Warning that trade diplomats could ‘break the Internet’ as WTO meets

For the past quarter of a century, the meteoric rise of the digital economy has been exempt from the kind of tariffs that apply to trade in physical goods.

That era may come to a screeching halt this week as a handful of nations threaten to scrap an international ban on digital duties in a game-changing bid to draw more revenue from the global e-commerce market that the United Nations estimated at US$26.7-trillion.

If governments fail to reauthorise the World Trade Organisation’s e-commerce moratorium, it could open a new regulatory can of worms that could increase consumer prices for cross-border Amazon.com purchases, Netflix movies, Apple music and Sony PlayStation games.

“Absent decisive action in the coming days, trade diplomats may inadvertently ‘break the Internet’ as we know it today,” International Chamber of Commerce secretary-general John Denton wrote in a Hill opinion piece published last week.

The WTO’s e-commerce agenda dates back to 1998, when nations agreed to avoid taxing the then-fledgling market for digital trade. WTO members have periodically renewed that ban at their biennial ministerial meetings and are considering whether to do so again at this week’s gathering of ministers in Geneva.

But some nations like India and South Africa argue that the growth of the Internet justifies a rethink about whether the WTO’s e-commerce moratorium remains in their economic interests. In 2020, they introduced a paper that said the moratorium prevents developing countries from gaining tariff revenue from transformative technologies like 3D printing, big-data analytics and artificial intelligence.

Splintering

While nations could draw somewhere between $280-million and $8.2-billion in annual customs revenue, new digital tariffs would also harm global growth by reducing economic output and productivity, according to the Paris-based Organisation for Economic Cooperation and Development.

The International Monetary Fund previously calculated that a splintering of the digital economy could ultimately deliver a 6% hit to global economic output over the next decade.

If the moratorium lapsed, “it could set in motion a stampede to impose tariffs on digital flows across borders, put an unnecessary strain on an already battered global economy, and signal to the world that inflation be damned”, according to John Neuffer, the CEO of the Semiconductor Industry Association.

To be sure, it’s not immediately clear how exactly a government would impose customs duties on electronic transmissions. It would probably be “prohibitively expensive” for customs officials to track and quantify the value of the countless data packets that bring these products to consumers’ devices, according to Denton.

There’s reason to believe that India is using the threat of new tariffs as a negotiating tactic

“While viewing a single movie, a device could receive as many as five million data packets from nine jurisdictions,” Denton wrote. “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?”

Furthermore, the WTO does not define the scope of e-commerce transmissions so there is no clarity as to which online services would be subject to new duties — be it bitcoin cryptocurrency transactions, Airbnb lodging, Uber car rides, Doordash food delivery or Peloton fitness classes.

Finally, the proliferation of virtual private network applications that mask IP addresses would complicate, if not render impossible, efforts to identify the origin of many digital commerce transactions.

There’s reason to believe that India is using the threat of new tariffs as a negotiating tactic to persuade other nations to concede to its demands for unrelated trade concessions.

India previously threatened to scrap the e-commerce moratorium during the WTO’s last ministerial in 2019 but backed off after nations agreed to avoid initiating disputes over certain questionable intellectual property practices. The e-commerce debate may also be used as leverage for India’s demands to water down WTO subsidy rules for public stockholding food programmes.

Such brinkmanship is made possible by the WTO’s principal of consensus, which allows any one of its 164 members to block any agreement for any reason.

“India, South Africa and their allies use the moratorium as leverage because they can,” said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy in Brussels. “Developing countries have everything to win and nothing to lose by holding the WTO prohibition on data tariffs ransom.”  — Bryce Baschuk, (c) 2022 Bloomberg LP