Modernizing global trading rules

At the beginning of the year, on the sidelines of the Davos forum, 77 of the 164 members of the World Trade Organization agreed to start work on a project they’ve (arguably) let slide since the late 1990s: coming up with a uniform set of rules for global online commerce.

In effect, the WTO is going to be spending the next few years trying to catch up with more than two decades of growth and change in the e-commerce field. Since WTO members met in 1998 and agreed to continue a moratorium on charging customs duties on electronic transmissions (it’s been renewed at two-year intervals ever since), the global online market has exploded. Online retail sales alone hit $2.3 trillion US in 2017 and are projected to top $4 trillion US by the end of the decade.

“It’s been a long time coming,” says Valerie Hughes, former director of the WTO’s Legal Affairs Division, now senior counsel with Bennett Jones in Ottawa. “They’ve periodically renewed the moratorium, but the WTO community hasn’t been able to agree on much else.”

The WTO won’t find consensus any easier to reach this time. The Canadian government recently solicited proposals from stakeholders on what a WTO e-commerce agreement ought to look like. The Canadian Bar Association completed its submission to Ottawa this month.

Expect to see two broad policy areas emerge as flashpoints during the talks: government revenue streams and barriers to the free flow of information and digital products.

The moratorium on charging duties on e-commerce was uncontroversial back in the late 1990s, when the online marketplace was so much smaller. Canada agreed to forego charging customs duties on electronic transmissions and digital products in the re-negotiated NAFTA and CPTPP trade deals, and similar moratorium clauses have made their way into other multilateral trade deals in recent years. Major industrialized nations want the WTO moratorium made permanent.

But the pitch for a permanent moratorium may split the WTO between developed and developing nations, with India and South Africa pushing for the right to turn more online commerce into government revenue. In a communiqué issued last July, the two countries argued that the rapid growth of e-commerce and the emergence of 3D printing technology — which is blurring the line between “services” and “products” — means governments are passing up more and more revenue every year.

Wendy Wagner practises trade and privacy law at Gowling WLG. She says a failure to hold the line on tariffs, taxes and duties at the WTO could put Canada in an awkward position.

“If we’re not going to tax digital products, we’re likely not going to apply that rule selectively, either,” she says. “We want every country to agree to the same set of rules. (But) if we’re extending the benefits to countries that aren’t extending those benefits back to us, we’re not getting anything back for what we’re giving up.”

In its brief to the federal government, the CBA says Canada should seek agreement at the WTO on non-application of customs duties on digital products and services. It suggests the WTO consider national treatment rules for e-commerce that would prohibit discrimination against foreign products through taxes and regulation. And it argues for consistent taxation of e-commerce among WTO markets; failing that, it suggests that Canada consider a VAT-style digital services tax.

“But public opinion is going to matter here,” says Abigail Dubiniecki, a UK-based freelance lawyer specializing in data privacy and trade. “Remember the uproar over taxing Netflix?

“Online has to be frictionless for the consumer. Anything predicated on taxing consumer products is going to be very hard to introduce. Just think of how easy it would be to package as an election issue.”

Tariffs and taxes can stunt the growth of small-and-medium-sized enterprises in e-commerce. So can restrictions on data flow designed to keep information secure — or to give a country’s national corporate titans a leg up. The CBA brief says a WTO framework that makes “different privacy requirements interoperable across jurisdictions,” instead of the current patchwork of bilateral or multilateral agreements, would be a vast improvement.

That might turn out to be the most daunting challenge facing the e-commerce talks. Some countries require that data generated within their borders be stored there as well. Canada imposes such “data localization” requirements on banks, insurance companies, and other financial institutions. B.C., Nova Scotia, and New Brunswick have their own limited rules.

“Requiring that data collected in a country be stored in that country is seen as the best way to protect individual privacy,” says Hughes. “China wants data localization (in the WTO agreement) as well.

“But countries that are very big in e-commerce, like the United States, want to store the data in their own jurisdictions. They don’t want to have to require that their companies build a lot of expensive infrastructure in other countries.”

In all questions of data flow and security, China remains the wild card. The CBA brief calls for a WTO debate on a possible global agreement on intellectual property rights that would address, among other things, the protection of online creative content, enforcement of injunctions internationally, royalties and licence fees, protection of codes and databases and measures to address the “forced licensing or transfer of ownership for access to certain markets (e.g. China).”

Beijing has a history of compelling foreign companies and investors to partner with domestic firms — the foreign companies get access to the vast Chinese market in exchange for “sharing” technology and trade secrets with China. Washington and Beijing have been negotiating an end to forced technology transfers; the negotiations have been slow and halting. Between tech transfer, trade talks and a burgeoning tariff war, the planet’s two largest economies are bringing a lot of baggage with them to the WTO e-commerce table.

Most observers seem to think the WTO can still secure some low-hanging fruit. Dubiniecki sees an opening to negotiate a common set of rules that could make e-commerce easier for businesses and consumers alike, by removing technical and logistical barriers for things like e-payments, parcel delivery, and electronic signatures.

“If we want international organizations like the WTO to be relevant and supported by people, we need to think about day-to-day pocketbook issues that affect consumers and SMEs directly, but also undermine the potential for e-commerce globally,” she says.

But the World Trade Organization is under enormous political pressure now, with the U.S. actively engaged in undermining a WTO appellate system the Trump administration insists is unfair to American businesses. Hughes agrees that the political brawl over the WTO’s future isn’t conducive to calm deliberation on e-commerce. But she doesn’t think it’s a mortal threat to the institution either.

“I’ve been to several funerals for the WTO already, and it’s still alive,” she says. “They’ll get something out of the e-commerce talks. It won’t be everything, but it will be something.”