Duty-Free Cyberspace: What It Means, Why It Is Important 
 

Presentation by the Office of the United States Trade Representative

Williamsburg, Virginia

June 22, 1999 
 

      When the phenomenon of electronic commerce first captured the world’s imagination three years ago, trade negotiators from around the world, who had toiled for years trying to bring down layer after layer of trade barriers, were faced with an extraordinary fact: electronic commerce is, in many ways, as close as we have come to a global free trade zone, and we had not yet negotiated anything in this area.  Government regulation of electronic commerce is minimal, and no one company dominates the market as to prevent vigorous competition, innovation, and entrepreneurialism.  The question faced by negotiators was how to preserve the dynamic qualities of a new marketplace, where entrenched interests and protectionism had not yet taken root. 

      In tackling this question, the United States focused on customs duties which -- unlike internal taxes -- are duties (or tariffs) imposed on imports at the border.   

      The issue of customs duties has dominated trade negotiations over the past century–as is clear from the text of the General Agreement on Tariffs and Trade, one of the foundations of the World Trade Organization.  The reason for this focus is that customs duties have traditionally been one of the primary ways to protect domestic industries and thereby distort trade.  Through customs duties, countries impose a differential burden at the border which has the effect of disadvantaging imports. 

 The U.S. policy over the past 50 years, starting with the GATT, has been to use international mechanisms to progressively lower duties and eliminate these trade distortions, based on the conviction that consumers benefit from cheaper goods, businesses benefit from the discipline of the marketplace, and the overall economy benefits from enhanced growth.  The growth of world trade–and consumer welfare–over the past five decades have demonstrated the wisdom of this approach. Given the trade-distorting effects of custom duties in the conventional trade, it was only logical to ensure that these distortions are not extended to electronic commerce.  Thus, in May 1998, 132 Member nations of the WTO endorsed a ministerial declaration pledging to continue the practice of not imposing customs duties on electronic transmissions.  This commitment to maintaining a duty-free cyberspace will be reviewed at the next WTO Ministerial, to be held this December in Seattle. 

      What does duty-free cyberspace mean, practically?  It does not mean that when one orders a camera on the Internet from Germany that the camera -- i.e., the physical good -- crosses the border duty-free.  Nor does it mean that items ordered electronically are exempt from internal taxes.  Rather, the concept of duty-free cyberspace is more narrow: it merely states that electronic transmissions coming from abroad are not subject to customs duties at the border. 

      No country currently imposes duties on electronic transmissions.  We are, however, the only WTO member that has made this an internationally binding commitment, by specifying this in our tariff schedule.  We are seeking all WTO Members to follow the U.S. example and do the same. 

      The implications for electronic commerce may not be immediately obvious, but they are enormous.  Not only are international data flows transmitted electronically growing exponentially, but the value of the content embedded in that data is growing as well.  The software industry is just one example: this is a 200 billion dollar industry that is based on bits and bytes, zeros and ones.  While most people now buy software through a physical media, there is no reason we should not be able to buy it (and export it) electronically.  Ensuring duty-free status for such products would be of great value to U.S. firms, and would bring benefits to consumers around the world. 

      Obviously, imposing customs duties on the electronic delivery of software would add a cost to the product and restrict trade. Apart form the direct financial burden on the transmission itself, however, is the cost of instituting a mechanism to collect such duties and the administrative cost of complying with an approach.   

      For a delivery mechanism based on an open network, where borders are meaningless, imposing customs duties “at the border” would be a crushing burden.  Is it really feasible to route all data traffic through a single “gateway”, where customs officials would be tasked to assess duties?  Could customs officials identify the value of data and assess duties accordingly?  Doing so would establish a practice which would have a chilling effect on trade.  Needless to say, many companies would shun doing business with countries that imposed such requirements. 

      The collection of customs duties would be particularly burdensome, since, by definition, it would only apply to “foreign” data or transmissions.  This could balkanize the Internet, by forcing companies to restrict data flows to within their country, in an attempt to avoid customs duties–undermining the inherently global nature of the Internet. 

       The work of this Commission on internal taxation will have a direct effect on our ability to achieve our goal of keeping cyberspace duty free.  This open forum, where all such issues can be explored, and all voices heard, is our best chance to demonstrate to the world community that inclusive solutions that preserve open markets are possible. 

      Like us, all countries have legitimate concerns about the impact electronic commerce will have on their tax revenue base.  Countries may be tempted to try and address these concerns at the border, where traditionally, it has often been easier to collect revenue.  If we can demonstrate the growth-enhancing aspects of electronic commerce, and demonstrate a fair, credible and effective approach to internal taxation which addresses issues raised by electronic commerce, then the temptation to institute trade-distorting border controls on data might be avoided.   This is the leadership role this Commission should play–helping solve the problem, and setting a model for others to emulate.