders digitally (like a CD or a book), have generally been growing in developing countries over the last decade (Figure 2), continuing to generate tariff revenue.

Figure 1: NICDET commitments in RTAs can provide usueful guidance on the interpretation of the potential scope and definition of the Moratorium

The commitment is not tied to the Moratorium lapse Internal taxes are outside the scope of the commitment

The digital trade chapter clarifies that services rules apply to ET services

The content of electronic transmissions is covered

High income countries

Developing countries

Number of countries adopting a particular addition or clarification in at least one of their trade agreements

Note: Income group classification according to the 2022-2023 WB classification, where developing countries refers to LMI and UMI countries.

Source: Own calculations based on TAPED.

Understanding the scope, definition and impact of the WTO e-commerce Moratorium

Average yearly change in physical imports of digitisable goods

New evidence taking into account differences across countries in their imports of digitisable goods, the incidence of their other commitments and practices in trade agreements on the collection of customs duties on digitisable goods, and the potential offsetting effects of VAT/GST taxes shows that:

• The foregone customs revenue that can be attributed to the Moratorium is generally small, on average equal to 0.68% of total customs revenue or 0.1% of overall government revenue.

• Revenue implications differ across income groups. The potential revenue effects, although small, are on average more important for countries in lower income groups, often due to the fact that these charge higher tariffs. For the low-income group category, this corresponds on average to 1.64% of customs revenue or 0.33% of total government revenue.

• There are important heterogeneities across countries. Estimated potential foregone revenue can be high for some countries, suggesting that particular attention to possible fiscal adaptation strategies and capacity building is warranted.

• In most cases, standard VAT/GST taxes applied on digital services imports would completely offset the fiscal revenue effects of the Moratorium. This is the case for 77 of the 106 countries for which data is available. Where consumption taxes do not completely offset potential losses, they can help attenuate the potential adverse fiscal effects of the e-commerce Moratorium.

These findings underscore the potential to find fiscal solutions, based on consumption taxes, to collect revenue on immaterial imports based on widely adopted and internationally accepted standards. These taxes are efficient (IMF, 2023) and have a demonstrated capacity of increasing tax revenues (OECD, 2023). They also do not present shortcomings specific to customs duties, such as detailed product classification or the determination of origin.

Benefits of renewing the e-commerce Moratorium

To date, little attention has been given to the benefits that could be foregone with the failure to renew the e-commerce Moratorium. Existing OECD evidence (2019) has already shown that electronic transmissions can help reduce trade costs, increase consumer welfare and promote export competitiveness.

There are however more channels through which the lapse of the e-commerce Moratorium may create additional

costs. Increases in trade policy uncertainty, measured as a one percentage point change in the ‘water in the tariff’, the difference between applied and bound rates, lead to reductions in trade in digitisable goods of around 0.17-0.2%, with higher impacts for low-income and middle-income countries. Not renewing the moratorium could entail moving this policy uncertainty to electronic transmissions.

Figure 2: Imports of digitisable goods have been growing, particularly in low-income countries

Note: Markers represent individual countries. Based on 206 countries & territories. Red lines show the income group average. The horizontal axis line indicates 0% average growth. Calculations based on BACI data.

Understanding the scope, definition and impact of the WTO e-commerce Moratorium

Tariffs on electronic transmissions would hit low-income country trade most. A hypothetical exercise in which existing tariffs on digitisable goods are applied to digital services (which is where electronic transmissions are measured in existing trade statistics) shows that imports and exports of low-income countries would fall by 32% and 2.5% respectively. For middle-income countries losses would be of 6% and 0.4% and for high-income countries of 0.04% and 0.5%. In terms of trade effects, developing countries would suffer most from lifting the moratorium.

Another channel through which firms can benefit from electronic transmissions is through the input channel. Businesses have been adopting digital solutions, such as software or computer services (whether imported via physical carrier media or digitally), often sourced from abroad, to enable their digital transformation. Evidence confirms that the use of digital inputs and of digitisable

goods contributes to domestic competitiveness, measured as the domestic value added in final consumption (Figure 3). Any trade cost increases, whether on digitisable goods or digital services, including through the application of tariffs, would lead to losses in domestic competitiveness, affecting local production and employment. There is a selfinterest case for maintaining a duty-free environment for electronic transmissions.

The impact of greater barriers on electronic transmissions is also likely to be asymmetric, affecting SMEs most. Analysis using the World Bank Enterprise Survey (WBES) suggest that being able to deliver trade digitally is associated with higher propensities to export of smaller firms and not larger ones. In light of the fact that SMEs generally have a lower propensity to export than larger firms, the ability to deliver products digitally may be an important mechanism to reach foreign markets, and this channel may be affected by the Moratorium lapse.

There is a strong case to renew the Moratorium.

When WTO Members consider whether or not to extend the Moratorium at the next Ministerial Conference, they should consider the emerging evidence suggesting that the potential foregone revenue costs of the Moratorium are small and that its lapse would come at the expense of wider gains in the economy.

References

• IMF (2023), Fiscal Revenue Mobilization and Digitally Traded Products: Taxing at the Border or Behind It?

• OECD (2023), “Understanding the potential scope, definition and impact of the WTO e-commerce Moratorium”, OECD Trade Policy Papers.

• OECD (2019), “Electronic transmissions and international trade - shedding new light on the moratorium debate”, OECD Trade Policy Papers. www.oecd.org/trade

Figure 3: Digital inputs are key determinants of domestic competitiveness

Figures show the impact of increasing digital inputs by one standard deviation on domestic value added

a. Digital services inputs

b. Digitisable goods imports

Note: Standardised regression coefficients capturing impact of increasing digital services inputs and digitisable goods imports on domestic value added with confidence intervals (95%).Calculations based on data from TRAINS and ITPDE.