Trade protectionism 4.0: a road we shouldn't go down

Despite the increase in global trade protectionism, international trade in electronic goods and services has so far been largely safeguarded. The reason for this is a moratorium that has been in place within the World Trade Organisation for over 20 years. However, more and more countries have recently been considering import tariffs on electronic commerce. The benefits of such import tariffs would not outweigh the potential costs. A strong international framework is needed to ensure free trade in digital goods and services. After all, in the context of 'economy 4.0', 'trade protectionism 4.0' is something we should avoid.

Economy 4.0 and the associated digital transformation has brought about many changes in recent decades. One of these is the possibility of transferring electronic content over digital networks - e.g. music, e-books, software, etc. This has made the international trading of such electronic goods and services a lot cheaper and easier. In an increasingly digitised economy, taxation is an important topic within international institutions such as the World Trade Organisation (WTO) and the OECD. Until now, this international trade in digital flows has remained largely free of trade protectionism. The implementation of import duties on digital trade would in itself have a negative economic impact. If other countries were to follow suit and retaliate, the negative impact on global growth would be even larger. In the context of increasing trade protectionism everywhere else (see also KBC Economic Opinion of 25 January 2019), this is something we need like a shot to the foot.

WTO moratorium in doubt

As electronic commerce grew at a rapid pace and created opportunities for global economic growth, the WTO member countries agreed in 1998 to a moratorium on customs duties on so-called electronic transmissions. This moratorium has to be renewed on a regular basis. During the most recent vote on this issue in December 2019, WTO Members opted for an extension until the next conference in June 2020. Nevertheless, some countries proposed to rethink the temporary moratorium. India and South Africa are even considering allowing unilateral tariffs on imports of digital flows.

After all, they argue that more and more products that were previously traded in a physical form, such as CDs, DVDs, etc., nowadays cross national borders via digital ways. By not levying import duties on these digital flows, they lose a lot of custom revenues, which are not an insignificant source of income for developing countries. This is particularly the case for net importers of digital products such as India and South Africa, while net exporters - mainly highly developed countries such as the US and the EU - are little affected. Developing countries also fear that making the moratorium permanent would severely limit their ability to protect domestic products and services traded online.

There is also discussion on the scope of the WTO moratorium since there is no official definition of the term 'electronic transmissions'. As a result, some developing countries interpret this as only the carrier or medium - e.g. CDs, DVDs, electronic bits. According to others - mainly net exporters - it also includes the content value of the electronic transmission. In the first case, the moratorium would not prohibit WTO Members from levying import duties on the content traded electronically.

Losses rather than profits

Several studies¹ have already estimated the loss of custom revenues for net importers as a result of the moratorium. The amounts vary, but most studies agree on the following: the increase in revenue from customs duties on electronic transmissions would not outweigh the loss of GDP. If countries were to withdraw from the moratorium and unilaterally impose tariffs on imports of digital goods and services, this would lead to higher prices and lower consumption. This would slow down economic growth and reduce tax revenues. Especially if other countries were to introduce retaliatory tariffs, the economic damage would be considerable. For example, the European Centre for International Political Economy² calculated that the loss of GDP in India would be 49 times bigger than the revenue from custom duties. Not only consumption would be affected in such a scenario, but also investments, jobs and ultimately productivity and prosperity. The trade-off between tax revenues for the public sector and the costs for the economy in general would thus be particularly poor.

In addition, import charges on electronic transmissions would largely outweigh their benefits. In general, electronic transmissions reduce transport costs. Mainly for developing countries this leads to a global level playing field as they generally have higher transport costs. Digital technologies, such as web pages and the ability to transfer information over the internet, also improve access to export markets for companies in developing countries. Consequently, not only the impact on customs revenues but also other factors should be considered when evaluating the moratorium.

Better international framework needed

As digital and e-commerce play an important role in international trade relationships, agreements in this area are increasingly included in preferential trade agreements. For the sake of clarity, the agreements do not adopt the term 'electronic transmissions'. They rather contain descriptions such as 'digital products'. The focus is usually on the substantive value of the products rather than on their carrier or medium. For example, the new trade agreement between the US, Mexico and Canada - or USMCA, NAFTA's replacement - contains a chapter in which the parties state that they will not implement import duties on digital products that are transferred electronically. The trade agreements between the EU and Canada (CETA) and between Japan and Switzerland also contain similar chapters.

Hence, agreements on whether or not to introduce tariffs on trade in digital products and services are also made separate from the WTO moratorium. This in itself is a good thing, but as long as there is no better multilateral framework - which applies to all WTO members - there will remain ambiguity and doubts about the moratorium. One day this could result in the end of the moratorium if it is not extended. In other words, this could be the starting shot for trade protectionism 4.0.

A better international framework is therefore needed, and the World Trade Organisation can play an important role in this. A more unambiguous definition of the term 'electronic transmissions' is already a prerequisite for further discussions. Moreover, in the long run, a permanent agreement would remove the uncertainty of regular voting on an extension of the current moratorium. After all, trade protectionism 4.0 is a path we should not take.

_{¹ E.g. WTO (2016), “Fiscal Implications of the Customs Moratorium on Electronic Transmissions: the Case of Digitizable Goods”}

_{² ECIPE (2019), “The Economic losses from ending the WTO Moratorium on Electronic Transmissions”, Policy Brief No. 3/2019}