The WTO Extends its Customs Moratorium for Digital Products: Good News for Creators, Copyright Industries…and for Consumers

Source: WTO

At the recent 12th WTO Ministerial meeting, the first in more than four years (because of COVID), Trade Ministers reached agreement on several key decisions. Two of them of are of direct interest to copyright industries, one for what was not done (relating to an intellectual property patent waiver for COVID-19 vaccines) and one related to a further extension of the 1998 moratorium on the application of customs duties to digital products. I am going to focus primarily on the latter because of its importance to content industries, to consumers everywhere and to the global economy.

It is no secret that the WTO is facing its challenges. Created as an organization in 1995 from the framework of the General Agreement on Trade and Tariffs (the GATT), a trade treaty established in 1948, the WTO today has 164 members, representing almost total global coverage. It sets trade rules which members agree to abide by, and (until recently) settled trade disputes between members. In recent years, there has been a split between developed and developing country members over how strict the rules should be, and to what extent the organization’s dispute settlement decisions should apply to members. Ongoing negotiations to resolve these issues have hit gridlock. Nevertheless, the organization is the only global regime that governs trade; it is indispensable to maintaining trade disciplines and fighting growing protectionism.

At its most recent meeting, WTO ministers did not resolve the ongoing impasse over the dispute settlement body nor other deep-seated conflicts between developing and developed countries, but they were able to agree on a package of measures, including the two related to copyright. The copyright related measures included a decision to permit compulsory licensing of patents necessary to produce vaccines to treat COVID-19 infections, and an agreement to “to maintain the current practice of not imposing customs duties on electronic transmissions until MC13 (the 13th Ministerial Conference), which should ordinarily be held by 31 December 2023. Should MC13 be delayed beyond 31 March 2024, the moratorium will expire on that date unless Ministers or the General Council take a decision to extend.” In other words, the “customs moratorium” on digital products, first instituted in 1998 for two years and extended until the next ministerial meeting at every meeting since, has been extended for another two years.

The COVID-related patent waivers will address concerns raised by developing countries, permitting the compulsory licensing of patents for production and export of generic vaccines. This more targeted compromise approach replaces the unnecessary and overly broad original proposal floated by South Africa and India that would have also included a waiver on industrial designs, trade secrets and copyright for any technologies potentially related to fighting COVID.

As for the extension of the customs moratorium, if it has been extended at every ministerial meeting since 1998, you might ask, what is the big deal about one more extension? And what is the moratorium all about and why is it important? A significant element of the moratorium is that it is just that, a “moratorium”, in other words a “temporary prohibition”. If it has been in existence for over twenty years yet has not been made permanent, there must be a reason for this. To understand why, we need to look at the origins of the WTO moratorium. At the organizations 2nd Ministerial meeting in 1998, the WTO adopted a work program to examine all trade issues related to e-commerce, which was in its infancy at the time. Unlike physical goods, digital products delivered seamlessly electronically via the internet were not stopped at the border and subjected to customs duties. At the time, it was decided not to prejudice the outcome of the work program. Therefore it was agreed that a customs “moratorium” on goods delivered through electronic transmissions, (i.e. suspending the application of import duties on digital products) would be put in place while more work was undertaken to better understand the impact of digital goods and services on global trade. The term “moratorium” implies that but for the suspension, customs duties would normally apply. The amount of the duties (tariffs), like duties on physical goods, would depend on various factors, such as whether a country wished to impose them either to generate revenues or to protect domestic industries. Tariffs can be set high or low, be completely abolished or kept in place but suspended. Calculation can be based either on value or some other measurement, e.g. per kilo. Having established a tariff on a given product, countries can then choose whether to implement the tariff or whether to agree to lower or abolish it in return for equivalent concessions from trading partners.

Calculating a value, and thus a duty rate, on electronic transmissions is not easy. Digital products (goods or services) can range from music and audio-visual content such as movies or other broadcasts, to e-books, software, video games and various forms of data such as designs, legal documentation and health information delivered through media files as well as 3-D printing. E-commerce (digital trade) is defined as the production, distribution, marketing, sale or delivery of goods and services by electronic means. The fact that products delivered electronically have been exempted from customs duties and other border clearance requirements is both a reflection of the difficulty in applying border measures to digital goods and services as well as a generally accepted realization of the benefits of encouraging e-commerce and digital trade.

The internet has enabled access to global markets for those providing digital content, ranging from Hollywood studios and record labels to individual artists, web designers and software developers. It also provides a means to access offshore services such as legal document preparation and review, accounting and auditing, and tele-health. It is a key element in allowing micro and small businesses to access customers globally, in transmitting knowledge and education, keeping costs down and making supply chains more resilient. The global importance of the digital economy was underscored by a statement from the International Chamber of Commerce, representing 91 trade associations from all continents, urging that the moratorium be extended. But if digital trade is so generally beneficial, why has the customs moratorium not been made permanent?

Developing countries (and developed countries in years past) have traditionally used tariffs to create protective walls behind which to nurture their own “infant industries”, as well as to generate government revenue, given often ineffective tax collection systems. There is however a price to be paid for these tariffs in terms of economic inefficiency, with the costs largely borne by consumers and secondary producers in protected economies. As more products are traded digitally, some developing countries have begun objecting to the digital exemption, arguing it bypasses their tariff walls without compensation. In 2020, India and South Africa (not coincidentally the same two states that championed the broad IP waiver related to COVID), filed an objection to the continuation of the moratorium, arguing that it unduly benefited developed countries, primarily the US and EU, and China, technically not a developed country. The paper claimed that the moratorium was costing $10 billion in customs duties annually, with 95 percent of the “losses” being absorbed by developing countries. It also challenged the assumption that digital services are covered by the moratorium.

Many economists would say that these purported losses were actually “savings” enjoyed by consumers in developing countries where tariffs on imports of digital products have been foregone. But India and South Africa are also interested in advancing their agenda in the WTO and in obtaining additional trade concessions from the developed countries. Thus, to put a price tag of $10 billion in revenues “lost” to developed countries (notwithstanding it is consumers in the developing countries who actually pay these so-called “lost revenues”) sets up the negotiating agenda to demand equivalent concessions from the developed world in terms of improved market access through ongoing WTO negotiations. This is further borne out by the statement in the India/South Africa paper that if the moratorium was lifted, developing countries would not necessarily implement tariffs on digital products, just that they could do so. In effect, the paper decries the supposed benefits that the moratorium confers on developed countries and China, and demands its elimination to create a perceived negotiating advantage. This is notwithstanding the fact that a content-rich country like India exports digital products and maintains large offshore service operations facilitated by duty free access of digital content and has benefited enormously from the suspension of customs duties on electronic transmissions, as have many other developing countries.

In response, a number of developed and developing WTO members (Australia, Canada, Chile, Colombia; Hong Kong, Iceland, Republic of Korea, New Zealand, Norway; Singapore, Switzerland, Thailand and Uruguay) filed a counter paper arguing that overall benefits of the free flow of digital products far outweigh any potential foregone government revenues, pointing out that the significant issue of consumer welfare is missing from the India/South Africa paper. The paper draws on a detailed OECD economic study published in 2019. The basic argument is that the cost of the tariffs imposed on imports of digital products via electronic transmissions will be borne primarily by consumers, not exporters. Foregone customs revenues can be recouped by imposing taxes (such as consumption taxes) on the incremental overall economic growth generated by the efficiencies to economies brought about by cheaper digital inputs. Here is one excerpt;

The welfare analysis (of the OECD paper) outlines that the reduction in production and transportation costs associated with digital deliveries, as well as the removal of the tariff, can lead to a reduction in price. In consequence, the increase in demand leads to a rise in imports and an increase in consumer surplus, part of which is associated with redistribution from the domestic producer and part of which is from government revenue to the consumer. The study is unambiguous: the overall impact to the economy is ‘positive and large’….The study finds that the imposition of equivalent duties on electronic transmissions could negate those positive effects by increasing the price of the digital delivery…”

And so, the debate continues. Because some countries are unwilling to give up the perceived leverage of being able to impose tariffs on digital products, yet implicitly recognize the benefits that tariff free treatment of digital products confers on both local economies and the global economy, the moratorium gets rolled over and kicked down the road. That has happened once again, and the moratorium will stay in place at least until 2024. Hopefully at the next Ministerial meeting, it will either be made permanent or at least further extended.

A failure to renew the moratorium would be a significant setback for the global trading system and for the trade liberalization agenda. It would impose a potential barrier for consumers of digital products and services and slow adoption of the digital economy. For creators and copyright industries, who have invested heavily in the development of digital products and digital delivery, it would be a retrograde step that would, in the end, increase costs for consumers and reduce their options. Given the current power dynamics within the WTO, it is likely too much to expect that the moratorium will be made permanent. That is the best possible outcome that would ensure long-term predictability and stability. In the meantime, it is good news that the moratorium has been extended to 2024, and hopefully beyond.

© Hugh Stephens 2022. All Rights Reserved.

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