Trade war goes digital: Countries eye tariffs on internet economy

A 20-year global moratorium on imposing tariffs on digital trade could end next week if India or South Africa makes good on threats, according to trade officials and documents. This could potentially force people to pay duties on software and movie downloads.

Since 1998, World Trade Organization (WTO) members have renewed a ban on import duties on so-called “electronic transmissions”, which are worth up to $255bn a year by one estimate.

Some think the long-standing moratorium favours rich countries because the ban received strong backing from Washington at the outset, and because most of the lost customs revenues are thought to be borne by developing countries.

Pressure is now growing to lift the ban as more books and movies become digital, potentially reducing revenues further.

India and South Africa circulated an internal WTO document, reviewed by Reuters this week, that cited the potential of 3D printing to manufacture products and that said rising digitalisation compelled “a rethink of the role of the temporary moratorium” last year.

The fate of the moratorium will be decided on next week, and its renewal requires full consensus.

Asked about South Africa’s position, South Africa’s WTO ambassador, Xolelwa Mlumbi-Peter, said in an emailed response this week that it was “still consulting on this important decision”.

India did not respond to a request for comment.

“At the moment, there are a number of countries that feel confident they can stand aside from the global consensus,” said John Denton, secretary-general of the International Chamber of Commerce (ICC). “It could break the internet.”

A proposal backed by 21 countries, including China and Canada, seeks to extend the ban for at least six months when it expires at the end of 2019. Deal broker Switzerland said “a large part of the WTO has signaled its support for the moratorium”.

Such duties could be difficult to apply, and it is not clear how the origin of digital products – or whether they are imports – would be determined.

“How do you put a tariff on a byte? How would you capture millions of data flows from multiple sources flowing across countries’ borders every minute of every day?” asked Denton.

The first possible answers to such questions are emerging. Indonesia created tariff codes for digital goods in 2018, fixing the level at zero percent for now.

Lost revenues?

Should the moratorium end, it does not mean that tariffs will immediately follow, Mlumbi-Peter stressed. But this is seen as more likely in a new culture of permissiveness following the expected paralysis of the WTO’s top ruling body after December 10, 2019.

“If someone tries to experiment putting customs duties on even a limited set of products or services, then there is a risk of immediate retaliation absent of the dispute settlement function,” said the ICC’s Andrew Wilson.

Estimates of the ban’s effects vary. At the top of the scale, a recent United Nations report said potential annual tariff revenue losses could be up to $10.4bn a year, with more than $10bn lost by WTO developing countries.

“More and more production is going to be digitised in the future, so developing countries will lose tariff revenues,” said Rashmi Banga, the report’s author.

However, a study by the Organisation for Economic Co-operation and Development questioned these assumptions, arguing that the revenue gains from lifting the ban would be relatively small, and that tariffs would lead to higher prices for consumers, among other costs.