Part 3: The State of Play on the debate on the Rules

[Español] As early as 1998, the World Trade Organization (WTO) had issued a Ministerial Declaration on Global Electronic Commerce at the Second WTO Ministerial Conference in Geneva, Switzerland. Simply recognizing that global electronic commerce was growing and that therefore the WTO needed to have a work program to discuss rules that would govern this new form of trade. The most significant impact of this Ministerial Declaration was the agreement to not do anything in the meantime. Particularly, it stated that WTO Members would not impose custom duties on electronic transmissions, for some countries who were already carrying out this practice, it was a continuation of the status quo. However, for some countries, this was relatively new and did not have rules on exempting custom duties on electronic transmissions. This would be a point of contention in future discussions, which this report will delve into later. This agreement in the Ministerial Declaration to not impose custom duties on electronic transmissions would be, to this day, referred to in trade negotiations and discussions as the Moratorium. The Declaration had given a mandate to form a work program and a Moratorium would apply while consensus was reached on what rules would apply to e-commerce. The WTO work program on e-commerce subsequently adopted in September 25, 1998, stated that the WTO Council for Trade in Services shall examine the rules within the legal framework of the General Agreement on Trade in Services (GATS) and any aspects relevant to e-commerce in the General Agreement on Tariffs and Trade (GATT). The Council for Trade Related Aspects of Intellectual Property Rights (TRIPS) would also get involved in the work program by reviewing any relevant rules to e-commerce regarding in particular the protection of copyright, trademarks and new technologies among other related rights. The WTO work program also included instructions to study the possible implications of e-commerce on development needs of developing countries. Mandates were given out but the discussions would move slowly, presumably as it took a back seat to other more pressing issues within the WTO and the contentions that would be raised on the different interpretations on the definition of e-commerce in the WTO. In this aspect, agreement on one definition is crucial.

GATS and the GATT in simple terms   The General Agreement on Trade in Services (GATS) is one of the 20 Agreements within the World Trade Organization. There are three basic areas that the WTO covers: Goods, Services, and Intellectual Property. The corresponding agreement to these three areas are the General Agreement on Tariffs and Trade (GATT), the GATS and Trade Related Intellectual Property Rights (TRIPS)    The General Agreement on Tariffs and Trade (GATT)-1994 was the predecessor of the WTO. After several years of global negotiations, an agreement was reached to transform the GATT-1994 into a legal body, the WTO, that would have the mandate to legally enforce and oversee global trade rules. It is also tasked to ensure that trade flows as smoothly, predictably and freely as possible. In addition to the GATT, which covers goods, the GATS and the TRIPS, the WTO had a crucial legal ability, it had the Dispute Settlement Mechanism, which essentially allowed Members to present legal complaints against Members whom they believe is violating on of the rules in the 60 agreements under the auspices of the WTO.

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Reiterating what was detailed earlier in the paper as the various definitions, here they are again, keeping in mind that definitions define rules. The definition of e-commerce in the WTO work program is: “electronic commerce is understood to mean the production, distribution, marketing, sale or delivery of goods and services by electronic means. The work programme will also include consideration of issues relating to the development of the infrastructure for electronic commerce.”[1] Breaking down this definition, it is understood that e-commerce under the WTO would involve any or all parts of the global value chain of the end good or service.

This is not a definition universally agreed to, today as other definitions only count the transaction to be e-commerce if the end product or service delivered is digital. The two stark different definitions are those below, which was mentioned earlier in this paper.

  • The Organization for Economic Cooperation and Development (OECD) for example, emphasizes this point that it is the end not the supply chain. Furthermore, the OECD includes an important aspect of the process, the digital good or digital service has had to have crossed a border for it to be classified as digital trade.
  • For the United Nations Conference on Trade and Development (UNCTAD), it is a broader scope, “defines “e-commerce” as purchases and sales conducted over computer networks. To the UNCTAD, “e-commerce can involve physical goods as well as intangible (digital) products and services that can be delivered digitally.”[2]

More comprehensive lists can be found in the Standard Industrial Trade Classification and the Harmonised System classification. The Harmonised System list was used in the UNCTAD Research Paper No. 29. The study also used bilateral trade data and tariff data from World Integrated Trade Solutions (WITS) database, which is published by World Bank and UNCTAD.

Although definitions are varied, the digital goods and digital services are already being conceptualized, produced and delivered. The general understanding as well is that trade is considered digital if it is enabled digitally, and the good or service is accessed or delivered via the internet or physically. This follows somewhat the definition of the WTO that defines e-commerce as any good or service that had at some point in the global value chain, been enabled digitally. However, the lack of agreement in the WTO, the only multilateral trading system that has the capacity to legally enforce countries to follow trade rules, means that technology corporations are basically operating without globally agreed trade rules. The only rule that is standing is the Moratorium and this has already been adopted by at least 56 WTO Members in regional free trade agreements, of which, many have included a provision to permanently prohibit custom duties on electronic transmissions. This adoption of the Moratorium in these free trade agreements presents the question of whether this will affect the ongoing debate in the WTO negotiations around e-commerce. This is because the WTO has a rule of Most Favored Nation (MFN) which basically means that all Members are given the same preferential access, say, a lower tariff on a particular good cannot just be given to one or a few Members, as that would be labeled as discrimination by the WTO MFN rule. This can be used as a negotiating tool to say that according to this WTO MFN rule, the permanent Moratorium should then be applied to all the 164 Members of the WTO. Although, some will disagree to this reverse application of the MFN rule as it would be understood that what concessions are given to each other are within the context of the WTO negotiations. These, some consider, would be the basis of a negotiation of a regional or bilateral free trade agreement and additional concessions or provisions given outside the WTO cannot then be brought back to the WTO and applied.

The main debate in the WTO discussions around e-commerce is whether or not the Moratorium should be made permanent or if consensus can be reached on a new set of rules. The Moratorium has been in place since 1998 and was continuously extended every two years at the WTO Ministerial Conferences. However, since the exponential growth of digital trade, debates have intensified within the WTO on the Moratorium and Members have presented proposals on the way forward. 

A number of Members decided to create an informal group at the sidelines of the WTO 11th Ministerial Conference held in Buenos Aires last December 2017. It is not clear if the already existing WTO Friends of E-commerce for Development group spearheaded this side initiative and if they invited others. The Members of the Friends of E-commerce for Development group are Argentina, Chile, China, Colombia, Costa Rica, Kazakhstan, Kenya, Mexico, Moldova, Montenegro, Nigeria, Pakistan, Sri Lanka and Uruguay and the MIKTA (Mexico, Indonesia, Korea, Turkey and Australia group) have held several workshops on the theme.

Then, in Davos, Switzerland, last January 2019, WTO negotiations on trade-related aspects of electronic commerce were launched in Davos with the participation of 76 Members, which, at present, grew to 86.  These negotiations are supposedly informal and considered plurilateral. However, this is also a more sophisticated way of excluding others with the supposedly philanthropic goal of moving negotiations in order to deliver ways forward especially for small and medium enterprises, developing and least developed countries.

Key developments in the negotiations in the WTO moved when India and South Africa presented a joint proposal presenting arguments against the continuation of the Moratorium. The potential loss of revenue from not being able to charge duties and charges, not being able to use tariffs as a trade policy instrument, and a number of other concerns were all raised. These are standing concerns citing that the Moratorium has basically been a duty-free access to markets. This market access by itself is not the problem, however, if one side has the more advanced technology and digital products and the other side does not, and is in fact, a net importer of these digital goods, the only one gaining in this scenario is the one with the digital products entering duty-free to sell in markets that do not have yet the capacity nor technology to compete.

However, in an apparent response to the joint proposal of India and South Africa, the WTO Friends of Services presented a communication debunking the claims of the joint proposal of India and South Africa. Some key points presented in the communication that was based on a comprehensive study by the OECD:

“While recognizing the importance of this concern, we consider it timely to adopt a more holistic approach, by taking into account other relevant factors and their impact on consumers and on export competitiveness, and placing existing empirical evidence into a wider economic context. With this perspective, we wish to draw Members’ attention to a publication on electronic transmissions and international trade issued in November 2019 by the OECD and entitled “Electronic transmissions and international trade – shedding new light on the moratorium debate” (hereafter referred to as ‘the study’). The study argues that the overall benefits of duty free electronic transmissions outweigh the potential forgone government revenues due to the E-Commerce Moratorium.

The OECD study indicates that lifting the Moratorium would have limited effects on government revenue implications and that it would ultimately come at the expense of gains that are more significant in consumer welfare and export competitiveness. In this perspective and for further discussion, we would like to encourage Members to consider carefully all the elements contained in that study. When reflecting on revenue implications, we call for Members to consider internal taxes or internal charges in line with WTO commitments which could serve as alternative sources of government revenue. We continue to support open, inclusive and transparent discussions on electronic commerce and on the Moratorium in particular.”[3]

This communication and the study cited caused quite a stir as for example, calculations in potential lost revenue varies wildly depending on factors used by the researchers. However, this message that the Moratorium would supposedly be good for developing countries rather than negative, has heightened the debate. The WTO Friends of Service group is composed of Australia, Canada, Chile, Colombia, Hong Kong, Iceland, South Korea, New Zealand, Norway, Singapore, Switzerland, and Uruguay.

The negotiations on electronic commerce in the WTO continue with three co-convenors managing the work. The co-convenors are Australia, Japan and Singapore. Deadlines have been set for new proposals from participating Members with the aim of presenting a consolidated negotiating text by 2021.

The vast difference in computations on the potential loss of revenue due to the Moratorium is one of the core debates in the negotiations on electronic commerce in the WTO. Various studies done have used different methods but a key difference recognized itself by the study done for the UNCTAD was whether bound or applied tariffs were used in the calculations. Across the studies, the difference is huge, with one end calculating only an estimated 280 million USD and another end at 8 billion USD. The OECD study compiled the following table, see Table 4, to show the differences in calculations between the studies and whether bound or applied tariffs are used in the calculations.

What are bound and applied tariffs?

Tariffs are customs duties levied on merchandise imported into the country. Tariffs are a way to raise revenue for the government and is also a policy tool that governments can use to help give an advantage to local industries that produce the same goods or to lower tariffs in case the economy benefits from the easy entry of particular goods. In the World Trade Organization, countries entered into agreements where they have “bound” their tariffs or set them at agreed rates, usually a ceiling rate that cannot be raised beyond that amount. In practice, however, WTO Members agree to lowering tariffs further to supposedly encourage more trade and those are referred to as “applied” rates. There is usually a big gap between applied and bound rates and as such, calculating using either those rates impact the results greatly.   

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The debate around the Moratorium or the focus on the argument that developing countries are losing potential revenue from custom duties on electronic transmissions; is indeed crucial as various studies, though with a very wide range, show that there indeed are millions or billions to be lost. However, e-commerce or digital trade, has many aspects, elements, pillars, reach and infrastructure just to name a few, that go beyond the debate of the Moratorium.

There are also various other proposals on taxes that are not limited to the issue of customs duties but are not under the scope of a free trade agreement but rather should be that of a sovereign nation. National taxes should be under the gambit of governments and can be used as a policy tool to ensure the local economy, local consumers and local industries are looked after and benefit. Existing trade rules within the WTO have core rules such as National Treatment that dictate that governments should give the same treatment to foreign corporations as with domestic ones. However, there are no such existing rules yet on digital trade, particularly goods and services. The customs duties debate is only one aspect of this. There is a much bigger picture that includes the growing digital divide as countries with the technology, capital and infrastructure leave behind those without. There are also the technology companies that are now earning millions and billions of dollars. There is a much larger picture to be seen when discussing digital trade.

There is however, more to discuss on international digital trade rules when it comes to data. Here is an example from Australia on the vast scope that the current Moratorium debate is missing:

[1] World Trade Organization (1998) “Work programme on electronic commerce” Adopted by the General Council on 25 September 1998. Geneva

[2] Herbert Smith Freehills (2018) “Digital Trade – definition” Herbert Smith Freehills

[3] World Trade Organization Documents (June 2020) WT/GC/W/799/Rev.1 “Work Programme on Electronic Commerce: Broadening and Deepening the discussions on the moratorium on imposing customs duties on electronic transmissions”*&DisplayContext=popup&languageUIChanged=true

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