Most people have never heard of the World Trade Organization’s (WTO) moratorium on customs duties on electronic transmissions. And yet it may be one of the most important trade deals in recent history, given the outsized effect it has had on the growth of the internet.
The moratorium – which has been renewed by WTO member states every two years since 1998 – has enabled the digital economy to flourish by prohibiting governments from applying tariffs to international data flows. It has thus shielded the internet from distortions and frictions induced by levies at national borders.
But this enabling environment may soon be lost unless the U.S. makes a decisive diplomatic play to secure its future. A handful of countries – most notably India and South Africa – have signaled their intention to let the moratorium lapse at the WTO’s ministerial conference in Geneva next week. That would leave governments free to begin experimenting with unilateral tariffs on everything from software, e-books and cloud services to the data underlying popular streaming services.
Proponents of ending the moratorium argue that the digitalization of previously physical goods – books to e-books, CDs to Spotify, DVDs to Netflix – has resulted in a loss of tariff revenues. Viewed through this narrow lens, the idea of applying duties to digital transactions may seem appealing to governments seeking to protect domestic revenue bases in the wake of the coronavirus pandemic and spiraling commodity prices presaged by the war in Ukraine.
The response from the Biden administration to these arguments has been decidedly muted. But the case for renewing the mortarium is crystal clear — and quite straightforward to make.
Indeed, it’s particularly telling that no customs authority has been able to demonstrate how a digital tariff system would work in practice. Consider video streaming. The moment you begin watching content on your smartphone app – whether in Jakarta, Paris or Mumbai – your device begins receiving packets of data from servers in nearby countries. While viewing a single movie, a device could receive as many as 5 million data packets from nine jurisdictions. It would be prohibitively expensive for customs officials to track these millions of electronic transmissions and determine their origin, and it would be nearly impossible to quantify their value.
How, then, would countries accurately (and impartially) calculate the tariff on a single viewing session, byte of data or file size – let alone on the endless stream of data and messages that enable modern business-to-business transactions? And how would they do so at a speed congruent with that of the digital economy? There are no clear answers to these questions — only the threat of chaos and frustration online if countries start to experiment with online duties.
What’s more, tariffs on data would cause economic harm to the very countries that impose them. Analysis by the European Center for International Political Economy has shown that placing duties on digital goods and services would lead to higher prices and reduced consumption — slowing GDP growth and shrinking tax revenues. The OECD has also concluded that the opportunity cost in terms of lost revenue due to the moratorium is low, and far outweighed by the increase in consumer welfare brought about by digitalization.
But more to the point, digital tariff barriers are simply unnecessary. Governments already have other ways to address potential losses in fiscal revenue from the digital economy. Australia, for example, has successfully implemented a non-resident digital goods and services tax. Revenue from the tax has surpassed expectations, and compliance is high. What’s more, the OECD is (thankfully) making rapid progress in implementing the consensus solution to the tax challenges arising from the digital economy that was concluded thanks to decisive U.S. leadership last year.
At a time when the spill-over effects of the war in Ukraine are already placing a significant drag on global growth, the last thing we all need is for the WTO’s digital moratorium to lapse — opening up a vast new front for protectionists and anxious politicians to exploit.
We can only hope that the U.S. will step up in the coming days to preserve the most important trade deal that you (probably) never heard of. Absent decisive action in the coming days, trade diplomats may inadvertently “break the internet” as we know it today.
John W.H. Denton is secretary general of the International Chamber of Commerce, a global business organization representing 45 million businesses.