GTIPA Perspectives: The Importance of E-commerce, Digital Trade, and Maintaining the WTO E-commerce Customs Duty Moratorium

October 26, 2020

The Global Trade and Innovation Policy Alliance (GTIPA) is a global network of over 40 independent, like-minded think tanks from 26 economies throughout the world that believe trade, globalization, and innovation—conducted on market-led, rules-based terms—can maximize the welfare of the world’s citizens. The Alliance exists to collectively amplify each member’s voice and enhance their impact on trade, globalization, and innovation policy issues while bringing new scholarship into the world on these subjects.

This report shows GTIPA members’ perspectives on e-commerce and digital trade in light of negotiations on new rules World Trade Organization (WTO) member nations are deliberating regarding the moratorium on cross-border electronic transmissions customs duties (i.e., duties on digital products). This volume aims to demonstrate how GTIPA member countries—including Argentina, Colombia, Germany, Ghana, Greece, Italy, Jordan, Mexico, Poland, South Africa, and the United States—benefit from and support e-commerce and digital trade, and how keeping tariffs off the Internet drives domestic and transnational growth, fosters global integration, sparks innovation, narrows the digital divide, and creates employment opportunities.

Information and communication technologies (ICT), such as the Internet, have transformed the economic exchange of goods, services, data, and information, which collectively constitute e-commerce and digital trade. The United Nations Conference on Trade and Development (UNCTAD) reported that e-commerce sales hiked to $25.6 trillion globally in 2018, up 8 percent from 2017. From e-files, blueprints, data-hosting systems, and software solutions to websites, emails, music, and movies, electronic transmissions and the content and services they constitute are critical to today’s global economy.

Moreover, the current global health crisis accentuates the importance of maintaining and developing a global digital marketplace. E-commerce and digital trade are lifelines people rely on during COVID-19-induced forced isolations. More broadly, the pandemic has accelerated businesses’ digital transformation in all sectors, from healthcare and retail to manufacturing and financial services. This growing reliance on digital technologies and connectivity makes it clear that the international community should enact new rules to support digital free trade and e-commerce, including by refraining from passing customs duties on electronic transmissions.

The benefits of e-commerce and digital trade are clear, abundant, and undebatable. Not only does the 21st-century economy enable more trade to occur, but it also connects the previously unconnected to the global marketplace. Electronic transmissions undoubtedly promote Internet penetration and mobile connectivity. In Jordan, the nation’s robust information and communications technology (ICT) infrastructure has permitted several start-ups to flourish, including the famous incubator Oasis500. Consumers have an increased ability to access a comprehensive set of goods and services at reduced prices and higher quality. Businesses (especially small and medium-sized enterprises (SMEs)) can easily enter new markets around the world, often through the use of platforms. This diversifies their sales and thus increases their profitability and likelihood of survival. In effect, e-commerce and digital trade shrink the distance between buyer and seller—by nearly one-third. Easing online transactions expands efficiency and speed while lowering operational costs and bureaucratic procedures. Academic research has shown that e-commerce reduces transaction or trade costs by a substantial margin.

Greater use of digital tools and engagement in international e-commerce and digital trade unlocks more resources for investments in intangible assets (i.e., research and development (R&D), staff training, intellectual property (IP), and branding), hence sparking more innovation. With the digital economy at an all-time high, it is natural that intangible assets continue to flourish. According to the McKinsey Global Institute, intangible assets have more than doubled as a share of global revenue, from 5.5 to 13.1 percent since 2000. In short, an open and tariff-free Internet leads to global economic growth as it makes trade more accessible, dynamic, and innovative.

This is important as industries increasingly seek to develop their competitive and innovative advantage by integrating emerging technologies at every production stage. The free flow of data to and from applications worldwide is essential for all sectors, including manufacturing, services, and agriculture. For instance, German engineering firms rely on data flows to service critical infrastructure such as power grids, which keeps hospitals up and running, In the United States, the semiconductor industry transfers electronic files containing designs for semiconductors or blueprints to testing and certification centers in India as part of global production networks. Meanwhile, Microsoft’s Africa Development Centers in Nigeria and Kenya participate in free flows of data when creating and sharing innovative solutions for local and global markets.

Big and small firms all rely on digital trade and data flows; however, micro, small, and medium-sized enterprises (MSMEs) are even more susceptible to these types of costs and barriers to digital trade. MSMEs lack the size, resources, political capital, or management capabilities to navigate regulations among multiple jurisdictions. Their ability to engage in international trade depends on rules and tools that ensure easy, safe, and low-or-no-cost customer and market identification, communications, transactions, and deliveries to people around the world. This serves particularly true in Mexico, where 97.3 percent of firms are MSMEs and 2.7 percent are SMEs. Further, MSMEs tend to rely on larger platforms to sell their goods and services (i.e., MercadoLibre, Amazon). For example, initiatives such as Amazon’s “Made in Italy”—which has seen Italian product sales rise by 30 percent, with 45 percent sold as exports—would suffer. With trade obstructions, MSMEs will export and innovate less and therefore be less likely to survive. To sum it up, accessing and operating in foreign markets is vital for the survival of MSMEs and local entrepreneurial ecosystems.

When WTO members enacted the moratorium on customs duties on electronic transmissions in 1998, digital products such as software and e-books were in their infancy, so the suspension was both a rather commendable—and successful—prediction of the digital future of trade and a statement of faith about the need to preemptively protect e-commerce and digital trade from traditional trade barriers. While the term “electronic transmissions” was not clearly defined, it is only fair and reasonable to conclude that it includes both e-commerce and digital trade.

Since 1998, WTO member countries have periodically agreed to renew the moratorium every two years, motivated by recognizing that the growing global digital economy should be kept tariff-free. In December 2019, the WTO General Counsel voted to maintain the suspension until the biennial WTO Ministerial Conference of 2020. As the COVID-19 outbreak forced the WTO to postpone this meeting, some countries—notably India, Indonesia, and South Africa—continued to push for the end of the moratorium. This small group of developing countries argue that the digitalization of goods and services has significantly hampered their ability to collect customs revenue, often ignoring the larger net negative effect digital tariffs would have on global trade, innovation and competitiveness, domestic output, and productivity.

Extending the moratorium is of paramount importance. According to 2017 data, the global digital economy was worth $11.5 trillion, equivalent to 15.5 percent of global gross domestic product (GDP), which has grown two and a half times faster than the broader economy over the past 15 years. Keeping the moratorium in place fosters certainty and predictability for both domestic digital economic activity and global production networks and supply chains. It is unclear whether it’s even technically feasible to administer a fair, predictable, and efficient system to identify and collect digital duties. Either way, any effort to collect customs on every digital transaction would disrupt the seamless global flow of information and data via software, digital content, and any number of other Internet-based processes, which would inevitably impact broader economic output as well as the levels of global productivity and innovation. 

Applying customs duties on electronic transactions would have multiple negative repercussions for the global economy. Countries impacted by digital levies would retaliate with tit-for-tat measures, thus undermining digital trade and e-commerce. By preventing the duty-free flow of information and digital goods and services, governments charging such duties would only increase their own industries’ costs of accessing a wide array of technologies and data sources critical to growth and innovation, business operations, and the transfer of technology. Services affected would include the Philippines’ National Telehealth Center which, alongside American telecommunications service provider Qualcomm, has collected electronic medical records to track patient data, generate reports, and record outbreaks. Moreover, introducing such customs duties would only harm countries’ domestic exporters and jobs supported in those firms. Under this scenario, tech clusters such as Argentina’s Polo IT Buenos Aires, Kenya’s Silicon Savannah, and Nigeria’s Yabacon Valley would be damaged.

Countries may find it appealing to secure income duties on e-commerce transactions; however, doing so would hurt more than it would help. A European Center for International Political Economy (ECIPE) study concludes that developing and least-developed countries would lose more in GDP than they would gain in tariff revenues with the withdrawal of the WTO Moratorium. Across even just a handful of developing countries, ECIPE estimates annual GDP losses of $10.6 billion. India’s GDP losses would amount to an estimated $1.9 billion. In the same vein, a report published by the Organization for Economic Co-operation and Development (OECD) also demonstrates the negative economic impact of duties on electronic transmissions “outweigh the potential forgone government revenues.”

Ensuring global digital trade and e-commerce remains tariff-free is just one part of a broader strategy needed for countries to build a growing digital economy. Other aspects include creating a robust digital payments system, cybersecurity protections, IP protection, data privacy, digital literacy and skills, ICT infrastructure, and other elements.

WTO members should renew the moratorium on customs duties on international electronic transmissions, and where possible, make it permanent and binding. The temporary and ambivalent status of the suspension feeds into the uncertainty that affects the broader trade environment. At this stage, 56 WTO members (both developed and developing) have signed at least one regional trade agreement, including a provision prohibiting customs duties on electronic transmissions. For example, both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CCTTP) and the United States-Mexico-Canada Agreement (USMCA) have reinforced the moratorium by making it clear, permanent, and enforceable.

This GTIPA report seeks to help policymakers around the world make informed decisions about the growing importance of international e-commerce and digital trade. The paper lays out how each country, and the global economy as a whole, can capitalize on the benefits of a digital free trade agenda, which would support economic development in developed and developing countries alike.