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The advent of internet has made it possible for information to be transmitted over a far distance in an instance. Internet has made information – or data – a priced commodity that can be traded just like good through electronic transmissions which we will refer to as ‘digital good’ in this article. Digital goods range from consumer media/entertainment (such as e-books, movies, email services) to cloud services and software serving complex industries. Digital goods has reduced the dependence on imported physical goods, therefore reducing transportation costs (especially for developing economies) and increase domestic value added in exports as they have become a vital part in value chain.
Since 1998, WTO member economies have regularly extended a Moratorium on imposing customs duties on electronic transmissions – most recently in 2017. However, as trade in digital goods becoming more common, some member economies (including Indonesia) are voicing concerns about the fiscal revenue loss and domestic protection – jeopardizing the future of the Moratorium.
Arguments Behind The Opposition
The opposition towards the Moratorium mainly centred around the argument that the fiscal loss amounting from the moratorium is already huge as more and more products are now delivered digitally. For example, Banga (2019) uses a counterfactual projection of what trade in now-digitised products (e.g. eBooks, movies, music, software) might have been without digitisation (USD 255 billion in 2017) and calculates the tariff revenue that could be accrued if those products remain undigitized: USD 212 million for developed economies and USD 8 billion for developing economies in 2017.
Another opposing argument against the moratorium is the necessity to create a level playing field between domestic tax-paying businesses and foreign businesses who are outside the reach of tax administration. Some economies already implemented tax on imports of digital goods to customers. Import tax is administratively different than tariff/duty as they are being levied within a fiscal jurisdiction, not on the border.
The two aforementioned rationales behind the opposition towards the moratorium are also supplemented with the ambiguity of the wordings in the Moratorium document. Although most developed economies refer the “electronic transmissions” to both medium/process of content and the content itself, other economies define it only as the former. The narrow definition of electronic transmission (mostly used by net digital-goods importers) are used to justify their cause to impose duty on the latter (German Development Institute, 2019).

Main Arguments Supporting the Extension of Moratorium
As Banga (2019) uses a hypothetical projection of trade in digitizable products were they not digitised, the projection itself is arbitrary as it assumes the same rate of growth between 1998-2010 and extrapolates it to 2017. In reality, market structure has changed and prices are much lower now as digital transmission eliminates the need for transporting products and the physical value of the content carrier (e.g. paper, disk, film). Furthermore, market structure has changed with the proliferation of subscription based model (e.g. Netflix, Spotify) which supressed the incremental cost of accessing a product (in this case movies, album, podcast, etc.). It can also be argued that the subscription service has become a product by itself.
A study by Makiyama (2019) concludes developing economies will lose USD 6.5 billion in GDP collectively if they all levy the tariff, whereas the tariff potential can only make half of it (USD 3.5 billion). Imposing such tariff may also decrease investment and create a net welfare loss. However, the final implication may be employment loss that can reach up to 1.8 million jobs in all developing economies. The paper also explores the possible impact of global retaliation where total GDP loss in all developing economies can amount to USD 10.6 billion with employment loss of 3.2 million jobs collectively.
Another counterargument to Banga (2019) comes from OECD (2019) that highlights the small potential foregone fiscal revenue as a share of total government revenue (1.17% of all customs duty for overall developing economies). The share of imports in digitizable products is also small, amounting to 1.2% over total global imports, and highly concentrated in few product categories–printed materials (100% digitizable) and toys/games/sports requisites (26% digitizable).

The digital replacement of tangible products is only so much and limited to certain products. The digital era is marked by innovation of products that otherwise (without internet) would have never been invented. This includes software that are used by millions of customers, including individual businesses (that has become more common with the advent of gig-economy), SMEs, to large companies. The size of digital economy has swollen rapidly in the past few years. It is estimated that by 2022 over 60% of global GDP will be digitized. With more interconnectedness of global businesses through internet, imposing tariff on this market can create a huge economic impact.

 

Indonesia: How Will The Tariff Impact The Economy

According to Banga (2019), the foregone revenue due to moratorium in Indonesia is USD 54 million (2017). However, it is only 0.68% relative to the overall customs revenue of Indonesia. In Makiyama (2019)[1], GDP loss from imposing such tariff can reach USD 102 million with USD 128 million reduction in investment, a loss of 38000 jobs, and welfare loss amounting USD 99 million. The number can be much inflated if other countries also impose ‘retaliation’ tariff on Indonesian digital goods (being the largest digital economy in ASEAN, imposing such tariff can have a huge negative impact and deteriorates Indonesia’s position).

According to the preliminary findings of our study, the additional government revenue generated from the tariff won’t suffice the loss to the economy. We measure the impact of tariff on creative sectors through CGE modelling as the sector are currently digital at large (e.g. design, mobile app/gaming, filming, music) and found that GDP loss can reach USD 19.175 million in 2018 with a potential fiscal revenue of USD 18.6 million. Though our

[1] Makiyama (2019) uses Indonesia as an example of how the tariff may impact the economy (since Indonesia being one of the largest net importers of ‘digitizable products’ – USD 484 million in 2017 or 5th largest in the world)

preliminary finding doesn’t capture all activities in the economy that use foreign digital products due to data limitation (especially software-as-a-service/SaaS that are mainly used in businesses), this already describes that such tariff is unnecessary in the first place from a macroeconomic point of view.

Another concern is on the technicalities of the duty collection. The Indonesian government (through Minister of Finance Regulation 17/2018) already set a tariff schedule (chapter 99) on software and other digital products. Although the tariff rates for digital products are currently at 0%, the regulation has opened the possibility for the government to increase them. It may require businesses to report to the customs office – which means additional administrative hassle, contrary to the current administration’s effort in simplifying bureaucracy. Furthermore, digital good has a different nature with tangible goods as they’re intertwined with their embedded services. This shows how vague the definition of a digital ‘goods’ and how ending the moratorium can create further disputes.

 

The Way Ahead: Is There a Better Alternative to Tariff?

Drawing from the experience in the recent US-China trade-war, a net welfare loss occurs in most cases (Cavallo, et al., 2019; Amiti, Redding, Weinstein (2019). In other words, domestic consumers suffer more compared to foreign firms through increase in prices of the imported goods. The welfare impact of tariff may differ across products but it should be noted that as developing economies have little to no alternative to imported digital goods, levying such tariff may harm customers.

There are other ways the government can increase the revenue base of the digital sector. It is argued that tax as a better alternative, especially for consumption and income taxes as they apply to broader base. For instance, Singapore will implement GST (General Services Tax) for imported Digital Services by 2020. This system allows companies to be tax compliant without having formal permanent establishment within a fiscal jurisdiction (while current Indonesian tax code requires businesses to establish a business presence within Indonesian jurisdiction). OECD also proposes a unified approach on digital taxation worldwide that assigns taxation based on a business’ activity within each country’s jurisdiction (based on certain formulas).

ISD believes that transmission of information (digital goods) should be free without interference. Imposing a ‘border control’ on digital transmission are against the idea of internet – which is eliminating distances and borders across the globe. Not only does such border control can impact the economy negatively, the structure of the global internet may be altered in a way that reduce the flow of information and knowledge – which is unquantifiable.

References

Amiti, M., Redding, S. J., & Weinstein, D. (2019). The Impact of the 2018 Trade War on US Prices and Welfare. NBER Working Paper 25672.

Banga, R. (2019). Growing Trade in Electronic Transmissions: Implications for the South. UNCTAD Research Paper No. 29.

Cavallo, A., Gopinath, G., Neiman, B., & Tang, J. (2019). Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy.

German Development Institute. (2019). Governing Digital Trade – A New Role for the WTO. Briefing Paper 6/2019.

Lee-Makiyama, H. (2019). The Economic Losses from Ending the WTO Moratorium on Electronic Transmissions. ECIPE Policy Briefs.