Slapping Tariffs on Digital Data Flows Is a Really Bad Idea

by John Neuffer, President and CEO

The fate of a quarter-century old agreement that has served as a foundation for global digital trade will be decided in a week when trade ministers from around the world meet in Geneva for the 12^th Ministerial Conference (MC12) of the World Trade Organization (WTO).

Since 1998, the WTO has maintained a moratorium on customs duties on electronic transmissions. By creating a tax-free zone for cross-border flows of data, the moratorium has supported the explosive growth of global trade in Internet-related services, entertainment, and goods.

While the moratorium is critical to the global economy and must be renewed, its continuation is now at serious risk because of opposition from a handful of WTO holdouts, who claim they need increased tax revenue. Failure to renew the moratorium sets up the prospect of some WTO members, who choose to go this troubling route, imposing tariffs on just about any ones and zeros that cross borders digitally, including streaming music, software, social media, and financial transactions, just to name a few.

A proliferation of tariffs on electronic transmissions would be a major setback for the global economy as it struggles with the ongoing COVID-19 pandemic, inflation, and Russia’s invasion of Ukraine. The end of one of the WTO’s signature accomplishments after 25 years would also be a blow to that important institution, which has struggled to get wins on the board for trade liberalization.

Were tariffs on digital transmissions to explode in the wake of a moratorium failure, the U.S. manufacturing sector and the entire global economy would suffer. Take the U.S. semiconductor industry, for example. Semiconductors are one of the world’s most complex products to develop, design, and manufacture, relying on a seamless and unimpeded flow of semiconductor research, designs, software, and other data, which cross borders 24/7. Without the duty-free movement of data that has existed over the past quarter century, there is no way we could have developed the innovative prowess we have today, allowing us in the semiconductor industry to jam more than 50 billion transistors on one small chip and sell it into the global marketplace.

As Congress and the Biden administration seek to boost U.S. research, design, and manufacturing through enactment of innovation and competitiveness legislation, it’s important to remember the U.S. semiconductor design and manufacturing sectors – like other advanced sectors – can only be successful and competitive in an environment that permits the protected and seamless cross-border movement of R&D, design, engineering, and manufacturing data. Failure to renew the moratorium would risk putting a serious dent in the progress that would be achieved with passage of the competitiveness legislation currently before Congress.

When the numbers are crunched, the benefits that may derive from taxing digital flows simply don’t outweigh the drawbacks. According to a thoughtful OECD report,[1] countries slapping tariffs on data flows would lose more in consumer welfare and export competitiveness than they would benefit from new tariff revenues. Another report by ECIPE[2] finds “customs duties levied on electronic transmissions would cost more in lost economic growth and lower income from taxes than they would generate in additional tariff revenues.”

Moreover, a cancelled moratorium risks undermining the prospects of obtaining meaningful commitments to promote the digital economy in President Biden’s recently unveiled Indo-Pacific Economic Framework (IPEF). The problem is two prominent countries leading the charge to let the moratorium lapse (India and Indonesia) have also been welcomed into IPEF. Squaring that circle may be difficult.

U.S. leadership will be key to getting the moratorium renewed. The same goes for those economies counting themselves as developing and developed economies who for a quarter century have extended the moratorium.

Were the moratorium to lapse, it could set in motion a stampede to impose tariffs on digital flows across borders, put an unnecessary strain on an already battered global economy, and signal to the world that inflation be damned. And for the WTO, it will be hard to assess the upcoming 12^th ministerial conference as a success if this moratorium goes away. That’s just not the message the global economy needs from the WTO right now.

So, let’s get this right and stay the course when it comes to keeping tax authorities away from electronic transmissions of data. It’s a bad idea for everyone.

[1] The Case for the E-Commerce Moratorium by OECD – Issuu

[2] The Economic Losses from Ending the WTO Moratorium on Electronic Transmissions | (ecipe.org)