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At the World Trade Organisation’s 12th Ministerial Conference, developing countries will have tough battles to fight in order to assist their economies to recover faster and better from the pandemic.
One of the decisions that will need to be taken will be on the removal or extension of the moratorium on customs duties on electronic transmissions which was put in place in 1998 and has continued since then.
In 1998, based on a proposal from the US, WTO members decided to continue the existing practice of not imposing customs duties on electronic transmissions for two years, but since then this moratorium has continued for more than 20 years without any consensus on the definition of electronic transmissions and thereby, on the scope of the moratorium.
In the 11th Ministerial Conference in 2017, WTO members again decided to continue the moratorium till the next ministerial meeting.
In 2019, the developing countries again agreed to continue the moratorium till the next ministerial with the understanding that there will be more clarity on the definition of electronic transmissions (ET) and thereby on the scope of the moratorium, based on the repeated requests in the proposals of India and South Africa. However, till date there is no consensus on either the definition of ET or the scope of the moratorium. Meanwhile, the COVID-19 pandemic and rapidly progressing digital revolution have increased the potential tariff revenue losses of developing countries by manifolds and have also eroded their regulatory space to check the ‘online’ imports including those of luxury items like the video games, movies, music and print media.
The COVID-19 pandemic has changed the landscape of international trade as it has given a new boost to ‘online’ imports, especially in developing countries which are mostly the net importers of digitalised products. The pandemic coupled with the food crisis and the growing digital divide has amplified the demands on the governments’ revenues. But the WTO moratorium, on one hand, is restricting the fiscal space of governments by not allowing them to impose customs duties on these online imports, and on the other, is adding to the exponentially growing profits of the digital platforms which are the major exporters of electronic transmissions.
A new study estimates the extent of tariff revenues lost by the developing countries in the period of 2017 to 2020. Using the most conservative estimates, the study estimates that the global ‘online’ imports of electronic transmissions increased from $139 billion in 2017 to $204 billion in 2020. These estimates cover only 49 digitisable products which have been identified by the WTO. These are products which were traded physically with HS code but are now being increasingly traded ‘online’.
The results show that in the period 2017-2020, the growing imports in these digitisable 49 products have led to a tariff revenue loss of $56 billion to developing and least developed countries, of which developing countries have lost potential tariff revenue of $48 billion while LDCs (least developed countries) have lost potential tariff revenue of $8 billion due to the moratorium.
It has been estimated that with a combined population of around one billion, LDCs needed approximately $4 billion to finance two shots of the cheapest Oxford-AstraZeneca vaccine.
The LDCs could have generated around $8billion, if members had decided to remove the WTO moratorium in 2017. The cost of delay of the decision has been extremely high for the LDCs.
The total potential tariff revenue loss in the period 2017-2020 due to the moratorium has exceeded almost $500 million for many developing countries including Argentina, Brazil, China, Guatemala, South Korea, Panama, South Africa and Tunisia. The tariff revenue loss has exceeded $1 billion for many developing countries like China, India, Mexico, Nigeria, Pakistan, Paraguay and Thailand. For least developed countries, this period, i.e., 2017-2020 has been especially challenging because of the pandemic.
Many LDCs lost potential tariff revenue of more than $100 million including Cambodia, Ethiopia (excluding Eritrea), former Sudan, Malawi, Rwanda and Zambia. Many of the LDCs and developing countries have average bound customs duties higher than 20%. Average bound duties are as high as 92% in Rwanda, followed by Nigeria (80%), Pakistan (62%), Jamaica (50%), Malawi (45%) and Tunisia and Guatemala (40%), while average bound duties on digitisable products is 0.09% in EU countries, followed by USA (0.02%) and Switzerland (0%).
The study forecasts that if the moratorium is not removed then by 2025 the online global imports of digitisable products are expected to reach $470 billion. Developing countries are expected to lose potential tariff revenue of at least $25 billion per annum from 2025 onwards, while LDCs will lose at least $5.3 billion per annum.
In the year of the pandemic, i.e., 2020, The estimated potential tariff revenue loss in just on imports of 49 digitisable products has been more than a $100 million for many developing countries including Algeria, Argentina, Brazil, China, Guatemala, Indonesia, Jamaica, Kazakhstan, South Korea, Pakistan, Panama, Paraguay, Russian Federation, South Africa and Tunisia, while this potential tariff revenue loss exceeds $1 billion for some countries like India, Mexico, Nigeria and Thailand. In this year of the pandemic, many LDCs could have raised more than one million USD as tariff revenues from their imports of just 49 digitisable products, these include former Sudan, Malawi and Rwanda.
To weaken the demand of developing countries on removal of the moratorium, some studies have questioned the importance of customs duties for developing and least developing countries concluding that these revenue losses are minor, and these losses can be recovered by increasing domestic taxes. However, customs and other import duties as a tax revenue are indispensable to the government in many small developing countries. However, customs and other import duties as a percentage of total tax revenue of the government is more than 40% in countries like Somalia, Nauru, Central African Republic and Botswana and more than 25% in nine countries. It exceeds 10% of total tax revenue of the government in more than 40 countries.
Irrespective of the growing tariff revenue losses to developing countries on account of the moratorium, there are attempts being made to expand the scope of the moratorium by including services in the definition of electronic transmissions.
Some studies by the European Centre for International Political Economy (ECIPE 2019) and the Organisation for Economic Co-operation and Development (OECD, 2019) have argued for including ‘digital services’ in the scope of the moratorium. However, UNCTAD (2020) estimates show that including these services under the scope of the moratorium can increase its trade coverage by manifolds.
In addition to the loss of potential tariff revenues, there are broader implications for developing countries with the continuance of the moratorium. The impacts of losing their policy space to develop their digital capabilities as well as their software sectors can have important implications for their digital industrialisation.
With no clarity on the definition of ET and thereby on the scope of the moratorium, the continuation of the WTO moratorium on customs duties on ET in MC12 can lead to substantive future losses for developing and least developed countries. Not only will they lose their fiscal revenues but also their regulatory powers and the flexibility offered by the GATS to liberalise trade in services at their own pace and in the sectors of their choice. Removal of the moratorium, on the other hand, will provide greater revenues and regulatory power in the hands of the governments which can help them recover faster and better from the pandemic.
Rashmi Banga is Senior Economic Affairs Officer, UNCTAD, and can be reached at firstname.lastname@example.org.