trade policy brief
Shedding new light on the debate about duties on electronic transmissions
December 2019
It is important to consider both costs and benefits when countries reflect on whether or not to extend the WTO Moratorium on imposing customs duties on electronic transmissions. otential revenue implications must be considered in the context of overall government revenue, P as well as alternative, broader-based, non-discriminatory taxes which tend to be better suited to collecting revenue in the digital economy. Countries may also wish to think about the broader economic benefits that arise from the Moratorium, including lower prices for consumers (who pay tariffs), and greater export competitiveness.
What’s the issue? Electronic transmissions are a key feature of the evolving digital trade environment. However, as more trade becomes digitally deliverable, some World Trade Organisation (WTO) Members have voiced concerns about possible foregone customs revenue arising from the Moratorium on imposing customs duties on electronic transmissions. Understanding the revenue implications of the Moratorium requires thinking through what “electronic transmissions” refer to. Although there is no official WTO agreement on what these are, in a trade context, electronic transmissions are understood to refer to digitally delivered trade. However, the scope of the Moratorium has been interpreted in different ways. Some argue that it applies to the content of the transmission while others say it applies to the transmission itself (the “medium”). Discussions have also focused on what tariffs could be charged on what products absent the Moratorium. This has led to disagreement on how to measure the impact of the Moratorium, with wide differences in the estimates of potential foregone customs revenue – ranging from USD 280 million to USD 8.2 billion. With no easy answer to the question of the correct counterfactual to the Moratorium, it is important to take a step back to identify the different issues at stake in this debate.
Existing estimates need to be put in perspective Even the highest estimates of the potential customs revenue implications of the Moratorium, when set
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against overall government revenue, represent, on average, 0.08% to 0.23% of total government revenues for developing countries (see Table). This is notwithstanding methodological concerns with the approaches taken to calculate them, including the use of bound tariffs; the assumption that all goods that could be digitised will be digitised; and not taking into account complementarities between electronic transmissions and growing trade in other physical hardware like smartphones. Moreover, a careful assessment of 3D printing technology suggests that, while it is a versatile technology, it is unlikely to lead to dramatic declines in goods trade in the near future. This is because there are limitations to the use of the technology, related, among other things, to the inability to produce at scale, to long print-times and to material limitations. In addition, adoption of 3D printing as a manufacturing technology can lead to increases rather than decreases in trade – as, for example, in the case of hearing aids (Freund et al. 2019).
Tariffs come with costs, and their burden falls on consumers Tariffs are associated with lower output and lower productivity and their burden falls mainly on domestic consumers, not foreign firms. They are also an unstable and inefficient source of revenue relative to other taxes. This is why countries are moving towards other, nondiscriminatory value added taxes or goods and services taxes involving resident and non-resident vendors. These taxes can be better suited to revenue collection in the digital economy, yielding substantial tax revenues. For instance, by implementing simplified registration and
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Shedding new light on the debate about duties on electronic transmissions Summary of empirical estimates of potential foregone revenue Study
Duty type
Average total revenue losses million USD Developed
% of total customs revenues
% of total government revenues
Developing countries
Developed
Developing
countries
countries
Countries
Developed countries
Developing countries
233.4
613.5
0.7
0.9
0.01
0.13 0.07
Schuknecht and Pérez-Esteve (1999)
Applied rates
Teltscher (2000)
Applied rates
264
449.3
1.39
0.7
0.02
WTO (2016)
Applied rates
117.2
236.8
0.2
0.65
0.01
0.06
Banga (2017)
Bound rates
24.5
255.8
0.03*
0.15*
0.00*
0.01*
Applied rates
123.8
2,788.50
0.16*
1.58*
0.00*
0.08*
MFN duties
212.2
3,482.90
0.24*
2.00*
0.00*
0.10*
Bound rates
212.2
8,043.90
0.24*
4.35*
0.00*
0.23*
Banga (2019)
Note: *Estimates calculated using the World Development Indicators (WDI)
collection regimes for the collection of VAT on the crossborder B2C supplies of services and intangibles, South Africa has collected around ZAR 3 billion over a five-year period, Australia collected AUD 269 million in the first year of implementation and the European Union around 10.2 billion over a three-year period (OECD, 2019. p.6).
Electronic transmissions bring a range of benefits There are considerable benefits to being able to conduct trade electronically. These have too often been overlooked in the Moratorium debate. •
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Electronic transmissions reduce trade costs. Being able to digitise goods is tantamount to a reduction in transport costs – which can be as much as 20-30% of overall trade costs. These costs tend to be highest for developing countries, meaning that electronic transmissions offer new opportunities to overcome their trade cost disadvantage. Removing tariffs is welfare enhancing. Any loss of customs revenue arising from the removal of tariffs on digitisable goods would be offset by increases in consumer welfare, giving rise to net welfare gains (irrespective of how an electronic transmission is defined). Indeed, tariff reductions on digitisable goods would lead to consumer welfare increases of USD 940 million, outweighing costs associated with revenue losses by USD 73 million. Additional welfare gains are also likely to arise from reductions in transport costs, although these are more difficult to model.
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Use of foreign business services is key for export competitiveness, especially for lower income countries. Indeed, the use of such services, which tend to be digitally delivered, is associated with higher domestic value added in exports. So tariffs would reduce the export competitiveness of lower income countries the most.
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SMEs that use digital tools such as webpages or digital deliveries are more likely to become exporters giving rise to new opportunities to grow.
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What does this mean for policy? When countries consider whether or not to extend the Moratorium, they should take into consideration the wider benefits of the Moratorium and not focus solely on the revenue implications. Analysis shows that the revenue implications of the Moratorium are likely to be small relative to overall government budgets and that its lapse would come at the expense of wider gains in the economy, including in terms of consumer welfare and export competitiveness.
Further reading • Andrenelli, A. and J. López González (2019-11-13),“Electronic transmissions and international trade - shedding new light on the moratorium debate”, OECD Trade Policy Papers, No. 233, OECD Publishing, Paris. http://dx.doi.org/10.1787/57b50a4b-en. • Freund, Caroline; Mulabdic, Alen; Ruta, Michele. 2019. Is 3D Printing a Threat to Global Trade? The Trade Effects You Didn’t Hear About (English). Policy Research working paper; no. WPS 9024; WDR 2020 Background Paper. Washington, D.C. : World Bank Group. • OECD (2019), OECD/G20 Inclusive Framework on BEPS Progress report: July 2018 - May 2019, OECD, Paris.
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