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WTO E-Commerce Talks Move Forward, Disagreements Lie Ahead

On the sidelines of last week’s World Economic Forum meeting, over 70 World Trade Organization (WTO) members announced their intent to move forward with negotiations on trade-related aspects of electronic commerce. The Joint Statement is available here. This follows over a year of preliminary talks kicked off at the last WTO Ministerial in December 2017.

Promise of Universal Rules to Facilitate Global Digital Trade

With digital transactions increasingly intertwined with international trade flows, global agreement on rules that will sustain and further e-commerce is critical. Industry groups including CCIA have supported the ongoing discussions and encouraged countries to increase their engagement to develop rules on e-commerce. The inclusion of developing countries on the Joint Statement is also welcome, demonstrating that getting digital trade rules right is not merely an issue for the benefit of developed countries with established Internet economies but a key aspect of development.

The Internet is an inherently borderless ecosystem, characterized by low barriers to entry for exporters around the world regardless of size and resources. As countries consider digital strategies and set national policy frameworks that further innovation in their own economies and address challenges posed by the realities of the changing economy, disagreements on approaches abound. Some national strategies for the digital economy include frameworks that close off markets and present digital trade barriers. When this occurs, small businesses and startups are the ones that suffer the most and countries lose the ability to grow their own digital economy.

These talks should lead to a baseline of rules to create consistency so that any individual business can harness the potential of the global Internet economy. Just as the Joint Statement notes, these talks should take into account “the unique opportunities and challenges . . . by micro, small and medium sized enterprises, in relation to electronic commerce.”

Global cooperation to address changing aspects of the world economy through these negotiations is a welcome development.

Probable Sticking Points

However, what remains unclear is the scope of these new rules, and finding areas where countries can agree.

The U.S. intends to pursue rules that “create[] strong, market-based rules in this area” and that “reduce[] the barriers around the world that threaten to undermine the growth of the digital economy, including restrictions on cross-border data flows and data localization requirements.”

The EU stated that the new rules would: improve consumers’ trust in the online environment and combat spam, tackle barriers that prevent cross-border sales, guarantee validity of e-contracts and e-signatures, permanently ban customs duties on electronic transmissions, and address forced data localization requirements and forced disclosure of source code.

Even items where there have long been agreements, such as the moratorium on customs duties for electronic transmissions, have recently come under fire. Below are a few items that are likely to cause disagreement among WTO members. If these can be addressed in a meaningful way, the negotiations have the potential to lead to a groundbreaking achievement for the future of global trade.

Finding Agreement on Rules to Ensure Cross-Border Data Flows

Privacy and trust in online communications and the protection of data is critical to digital trade. However, some attempts to implement privacy standards can have the effect of restricting cross-border data.  

The EU outlined ambitious goals for the agreement and says it wants to “address” the forced data localization requirement. However, the EU’s proposed text for data flows in their own trade agreements signals that the EU will not accept WTO rules without significant exceptions that have the effect of restricting flows of personal data.

Making Permanent the Moratorium on Customs Duties on Electronic Transmissions

As explained in a previous DisCo post, e-commerce is not necessarily a “new” issue for the WTO. In 1998, WTO members recognized that in order to facilitate the Internet economy, customs duties should not be extended to electronic transmissions.

This understanding has been reflected in WTO members’ renewal of the moratorium at every Ministerial, most recently in 2017. Permanent bans on the imposition of customs duties on electronic transmissions are also a frequent item in trade agreements around the world (including but not limited to Article 14.3 of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Article 19.3 of U.S.-Mexico-Canada Agreement (USMCA), and Article 8.72 of the EU-Japan Economic Partnership Agreement).

However, some countries are taking steps to eliminate, or at the very least undermine the moratorium. India and South Africa (who did not join last Friday’s agreement) have argued that the moratorium has led to higher revenue loss due to the increase in products that are traded in digital form. Indonesia recently amended its harmonized tariff schedule to add “Software and other digital products transmitted electronically”, a move in contrast to their WTO obligations and that would set a dangerous precedent.

Attempts to undermine or eliminate the moratorium will do little to address revenue concerns and will deter growth by introducing significant compliance burdens. Countries in favor of continuing the moratorium have argued that “the moratorium had encouraged e-commerce and provided predictability.” Further, a departure from this practice has the problem of technical feasibility due to the difficulty and burden of determining the specific amount and value of electronic transmissions – a task that many economists still struggle with. Countries have also argued that the moratorium should continue to be understood to include both the transmission and the underlying content, “otherwise the moratorium would be meaningless”.

The Chairman of the WTO Work Programme on E-commerce noted that the intention is to reach an agreement on the moratorium by the end of 2019.

The China Question

The inclusion of China to these talks at the last minute is a positive development, and a sign that these talks have the possibility to be truly global rules and a win for multilateralism. However, their inclusion should be met with cautious optimism.

China has long ruffled feathers at the WTO. China’s most successful firms Baidu, Alibaba, and Tencent, have a combined valuation of $1 trillion, and the China 2025 strategy outlined ambitious plans to achieve market dominance in next-generation technologies. However, China often places egregious conditions on foreign firms looking to operate in China to compete against these companies, effectively shutting out foreign competition. As a recent Bloomberg article points out, there is a fear that China will aid in the creation of rules that are significantly watered down or that disadvantage other countries’ success.

Next Steps

The negotiation process is expected to launch in March 2019. This move to establish baseline global rules is an important step in modernizing trade rules. As these items are not new, it is not clear whether or not countries can find agreement. However, the agreement to come to the table to find common ground is an important step forward.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.