Global development hinges on maintaining open digital trade

Joy Agwunobi 

The role of digital trade in the global economy has grown significantly in recent years, with digital products such as software and movies now playing a larger role than ever. However, many developing countries have struggled to fully participate in this digital trade, which could have a negative impact on their economic growth and development. Policy reforms that promote digital trade inclusion are urgently needed, starting with maintaining the current tariff-free environment for digital products.

In addition to the traditional benefits of trade, digital trade has several unique advantages. The trade of digital products, such as software, helps to digitalise the economy and increase efficiency and productivity.Also, the exchange of digital media, such as subscriptions to international journals, promotes interconnectedness and knowledge transfer. The use of digital platforms, such as app stores and freelance programming sites, have also been found helpful in fostering inclusion by reducing trade barriers for small businesses and women-owned businesses. These benefits make it critical for countries to promote policies that encourage digital trade

According to recent data, the total value of global trade in digitally delivered products reached $3.82 trillion in 2022, accounting for a record-high 54 percent share of services trade. This growth has been driven by the rapid expansion of the internet and digital technologies over the past two decades, with an average annual growth rate of 8.1 percent. In comparison, other categories of trade, such as goods, have not experienced such rapid growth.

Despite the significant opportunities offered by digital trade, many developing economies are struggling to keep pace. Low-income countries in particular face a number of challenges, including lack of access to high-speed internet, inadequate information and communication technology infrastructure, and a shortage of digital skills. In addition, the legal and regulatory environment in these countries is often unpredictable and opaque, making it difficult for businesses to operate in the digital space.

A new report by the International Monetary Fund (IMF), the World Trade Organisation (WTO), and other international institutions, titled “Digital Trade for Development,” shines a light on issues where global solutions can help make global digital trade more inclusive. 

The report also outlined a number of specific recommendations for policy makers to consider when promoting digital trade, including the following:

– Enabling remote transactions by reducing technical, legal and financial barriers to accessing digital services.

– Enhancing trust in digital markets by strengthening consumer protection and data privacy regulations.

– Promoting affordable access to digital services by reducing data costs and improving digital infrastructure.

– Supporting cross-border deliveries by reducing trade and transport costs.

– Providing appropriate safeguards related to online transactions, such as data privacy, consumer protection, and cybersecurity.

– Implementing competition policies to promote healthy competition.

In addition to domestic policies, the report stressed the importance of international cooperation on digital trade. The report noted that countries need to agree on common “rules of the road” to ensure that digital trade continues to grow and deliver benefits for all. This includes areas such as data sharing, intellectual property protection, cybersecurity, competition, and consumer protection.

WTO moratorium  

The report highlighted that the WTO  has played a critical role in promoting digital trade through its moratorium on customs duties on electronic transmissions. Since its introduction in 1998, the moratorium has been extended on a regular basis and has helped to create a stable and predictable policy environment for digital trade.

The report mentioned that one of the key issues on the agenda of the 13th Ministerial Conference of the WTO, to be held in February, will be whether to extend the moratorium on customs duties on electronic transmissions. There has been some debate about the fiscal implications of the moratorium, with some countries concerned that it could affect their revenue potential and policy space.

However, the report highlighted recent research that shows that the moratorium has a limited impact on government revenue, and that there are other ways for countries to raise revenue while still maintaining an open and transparent environment for digital trade.

The report stated that existing studies show that the moratorium on customs duties on electronic transmissions has only had a small impact on government revenues. On average, the moratorium has led to a reduction in revenue of between 0.01 per cent and 0.33 per cent of overall government revenue. This is because tariffs on digitizable products are already low, particularly in advanced economies where digital trade has been the most prevalent. Therefore, the moratorium does not lead to a significant loss of revenue.

The report also noted that domestic consumption taxes, such as value added tax (VAT), are more efficient for taxing digital trade and can generate higher government revenues than tariffs. This is because consumption taxes are based on where the goods are consumed, rather than where they are produced or sold. As a result, consumption taxes can capture a greater share of revenues from digital trade, which is often conducted remotely.

In addition, the report highlighted that the revenue potential of VAT on trade in digitised products could be 2.5 times higher than the revenue potential of tariffs at current rates.

The report found that the difference in revenue potential between VAT and tariffs is largely driven by advanced economies, where VAT rates are higher than tariff rates. However, even in emerging market and developing economies, the revenue potential of VAT is either higher or roughly equivalent to that of tariffs. This is because VAT is a broad-based tax that excludes intermediate inputs, making it less distortionary than tariffs.

In addition, VAT is easier to administer and implement than tariffs, as it builds on existing tax infrastructure and experience. VAT also provides a stable and predictable source of revenue, which is important for countries that rely heavily on customs duties for government funding

The research also showed that the moratorium on tariffs on electronic transmissions can actually support developing countries’ efforts to reform their tax systems in a more efficient direction. It noted that by encouraging the use of VAT instead of tariffs, the moratorium can help to improve developing countries’ overall tax systems. This is because VAT is more efficient and easier to administer than tariffs. Therefore, there is no tradeoff between open and inclusive digital trade and developing countries’ ability to raise revenues. In fact, open trade can help to support developing countries’ inclusion in global digital markets.

These findings suggest that policymakers should focus on improving domestic tax systems rather than imposing tariffs on digital trade.