In today's global economy, digital trade has taken on an increasingly significant role. From software sales to streaming services, it has become a driving force behind economic growth. However, while digital trade offers immense potential, many developing countries are struggling to fully participate in this transformative landscape. This calls for policy reforms that prioritize inclusion, starting with the retention of the current tariff-free environment.
Digital trade offers several unique advantages beyond traditional trade. It helps modernize economies, boosting efficiency and productivity. The exchange of digital media, such as subscriptions to foreign journals, fosters connectivity, communication, and the dissemination of knowledge and innovation. Furthermore, digital marketplaces, like app stores and freelance platforms, reduce trade barriers for small businesses and women-led enterprises, promoting inclusivity.
The global trade in digitally delivered products reached a staggering $3.82 trillion last year, accounting for a record 54 percent of services trade. With an average annual growth rate of 8.1 percent for nearly two decades, it has outpaced other trade categories.
Despite these opportunities, many developing economies, especially low-income countries, face challenges in fully harnessing the potential of digital trade. These hurdles include gaps in connectivity, information technology infrastructure, digital skills, and a lack of predictable and transparent legal and regulatory frameworks. A recent report by the IMF, the World Trade Organization, and other international institutions on "Digital Trade for Development" sheds light on issues where global solutions can make digital trade more inclusive.
Domestic policies and regulations must enable remote transactions, enhance trust in digital markets, promote affordable access, and support cross-border deliveries. Safeguards related to online transactions, such as data privacy, consumer protection, and cybersecurity, are essential for a thriving digital trade ecosystem.
Moreover, laws and regulations should ensure the easy entry and exit of firms, strengthen enforcement against anti-competitive behavior, and maintain an open trade regime to foster healthy competition.
International cooperation on digital trade is vital to establish common "rules of the road"—a prerequisite for continued growth and the realization of its benefits.
WTO Moratorium
The World Trade Organization (WTO) has a significant role to play in digital trade. The only multilateral rule specific to digital trade is the moratorium on customs duties on electronic transmissions. This moratorium, introduced in 1998 and periodically extended, prohibits tariffs on digital imports, providing a stable and predictable policy environment for digital trade.
The extension of the moratorium will be a key issue at the WTO's 13th Ministerial Conference in February. One contentious point revolves around the fiscal implications of the moratorium, with some countries concerned that it could undermine their revenue potential and policy flexibility. Recent research sheds light on this debate.
First, existing studies demonstrate that the moratorium has a relatively small impact on fiscal revenues, accounting for between 0.01 percent and 0.33 percent of overall government revenue on average. This is due to the low existing tariffs on digitizable products, especially in advanced economies where digital trade is most prominent.
Second, domestic consumption taxes, like value-added tax (VAT), are more efficient tools for taxing digital trade and can generate higher government revenues. IMF staff analysis reveals that imported digitized products within the scope of the moratorium are best taxed through existing domestic consumption taxes like VAT, which can be adapted for digital transactions.
Globally, the revenue potential of VAT on trade in digitized products could be about 2.5 times higher than that of tariffs at current rates.
This difference is primarily driven by advanced economies with higher VAT rates than tariff rates. However, for virtually all emerging market and developing economies, VAT revenue potential is either larger or roughly equivalent to that of tariffs. VATs are also economically efficient because they are broad-based, exclude intermediate inputs, are easy to administer, and have extensive implementation experience across all income groups.
This new staff research underscores that the WTO moratorium can effectively guide developing countries' tax reform efforts in a more efficient direction. There is no trade-off between open and inclusive digital trade; in fact, open trade actively supports the inclusion of developing countries in global digital markets.
For more insights, refer to the joint report "Digital Trade for Development" by the International Monetary Fund, Organization for Economic Co-operation and Development, United Nations Conference on Trade and Development, World Bank, and World Trade Organization.
