Craig Burchell is senior vice president of global policy at Huawei Technologies. Based in Shenzhen, China, he is a former head of global trade and market access at Philips Electronics.
Any action that adds to the uncertainty of the world's economy should be taken with extreme care. Yet last week, members of the World Trade Organization came perilously close to dropping a key agreement that helps countries grow their digital economies. This would have potentially hurt small businesses while adding risk and complexity to the digital dimension of the global trading system.
Since 1998, WTO member states have voted every two years not to impose import duties and taxes on electronic transmissions such as e-books, music, movies, video games and even streams of bits and bytes sent via email and text message. The agreement not to tax such products is commonly called "the WTO Moratorium," and it was scheduled to lapse at the 12th WTO Conference of Ministers in Geneva.
Thankfully, the Moratorium was extended. But WTO members should end the biennial renewal process and instead institute a permanent Moratorium on taxing nonphysical goods. Failure to do so will add to the duties, taxes, charges and overall burden placed on businesses, especially small and mid-sized enterprises, thereby hindering their growth and export potential.
To facilitate future trade, specialists are seeking ways to digitalize trade-related processes to reduce waste, lower costs and improve time-to-market for businesses. One example is allowing digital trade documents to be accepted legally.
Surprisingly, most of the world's trading jurisdictions still require documents that transfer possession of goods to be presented in paper form. But independent studies show that digitizing documents and forms could lower SMEs' trading costs by up to 70% while reducing time spent passing through customs by as much as 80%.
Digitizing documents and forms could lower SMEs' trading costs by up to 70%. © Reuters Exports could be stimulated even further by moving trade finance online. Access to trade finance is one of the biggest trade obstacles facing SMEs. A one-stop digital portal would provide access to financing from banks and fintech companies, letting SMEs process all documentation electronically and in standardized formats. One current example is the Singapore-based Digital Standards Initiative, a cross-industry effort to standardize digital trade.
Countries can also invest in smart port infrastructure, as China has done in the cities of Shenzhen and Tianjin. Using fifth-generation, or 5G, broadband networks and other technology has made these ports safer, greener and less expensive to operate. Digitalizing ports and nodes of the supply chain, such as distribution centers, would facilitate trade in physical goods as well as digital transmissions.
If the WTO Moratorium is allowed to lapse in the future and digital flows are subjected to tax, the cost of applying complex new customs duties will fall disproportionately on smaller enterprises. This would inhibit the growth of new technologies such as 3D printing and the deployment of more efficient, greener and faster networks.
It would also unfairly burden developing countries, whose economies rely on SMEs for as much as 40% of their national income, according to the World Bank.
The WTO Moratorium also helps keep the customs system from becoming unmanageably complex. There are already nine regional trade agreements and 13 bilateral ones that incorporate a permanent moratorium on taxing digital goods. If the WTO Moratorium is allowed to expire, companies will have to figure out which of the existing agreements may apply to their businesses.
Finally, the Moratorium helps prevent countries from repeating protectionist mistakes of the past. Nations have spent the past 150 years reducing or eliminating tariffs in the trade of physical goods. Much of the world's digital economy effectively operate without those costly and burdensome duties; introducing them would serve no useful purpose.
Some WTO Member States worry about losing the revenue they could generate if they tax intangible goods. But although tariffs produce revenue, they also impose costs. The OECD says that taxing digital transmissions would produce relatively little new revenue. And it estimates that the Moratorium currently saves anywhere from 250 million euros to 7.4 billion euros globally -- an extremely wide range that shows how hard it would be to estimate the digital tax burden accurately.
If governments want to raise revenue on nonphysical goods, there are better ways to do it. Sales taxes and Value Added Taxes, for example, are fairer and simpler to implement and comply with.
The WTO and governments should start preparing now to make the Moratorium permanent when they meet again in 2024. Voting on this matter once and for all will eliminate the uncertainty created by waiting until the last minute, then renewing the agreement for two more years. And it is a much better way to stimulate trade than imposing tariffs on electronic transmissions.