Photo: Robert Hradil/Getty Images
Commentary by Meredith Broadbent
Published February 16, 2024
As the 13th World Trade Organization (WTO) Ministerial Conference (MC13) approaches, grim expectations for the WTO system of fair trade rules abound due to (1) the organization’s chronic inability to reach new agreements to expand trade, and (2) growing instances of WTO members ignoring their obligations and skirting the rules.
Despite its longstanding support for the WTO, the United States is contributing to its problems given bipartisan disenchantment in Congress and the administration with its current state of affairs. Of course, success at the multilateral level is a give-and-take exercise, but the fact is that it would be easier for the United States—given the size and coherence of its domestic market—to eventually forsake the WTO in favor of regional trade agreements with trusted partners and allies. With this in mind, the organization’s relevance will depend on whether the negative spiral can be stabilized and reversed, particularly with regard to free trade rules that sustain the growth of small and medium-sized enterprises (SMEs).
The potential to deal a blow to SMEs through the looming expiration of the WTO’s customs duties moratorium on electronic transmissions, commonly referred to as the “e-commerce moratorium,” is front and center at the MC13, which will take place February 26–29 in Abu Dhabi. Although a mouthful, expiration of this temporary agreement to forgo applying duties on digital products transmitted electronically would have a serious negative impact on the international trading system, particularly as it applies to the tech and entertainment sectors.
Unlike international trade in traditional goods (physical products), which is governed by a strong and holistic set of free and fair trade rules, governance of electronic transmissions and digital trade through permanent rules is weak. For digitally delivered products and services, there are no permanent agreed-upon principles of nondiscrimination or national treatment like those that promote predictability for international trade in physical goods. The moratorium has been a temporary exception to this Wild West of weak rules for digital trade.
Trade in services now accounts for half of global trade on a value-added basis and is growing while merchandise trade is decreasing. Much of the current and future growth in services trade is tied to the growth of digital trade and the rise in digitally enabled services, which already accounts for 54 percent of global services exports in 2022, according to the WTO. At the same time, trade restrictive measures in the form of heavy-handed regulation of digital trade and data flows are also growing.
A relatively dependable element of WTO rules since 1998, the moratorium has been extended successively in two-year increments since then. Recently, however, opposition from certain developing countries to extension has hardened and the cost continues to rise as developing countries try to hold the issue hostage for other unrelated priorities. In this vein, India and Indonesia are engaged in expansive outreach efforts to convince other developing countries that are WTO members to allow the moratorium to expire. They argue that as more and more products are traded internationally in digital form, the moratorium has led to growing revenue losses to national treasuries. This is highly questionable in light of the findings of numerous studies. For instance, the WTO Secretariat assesses the impact of the moratorium on developing countries’ overall government revenue to be below 0.33 percent.
In the current world of advanced technologies, such as 3D printing and cloud computing, many leaders in these countries believe the moratorium has diminished the “advantage” of developing countries, given their tariff levels are generally higher than those of developed countries for physical goods. To the contrary, the moratorium has become a foundational principle guiding the global economy and is a great example of how the multilateral system, with all its flaws, can promote policies that foster innovation and growth, particularly for SMEs. Various studies have highlighted the benefits of a duty-free cyberspace for SMEs through low-cost access to global markets on one hand, and increased productivity and output induced by imports of innovative digital services on the other—in the United States but also in developing ones like India and Indonesia which currently oppose the moratorium’s renewal.
Growth in digital trade spurs growth throughout economies. Just as the WTO’s Information Technology Agreement, which eliminated tariffs on technology goods, played a fundamental role in inciting growth and deepening value chains in developing nations’ services sectors, so too does tariff-free trade in e-commerce promotes the adoption of new technologies and leads to virtuous growth throughout the global economy. Studies from the Organization for Economic Cooperation and Development have repeatedly shown that introducing digital tariffs would slow down digital trade flows in such a way as to largely offset any gains from new customs revenue. This is particularly true for India, whose opposition to the moratorium runs the risk of shrinking its tax base by severely hurting its most internationally successful industries (e-commerce platforms, entertainment, telecommunications and computer services.)
The threat of new arbitrary trade barriers against the free flow of digital trade is becoming more concrete, particularly in some of the large, influential developing economies. For example, Indonesia has added five new import categories to its tariff schedule for “software and other digital products transmitted electronically.” This change will enable the country to legally introduce tariffs of any level on these products (or transmissions) should the existing moratorium expire.
The expiration of the e-commerce moratorium would result in significant uncertainty and increased costs for companies and innovative individuals that sell services and products over the internet or use the internet for tasks such as internal management, dealer coordination, customer outreach, and fulfilling maintenance and service relationships. These “at-risk” areas are not exhaustive and merely serve to highlight some of the key elements that could be impacted by expiration of the moratorium.
With global cross-border data flows expected to reach $11 trillion by 2025, the stakes are high. A new generation of digital trade barriers will be disruptive and costly and lead to a fragmentation of the global digital market, which would hurt SMEs the most, if not prevent many from engaging in e-commerce altogether.
To ensure that services and digital trade continue to expand and fuel economies and employment, the global economy needs permanent multilateral digital rules and a revitalized WTO to enforce them. While some progress may be possible at MC13 on the draft Joint Statement Initiative, getting a comprehensive agreement which would establish permanent rules for fair and nondiscriminatory treatment in the digital trade sector is probably beyond reach at the conference. But extension of the e-commerce moratorium is an essential step in this direction.
At present, it is not clear whether the Office of the U.S. Trade Representative is pursuing a concerted negotiating strategy to achieve extension of the moratorium at MC13 in cooperation with the many allies who share the same objective.Given the economic impact on the United States economy, and SMEs in particular, it will be imperative for Congress to press the administration on this priority.
Meredith Broadbent is a senior adviser (non-resident) with the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. She would also like to thank Guillaume Ferlet for his helpful research assistance.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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