4 December 2019 | Andrea Andrenelli & Javier Lopez Gonzalez
I owe the discovery of the issues around the WTO Moratorium to the entry in the Cyclopaedia Tradeatica and its article transcribing a conversation on the topic held in Uqbar. It is reproduced in its entirety below.
Today in Uqbar, government officials are having a frank debate about whether to support the renewal of the WTO Moratorium on applying customs duties on electronic transmissions. Uqbar is a small country which relies on customs revenue for the provision of a range of important services to its citizens.
In today’s meeting, there is a group of officials that does not support the renewal of the Moratorium. They argue that digitalisation increases the number of goods that can be digitised and so renewing the Moratorium would mean losing out on important customs revenue. They also argue that they have little to lose from not renewing the Moratorium since they are not large producers of the type of items that are digitally transmitted.
Prime Minister Jorge Luis listens with intent, and while one part of his mind is navigating infinite libraries, the other is deeply concerned. He feels that not renewing the Moratorium might have negative implications for his country and turns to his trusted advisor, Ms Aleph, for a view of what is at stake.
“There are three issues that you need to consider”, she tells him.
“The first is indeed the extent to which we rely on customs revenue on products that can be digitised. But we need to consider this potential revenue relative to overall revenue. From our calculations, and taking the highest estimates, we stand to lose between 1 and 3 million Tlons, depending on the type of tariff that we use and assuming that all goods that could be digitised are digitised”. A considerable amount, thought the PM. “But” Ms Aleph continued, “you must consider that this represents between 0.08% and 0.24% of our overall revenue”. Sigh of relief.
“The second issue is the fact that there are better ways to raise needed revenues. Tariffs are an unstable source of revenue given that imports can fluctuate. Tariffs are also paid by our consumers and not by foreign firms. Besides, we don’t even have a reliable mechanism for collecting tariffs on electronic transmissions, and developing one could end up being quite costly. You see, the reason we rely so much on our customs revenue is because it is easy to collect, but this is unlikely to be the case for collecting revenue on electronic transmissions. If its revenues we’re after, there might be better ways of collecting taxes in the digital economy”.
“Oh, I see, and what might these be?” the PM asked.
“Well, our neighbours in Orbis have recently put in place a Goods and Services Tax (GST). This tax applies to all resident and non-resident companies selling in Orbis. Those that reach a threshold of sales of 75 000 Tlons are liable to pay a flat tax, collected directly from the seller for companies located abroad. Our counterparts from Orbis tell us they have managed to increase revenue collection considerably since they adopted this new system”.
“But what is the difference between this and customs duties on electronic transmissions?” inquired the PM.
“Well, the Moratorium applies to customs duties which are levied on imports and, as I said earlier, these are rather unstable sources of revenue. By contrast, the GST is non-discriminatory, it applies equally to all and, importantly, simplifies processes since the same rules apply to goods and to services, regardless of origin”.
“I see” said the PM. “But if we renew the Moratorium, would we be able to put this system in place?”
“Yes, absolutely, the Moratorium debate is only about customs duties on electronic transmissions, a GST like the one in Orbis is completely compatible with our WTO commitments”.
The PM looked pensive; Ms Aleph continued. “The last issue that you need to consider, PM, relates to the benefits associated with electronic transmissions. Don’t forget our growing exports of cultural goods and designs. A world where there are no tariffs on electronic transmissions means that we can sell these at lower costs, reaching more customers across the globe. As you know, as a remote country, we tend to face higher trade costs for our goods, making it more difficult for us to compete in international markets. Electronic transmissions enable us to overcome these cost disadvantages, generating new opportunities for our companies, many of which are small, to export. But we also need to think about how we benefit from electronic transmissions as users. We certainly don’t want to make it more expensive for our smaller firms to maintain access to productivity enhancing, world class digital inputs”.
“It seems to me that we are in a garden of forking paths” thought PM Jorge Luis. “If I have understood correctly, whether we go down the path of renewing the Moratorium or not depends on a range of factors. We must certainly consider potential foregone customs revenue, but we must also put this into perspective and consider alternative, more efficient ways of raising revenue in the digital economy. After all, the digital transformation is going to change the economy. New challenges will arise but so too will new opportunities, and so we must also consider how our decision will affect our ability to benefit from digital trade, correct?”
“Correct” said Ms Aleph.
“Time forks perpetually toward innumerable futures” thought the PM, but, having made a decision, he asked “So, why would we not go down the path of renewing the Moratorium?”