Updated: Nov 14, 2020
Over the past few decades, technological and digital innovations have changed the perspectives of our lives, from the way we communicate, work, play, learn, do business, and so much more. One notable example is how the internet has transformed communication and access to information. The internet has brought possibilities of nearly free and instant communication—something which was unthinkable before the internet, three decades ago.
The advent of the internet and the accompanying innovations known as the digital revolution has transformed our lives and created a new economic system—the digital economy. The digital economy creates massive opportunities, as well as frightening challenges.
Many economies, especially developing countries, lose billions of tariff revenues on digitally delivered products due to the 1998 World Trade Organisation (“WTO”) moratorium. The Moratorium prohibits governments from applying customs duties on Digital Products Transmission, best known as Electronic Transmissions (“ET”). For example, e-commerce has enabled products such as Software, music, books, movies, video games and most importantly DATA to be traded digitally rather than through CDs or DVDs as it was in the past. As a result, products which used to generate billions of customs revenues are now “duty-free”. According to the United Nations Conference on Trade and Development (“UNCTAD”) research, developing economies lost more than 10 billion USD in potential tariff revenue due to the WTO moratorium on ET in 2017.
Big Techs Dominance
The World Wide Web has unprecedentedly enabled globalization, this technology which empowered the centralised database architecture, has fueled the concentration of economic power in a few Global Technology Companies, known as Big Techs or Tech Giants. There are growing concerns that Big Techs are gaining not only economic power but also political power. Incidents such as Facebook–Cambridge Analytica data scandal and Google’s search engine manipulation effect say it all.
It is not by coincidence that on 29 July 2020, the House Antitrust Subcommittee grilled the CEOs of Tech Giants; Facebook, Amazon, Apple and Google to examine the effects of their dominance on the US and global agenda. However, it seems to be controversial whether the reign of Big Techs is either a threat or a success to their domicile economies. In his opening remark during the United States House Antitrust Subcommittee grilling, Facebook’s Mark Zuckerberg noted” the tech industry is an American success story; …. Our industry is one of the ways that America shares its values with the world. And one of our most significant economic and cultural exports.”
Who benefits from the WTO Moratorium on ET?
Yes, it is true, the US and China are so far the winners of the digital economy. In 2019, the digital economy amounted to 15 per cent of the global Gross Domestic Product (GDP) where the US and China accounted for almost 40 per cent of the total value. The US and China account for 90 per cent of the market capitalization value of the world’s 70 largest digital platforms and more than 75 per cent of the world market for public cloud computing according to the 2019 UNCTAD digital economy report.
Digital platforms and cloud computing (digital data) are the primary drivers of the digital economy. Furthermore, seven biggest digital platforms; Amazon, Apple, Alibaba, Facebook, Google, Microsoft and Tencent; account for two-thirds of the global digital economy total market value and five of the seven world’s biggest digital platforms are domiciled in the US. The dominance of the Tech Giants in the digital economy and global trade is observable in all industries. For example, in the media and advertising industry, various reports estimate that the two “Big Techs”, Google and Facebook recorded 41% of the global advertising market share in 2019. On the other hand, Amazon dominates the e-commerce market, with over 14% of global retail e-commerce market share as of 2019.
The Tech Giants’ legacy and landmark in driving the digital revolution is unquestionable. “I am proud that we have given people; who have never had a voice before; the opportunity to be heard and given small businesses access the tools that only the largest players used to have” Mark Zuckerberg remark during Antitrust Hearing on 29 July 2020. Indeed, communication and access to information are some of the major triumphs of recent decades, and the Tech Giant are the heroes of this digital revolution battle.
However, the digital revolution struggle, like any other battle, was not with no sacrifices and injuries.
Consequences of WTO moratorium on ET to developing economies are far beyond the lost customs tariffs
In the wake of the digital economy, the threats of WTO moratorium on Electronic Transmission go far beyond the loss of tariff revenue. They stifle the basic economic principles such as Voluntary Returns and the famous David Ricardo’s Economic theory of comparative advantage. Customs duties and other tariffs’ role is not only to generate revenue for governments. They also protect the local baby industries from the Tech Giant hunting, swallow, or competition as we call it. Therefore, the WTO moratorium has deprived countries, especially developing economies of their economic sovereignty, right and power to protect their economies.
The effects of Facebook and Google in countries’ local advertising industries is like a bell ringing from the top of a mountain. In many countries, Facebook and Google took over the Entertainment and Advertising market. As a result, local media houses; Radio/TV stations, newspapers have shut shop due to financial constraints.
The movie industry in many countries has fallen apart due to the dominance of Netflix, Amazon Prime and Disney. These movie streaming Giants take millions of subscribers away from local actors and leave them with no chance to inspire, support and promote their talents and local cultures.
We waited too long to react, and now the damage is too heavy to repair. Amending the WTO’s Moratorium on Electronic Transmission and other tax regulations may save developing countries portion of lost billions of tariff revenue but will hardly help to revive and protect destroyed local industries from the looming dominance of Tech Giants.
E-commerce is admired for transforming the retail industry; business can now reach their customers directly anywhere on the planet without a need for local representatives, distributors, or dealers. E-commerce cuts entry barriers and fosters international trade. As a result, millions of local businesses face more difficulties due to increased exposure to the aggressive competition of foreign companies to local markets.
The way forward
It might be the case that the 12th WTO Ministerial Conference which will be held in June 2021 could abolish the Moratorium on Electronic Transmission. However, abolishing the Moratorium alone will not solve the problem. Developing countries will have to tackle Regulatory and Technological challenges to assure that they are fighting fit for the race of the digital revolution.
The much-discussed “pacing problem”; the gap between technological advancements and mechanisms intended to regulate them did not leave tax policies and related regulations behind. It is worth mentioning that for the last two decades, countries did not have incentives or sense of urgency for nations to attend to “pacing problems” due to the 1998 WTO’s moratorium on ET. We are living and regulating a digital world with a regulatory framework built on mails, words and papers. Any country which intends to write the digital revolution “success story” should conduct a thorough review of their existing regulations and replace the outdated rules with an adaptive and collaborative regulatory framework which is capable of solving the ever-growing “pacing problem”.
However useful it may be, regulation alone cannot earn any country a medal in the digital revolution race. The internet infrastructure feeds the growth of informal retail in international trade. It is difficult for governments to control the inflow and outflow of digital products and services using the present physical customs infrastructure. In this regard, countries need technology infrastructure which can build impenetrable digital customs.
Now, the question is, can the current internet infrastructure provide such capabilities? The answer is clear; the recent twitter hack has indeed proved that the cyber-security risks are here to stay. The technology which can provide the digital customs with capabilities of tax stamping and tracing millions of e-commerce underdog websites goes beyond the internet.
Blockchain, the technological solutions
The inability of the internet to provide security and traceability solutions to digital customs is not insoluble. We might have heard about Blockchain technology and Distributed Ledger Technology. Blockchain, a new technology unveiled a decade ago, is predicted by many analysts to surpass the internet in terms of its impact.
Blockchain; as a distributed and immutable ledger technology, provides solutions to two key challenges that the internet is facing - trust and transparency. Blockchain uses smart contracts to facilitate the automation of transactions such as processing payments while simultaneously notifying all interested parties; this can include tax authorities. Contract terms that are executed through smart contracts eliminate the need for manual intervention in transaction processes which are prone to fraud or error. Blockchain has a proven ability to accommodate disintermediation, improve transparency, and increase auditability.
Blockchain builds its security on three security features, namely, use of ledger, chain of blocks and distributed application.
A ledger is a record of each transaction on a blockchain. Transactions recorded on blockchain are immutable, cannot be edited or deleted. Blockchain is a distributed application which supports peer to peer transactions without any intermediary. The ledger recorded on a blockchain network is distributed on all nodes or computers on a blockchain network. The digital customs built on blockchain suggest that tax authorities could form part of nodes on all digital platforms operating in their respective economies.
The nodes on a blockchain network authenticate all transactions through consensus mechanisms and detect data tampering based on its underlying characteristics of immutability, transparency, auditability, data encryption and operational resilience. Blockchain provides reliable defense against the cyber-attack because of replication of the data across many nodes running on entirely different computer networks and cryptographic integrity checks. If any of the nodes does not agree with a transaction, then it cannot be processed and protects the network from fraudulent transactions. This level of security enables tax authorities to implement tax policies efficiently.
As the name suggests, blockchain is a chain of blocks. Each block contains a hash value of its preceding hash to connect these blocks. Therefore, in case of any data rectification, the hash will be altered and will require changing the overall chain.
The distributed nature of blockchains provide superior safeguards against potential external attacks and promises enhanced security. Cryptography, as a central feature of blockchain, makes transactions more secure, authenticated, and verifiable. Transactions history is immutable; they cannot be deleted or changed once recorded on a blockchain. Tax authorities will present as validators on all digital platforms operating their respective economies and would not let pass any transaction which is not tax compliant.
Blockchain technology provides security and technological solutions that countries need to build successful digital customs. Blockchain solutions go beyond the provision of effective digital customs. Blockchain provides the highest level of transparency which offers countries a wide range of solutions to the efficient implementation of tax policies free from fraud.
The digital economy fuels increase in products being traded digitally. Customs revenue losses could keep increasing as the digital trade expands. As the 12th WTO Ministerial Conference approaches, countries should prepare for a new tax regime which could challenge the standing Moratorium on custom duties on Electronic Transmission. They should capitalize on blockchain technological solutions and adopt tax policies to build efficient digital customs which benefit all.
It is important to note that a successful implementation of a blockchain-enabled digital customs project will form part of a comprehensive national blockchain strategy and will be fueled by other blockchain-powered projects such as Central Bank Digital Currency (CBDC). As countries advance their exploration and realization of blockchain strategies, blockchain-powered digital customs will form part of initial projects that will attract attention.