Unbridled trade liberalisation and unnecessary binding rules in trade agreements have incapacitated many governments in terms of regulating imports and generating tariff revenues from non-essential imports. These potential lost tariff revenues are badly needed by developing countries to save lives and livelihoods of their citizens at this time of Covid-19 crisis.
With the ongoing lockdown in many countries, the demand for unnecessary luxury imports, especially via electronic means, has increased manifold. These include video games, movies, music and printed matter. The main exporters of these electronic transmissions like Amazon Prime Video (the US), Netflix (US), Ninetendo (Japan), Rockstar (US), etc., are experiencing an unprecedented surge in their sales and profits.
According to Bloomberg, Chinese mobile games’ net sales increased by 32 per cent in the first week of February compared with the prior year . While all around the world the stock markets have crashed, there was almost an 14 per cent rise in Netflix stock (NASDAQ: NFLX) since the beginning of this year.
At times of crisis like the current pandemic, tariffs on the growing imports of these electronic transmissions could have been the most simple and effective policy tool in the hands of the governments to check conspicuous consumption and to generate revenue. However, binding commitments like WTO e-commerce moratorium, is constraining the governments from doing what is most needed.
The WTO moratorium, which restricts governments from imposing custom duties on imports of electronic transmissions, was agreed upon in 1998 and has continued since then. In December 2019, WTO members decided to continue with the moratorium till the next Ministerial Conference, when a decision on the moratorium will be taken. However, the existing moratorium has ensured that while sales and revenues of digital players soar during the pandemic, governments are unable to collect custom duties from their imports.
Custom duties have been one of the main sources of government revenue in many developing countries. While developed countries are distributing billions and trillion of dollars to their citizens for their well-being, many developing countries faced with limited financial budgets are groping for new sources of revenue to provide their citizens with bare necessities.
Since most of the developing countries are net importers, this trend will continue in the future till the governments decide to put an end to the moratorium. According to UNCTAD Research Paper 29, removal of the moratorium on electronic transmissions can generate at least $10 billion per annum for developing countries and this tariff revenue will steadily grow with the rising imports of electronic transmissions.
Many developing countries have high bound duties on physical imports of these transmissions while developed countries’ average bound duties are around 0.2 per cent, which implies that exports from developing countries of electronic transmissions will not be impacted by the removal of the moratorium.
Further, there is a need to reconsider the scope of the moratorium by defining what electronic transmissions include. According to the existing studies like UNCTAD (2000), WTO (2016-JOB/GC/114), etc., electronic transmissions include all digitisable products, i.e., those products which have existing HS codes but are now being electronically traded.
These include five broad categories which are: movies; music; video games; printed matter; and software. However, there is a need to expand this category and include those digitisable products which have HS codes but have been converted into digital services and are being electronically delivered like streaming services for movies, music and video games.
As technology is advancing the physical products are not only being converted into digital products but are being further converted into digital services and the same physical products are being delivered through ‘on-line streaming’ services. Using the same HS codes of the corresponding physical products, governments should decide to levy custom duties on their streaming services, irrespective of whether they are downloaded electronically or delivered using online streaming services.
Some recent studies like ECIPE (2019) and OECD (2019) have argued for including business services in the scope of the moratorium. ECIPE (2019) has identified these services and estimated the impact of applying tariffs on these services. While the study finds that the tariff revenue collected will not be much, their model has many flaws including unrealistic assumptions.
OECD (2019) has also identified electronic transmissions as ‘digital deliveries’ but they include all services delivered through Mode 1 when they use the proxy of ‘foreign value added by services.’ However, services delivered under Mode 1 are those services which are disciplined under GATS and allows developing countries to regulate the imports of these services.
It is therefore important to identify only those digital services as electronic transmissions which have corresponding physical products and therefore associated HS codes. Electronic transmissions should include the following five categories, i.e., films (downloaded or streamed), music (downloaded or streamed), printed matter (downloaded or read online), video games (downloaded or played online) and software (downloaded or consumed as a service).
If electronic transmissions are so defined and the moratorium is removed, governments of developing and least developed countries will be able to regulate imports of luxury items like movies, music and video games; have a new growing source of revenue for facing this crisis; and they will be able to preserve their policy space and have the flexibility to decide how much custom duties they want to levy on imports of different categories of electronic transmissions.
In March 2020, India and South Africa in their communication (WT/GC/W/798) outlined the adverse implications of the moratorium for developing countries, which included the loss of policy space, loss of potential tariff revenues and related additional duties and surcharges; and possible impact of digital technologies like 3D printing on manufacturing in the developing countries.
Further to these impacts, custom duties on imports of online streaming services will provide a level-playing field to domestic producers of budding digital streaming services of music, movies and video games in the developing countries. It will also allow the governments to regulate luxury imports and conspicuous consumption when the funds are most needed to save lives and livelihoods of their citizens.
Covid-19 has revealed the importance of preserving policy space in international trade agreements and retaining the flexibility to regulate imports and levy custom duties by the governments.
The writer is Senior Economic Affairs Officer, UNCTAD. Views expressed are personal