WTO Moratorium on Customs Duties on Electronic Transmissions

World Trade Organization (WTO) members agreed at their second ministerial conference in 1998 to continue their practice of not imposing customs duties on electronic transmissions for an initial period of two years. They also directed the WTO General Council to establish a comprehensive work program on electronic commerce (e-commerce). Popularly known as the moratorium, this decision has been renewed at all subsequent WTO ministerial conferences, albeit with growing opposition from many developing countries. The last renewal at the 13th WTO Ministerial Conference held in early 2024 specified the end date for the moratorium and the work program—the 14th Ministerial Conference or March 31, 2026, whichever is earlier.

Both before and after the 13th Ministerial Conference, several experts in the developed world emphasized the importance of the moratorium for an open Internet and the growth of global e-commerce. Unfortunately, these views do not fully and adequately consider the concerns that developing countries have raised about the moratorium, including the lack of clarity about its coverage, its implications for public revenues in developing countries, and its impact on policy space for industrial policy. Similar concerns are also understood to be behind the decision of several participants of the WTO Joint Statement Initiative (JSI) negotiations not to communicate their acceptance of the JSI Stabilized Text of July 26, 2024, which envisages a moratorium that can be reviewed after 5 years.

It is important to recognize that developing countries are not a monolith and have diverse perspectives on the moratorium.

It is important to recognize that developing countries are not a monolith and have diverse perspectives on the moratorium. Some support the moratorium, while many others oppose it, as noted above. This article aims to enhance understanding of the concerns raised by opposing developing countries. Gaining deeper insight into these concerns is essential to fostering a balanced debate that can help achieve consensus among all WTO members.

Context: The global digital divide

The digital divide lies at the heart of developing countries’ concerns about the moratorium. This is a multifaceted concept. In the current context, the digital divide denotes the key differences between developed and developing countries when it comes to access, affordability, quality, and relevance of digital infrastructure and digital technologies. As a result, and despite the exponential growth in e-commerce, developing countries participate far less in e-commerce than developed countries. Estimates by the Organisation for Economic Co-operation and Development (OECD) indicate that OECD countries represented almost three-quarters of global digital trade exports in 2018.

The digital divide lies at the heart of developing countries' concerns about the moratorium.

Another measure of this digital divide is the business-to-consumer e-commerce ratio. This averages around 20% for least developed countries, slightly above 50% for developing countries, and about 80% for developed countries. With businesses and platforms in developed countries dominating global e-commerce exports, they are the main beneficiaries of the moratorium—that is, not required to pay customs duties on their substantial and growing volumes of digital exports. Developing countries, on the other hand, given their limited share in digital exports, do not benefit from the moratorium to the same extent. Moreover, they cannot use customs duties to support their businesses and platforms to further develop and expand. It does not help that the exact coverage and scope of the current moratorium are not clearly defined.

Definition: What is actually covered?

There is no agreed definition of “electronic transmissions.” The WTO Ministerial Declaration of 1998 and subsequent ministerial decisions/declarations to extend the moratorium did not define electronic transmissions. Similarly, even after including e-commerce provisions in a growing number of regional trade agreements, that term has remained undefined in the context of international trade rules. This leads to a legitimate concern of developing countries about the unknown extent of what is covered under the current moratorium. Is it the online delivery of digitized goods? Are digitally delivered services included? Does it refer to the transmission process or also include the content being transmitted?

Without an agreed definition in trade agreements, and with the advent of new technologies such as 3D printing, the coverage can be ever-expanding. Developing countries that oppose the moratorium are understandably unwilling to keep signing a blank cheque every 2 years.

Loss of Public Revenues: Where it hurts

The estimates of annual public revenue loss due to the moratorium vary greatly, from USD 10 billion (according to UN Trade and Development) to USD 280 million (according to the OECD). This is due to the lack of clarity about its coverage—as mentioned above—and the assumptions and methodologies used by the two organizations. Given this wide divergence about the total amount of public revenue losses, a better measure to understand the concerns of developing countries would be to look at the share of customs and other import duties in their total tax revenues. World Bank figures show that customs and other import duties can constitute 10% to 30% of many developing countries’ total tax revenues. For some, the share exceeds 50%. Therefore, they rely on customs duties much more than developed countries, where this share is generally well below 5%. In such a situation, the foregone ability to raise public revenue due to the moratorium will adversely impact developing countries’ public finances, severely curtailing their fiscal space for much-needed public investments in education, health, infrastructure, etc. In this context, it should also be noted that many developing countries already have huge budget deficits ranging from around 10% to 70% of their gross domestic products. Continuing the moratorium, in the eyes of these countries, can further exacerbate their budget deficits by adversely affecting their public revenues through customs duties.

Value-added tax or similar consumption taxes have been proposed to replace customs duties in developing countries. While useful, this proposed approach misses two important points.

As a countermeasure, value-added tax (VAT) or similar consumption taxes have been proposed to replace customs duties in developing countries. While useful, this proposed approach misses two important points. First, the imposition of VAT or similar consumption taxes predates the onset of e-commerce as developing countries have been trying to switch to VAT for several decades, considering it a better instrument to raise public revenue. However, it still faces many formidable challenges, including informality, compliance costs, and weak administrative capacity. It is highly doubtful that developing countries will be able to overcome all the difficulties associated with establishing and implementing efficient and effective VAT or similar consumption taxes in the short term to replace customs duties.

Second, VAT or similar taxes are levied equally on imports and domestically produced goods and services—unlike customs duties, which only target imports. Replacing customs duties with VAT would, in effect, grant duty-free market access (de facto national treatment) to imports and remove a competitive advantage that customs duties would have provided to domestic producers of the same products under the industrial policy of the country.

Policy Space: Customs duties as a tool of industrial policy

The pursuit of industrial policy is a legitimate goal of governments worldwide, including developed country governments. Customs duties and subsidies are key tools used for this purpose. Developing countries generally lack the financial resources to provide subsidies and often turn to customs duties on imports to allow domestic producers to establish themselves, grow, and become competitive. They consider and try to balance the interests of producers and consumers while applying this tool to industrialize and structurally transform their economies. The moratorium on customs duties on a growing list of digitally importable goods will reduce the policy space for developing countries to use an important tool to service their industrial policy goals.

The moratorium on customs duties on a growing list of digitally importable goods will reduce the policy space for developing countries to use an important tool to service their industrial policy goals.

Moratorium: How important is it?

Developing countries also caution about overemphasizing the importance of the moratorium, particularly its contribution to the growth of global e-commerce and to keeping the Internet open. At least two other factors have played a vital role in the growth of e-commerce. First, technological developments and breakthroughs have made digitizing an ever-increasing list of goods and services possible. This trend continues even faster, for example, with developments in artificial intelligence and 3D printing.

Second, COVID-19 gave great impetus to e-commerce—for example, the share of e-commerce retail sales in global retail sales jumped from 13.6% in 2019 to 18% in 2020. The moratorium’s role in keeping the Internet open is even more limited than its role in the growth of e-commerce. Rather, regulatory approaches—including for data flows and data localization—are far more important for keeping an open Internet.

Conclusion: Toward a consensus through better understanding and dialogue

This short article has briefly outlined the main concerns of developing countries regarding the moratorium on customs duties and the reasons many oppose making it permanent in its present form. Understanding these concerns is essential to having a balanced conversation on the issue. Summary dismissal or perfunctory attention will not be helpful. Only by better understanding each other’s perspectives and opening a two-way dialogue can a way forward toward consensus be found. A good starting point for that would be to have a substantive and constructive discussion on the definition of electronic transmission so the scope and coverage of the moratorium can be determined, taking into account the interests and concerns of both developing and developed countries.

Rashid S. Kaukab is Senior Specialist Trade and Sustainable Development at IISD. However, this article is written in a personal capacity and does not reflect the views of IISD.