Seattle Shouldn't Delete Free E-trade

by Aaron Lukas

Aaron Lukas is an analyst at the Cato Institute's Center for Trade Policy Studies and co-author of "Seattle and Beyond: A WTO Agenda for the New Millennium."

December 20, 1999

Negotiators at the World Trade Organization's Seattle ministerial meeting embarrassingly failed to launch a new round of trade talks this month. Predictably, anti-globalization Luddites have claimed credit for this outcome. But in truth, Seattle was doomed by stubborn policy differences between governments and a lack of leadership by the United States -- not by sign-wielding steelworkers or Starbucks-smashing students.

Now that a comprehensive trade round is on hold, it's doubly important that the WTO move forward in areas where consensus exists. Over the past decade, three major trade agreements -- on telecommunications, financial services and information technology products -- have been completed independent of any broader trade talks. Today, the area most ripe for such an agreement is on tariffs in cyberspace.

True electronic commerce -- the purchase and delivery of products and services online -- already takes place in a largely free-trade environment. Whether through prudent restraint or simply lack of the necessary know-how, no nation currently levies customs duties on wholly electronic transactions. In practice, this means that Americans aren't charged a special import tax when they download software, music or other digital content from a foreign company.

Given that nations have devoted considerable time and energy to lowering barriers to international trade through the WTO in other sectors, it only makes sense that they work to lock in the current beneficial state of affairs online.

A multilateral agreement on Internet tariffs is clearly feasible. Free trade in electronic goods and services is a unique situation: never before have all nations started from a free-trade position before negotiations began. Moreover, establishing the Internet as a free-trade zone would result in negligible revenue losses for governments (since tariffs are currently non-existent) and would not interfere with national income or consumption tax systems.

The Clinton administration first advocated classifying the Internet as a "Duty-Free Zone" in a paper published in 1996 -- a commendable effort that has helped to build international support for tariff-free trade in electronic content. One hundred thirty-two members of the WTO reached a temporary agreement, based on the United States' original proposal, on the exemption of electronic transactions from customs duties this past May.

The proposal has also proved popular at home. Despite being unable to agree on much else, the federal Advisory Commission on Electronic Commerce -- created by Congress as part of the Internet Tax Freedom Act -- recently passed a unanimous resolution in support of free trade online. The resolution suggests that the administration's policies in this area have widespread domestic support.

That's good news. As the world's leading producer of electronic goods and services, the United States has an especially strong interest in setting a good example by resisting pressures to charge customs duties on electronic transactions. As a 1998 paper published by the WTO pointed out, "85 per cent of Internet revenue is generated in the United States while only 62 per cent of the users are located there. This suggests that the United States is probably a net exporter of products through the Internet." Moreover, because the U.S. Treasury derives most of its revenues from personal and corporate income taxes, Washington must be careful not to raise barriers to trade in digital content that will encourage businesses to locate elsewhere. Federal income tax receipts will rise to the extent economic activity is encouraged through a commitment to free trade online.

In addition to the sale and electronic delivery of digital content, the Internet will also promote the flow of low-value shipments of physical goods directly to consumers. The growth of electronic storefronts on the Web, for example, makes it relatively simple for a customer in one country to order a product directly from a foreign seller. Because the costs of insurance and customs administration can equal or even exceed the value of a low-dollar shipment, this type of commerce may not reach its full potential unless reforms are instituted.

To facilitate the growth of those transactions, governments should consider expanding tax and duty-free thresholds, especially when the costs of inspection and collection would likely exceed revenues raised. As the country with the most commercial Web sites, the United States will benefit greatly if such sales are allowed to flourish. And as with any reduction in trade barriers, the U.S. economy will benefit even from unilateral action. Consequently, the United States should raise the threshold for customs treatment on small cross-border purchases -- at least doubling the current $50 limit -- regardless of whether other nations initially follow suit.

The prospects for online free trade are positive despite the recent failure in Seattle. To guarantee that this beneficial state of affairs continues, an agreement on the tariff treatment of digital transactions should be an immediate priority for the WTO, regardless of whether a new trade round ultimately gets going.