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WTO disarray leaves issue of duties on e-commerce unclear

Friday, December 10, 1999

By DAN RICHMAN Mail Author
SEATTLE POST-INTELLIGENCER REPORTER

The abrupt end to the World Trade Organization's meeting here one week ago leaves unclear -- even to the WTO itself -- just what protection electronic commerce now enjoys against discriminatory international trade barriers.

That uncertainty makes some of this region's companies nervous, even though the WTO says no nation has yet moved to impose duties on e-commerce.

The one-year-old moratorium on the 135 WTO member countries' imposing duties on e-commerce transmissions -- such as digitized images, music, books and software -- was set to be extended or ended at the Third Ministerial Conference. Neither occurred.

"It remains unclear as to what the status is, and that will continue awaiting discussions . . . on that question," said WTO spokesman Jean-Guy Carrier.

WTO Director-General Mike Moore said yesterday he wants to "reconvene the ministerial conference" as soon as possible. That phrasing suggests the conference isn't over, and if that's true, by its terms the moratorium is still in effect.

Internet transmissions still make up a tiny fraction of worldwide retail sales. By 2002, less than five percent of all retail will occur on the Web, according to projections by the Organization for Economic Cooperation and Development in Paris. But that's expected to hit 15 percent by 2005.

As the world's largest seller of software, Microsoft Corp. is concerned that sales and revenues could suffer if foreign governments begin imposing import duties on its products, said Brad Smith, general counsel for international law.

"We obviously favor continuation of the moratorium," Smith said.

Duties are fees that nations impose on imports. They can be used to protect a nation's own companies against foreign competitors by making imports prohibitively expensive.

Software downloaded or rented to computer users over the Internet is just the sort of transmission the moratorium was designed to protect. Those forms of software make up a small but growing percentage of Microsoft's business.

For example, the Redmond software company freely distributes its Internet Explorer browser and has pledged it will begin renting its Office software over the Internet.

But most of Microsoft's software sales are on CDs. And therein lies a larger but related question that was also left unaddressed on Friday: are software and other digital transmissions more accurately classified as goods or a services? That question will have to be answered before the moratorium is lifted, if it ever is.

Among WTO nations, goods are treated under GATT, the General Agreement on Tariffs and Trade, which largely bans the imposition of trade barriers. Services fall under GATS, the General Agreement on Trade in Services, which offers countries more latitude to fiscally discriminate against imports.

Everyone agrees software sold on a CD is a good. Is it any less so when it's downloaded or rented on the Internet? The European Union and Canada say yes. The United States and Japan disagree.

It has been widely rumored that the EU plans to refuse to extend the moratorium unless the WTO agrees to treat software as services. Gerard de Graaf, first secretary to the European Union's delegation to the United States, denied that rumor.

"The (EU) has consistently said we're not taking the moratorium hostage," he said.

But he stressed the size of the gap in beliefs as to how digital transmissions should be treated.

"We find it hard to accept conceptually that something that travels in ones and zeros is a good, something you can kick," de Graaf said.

He also said the EU wants to be able to protect its culture against movies and music by imposing duties on downloading them, just as "it's felt you need to give protection to French (conventional movie and music) producers or they won't produce."

A work program to study classifying e-commerce began in September 1998. Reports by at least nine nations have been submitted to the WTO's general council, which has not yet begun considering them, Carrier said. The status of that work program, too, was thrown into confusion by the termination of the Seattle meeting.

Another Seattle company likely to be affected by this issue is RealNetworks. Real not only downloads its streaming-media player software to users around the world, it also streams audio and video programming over the Internet worldwide.

Alex Alben, Real's vice president of government affairs, said the company is watching the situation closely, but he thinks that even if Europe imposes duties and the United States doesn't, the result could favor American companies.

"If European countries with the same products to offer as American companies impose penalties, it could shift the advantage to U.S. companies," he said. In any case, he said, worrying too much right now is premature. "It's all so much in flux that it's hard to see how it might play out. Among most countries, the education process on this issue is just beginning."

Not so relaxed is Jerry Sullivan, a professor of international business at University of Washington.

"Right now, the future doesn't look good" for unencumbered international e-commerce, he said. "The EU's position seems quite ominous to me."

Sullivan says if duties are imposed on electronic transmissions, companies might start setting up subsidiaries in foreign countries to avoid them. Amazon.com, for example, has set up operations in the United Kingdom and Germany. That has the advantage of placing them closer to customers. But it also renders them subject to all the same taxes domestic companies pay.

P-I reporter Dan Richman can be reached at 206-448-8032 or danrichman@seattle-pi.com

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