Why Digital Trade Should Remain Open

IMF Blog, December 13, 2023

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Digital trade includes software sales, streaming movies, digital media subscriptions, and digital marketplaces (app stores, freelance websites).
Policymakers should consider international rules that promote a predictable policy environment, including continued tariff-free digital imports.
A joint report Digital Trade for Development by international institutions (IMF, OECD, UNCTAD, World Bank, WTO) examines how global solutions can make digital trade more inclusive.

The value of global trade in digitally delivered products rose to $3.82 trillion last year.
Digitally delivered products accounted for a record 54 percent share of services trade.
Digital trade has grown at an 8.1 percent average annual growth rate for almost two decades, outpacing other categories like goods.

Barriers risking exclusion of many developing economies, particularly low-income countries:
- Gaps in connectivity and information and communication technology infrastructure.
- Shortfalls in digital skills.
- Lack of a predictable and transparent legal and regulatory environment.
Domestic policies that should be strengthened to enable participation:
- Enable remote transactions and enhance trust in digital markets.
- Promote affordable access and support cross-border deliveries.
- Provide safeguards related to online transactions (data privacy, consumer protection, cybersecurity).
- Ensure easy entry and exit of firms, strengthen enforcement against anti-competitive conduct, and maintain an open trade regime.
International cooperation is crucial to promote common “rules of the road,” seen as a precondition for digital trade to continue to grow and deliver benefits.

The moratorium, introduced in 1998 and periodically extended since, prohibits tariffs on digital imports and contributes to a stable and predictable policy environment for digital trade.
Whether to extend the moratorium is a key issue at the WTO's 13th Ministerial Conference in February.
Fiscal concerns raised by some countries focus on potential revenue loss and perceived constraints on policy space.

Existing studies show the moratorium has a relatively small impact on fiscal revenues—between 0.01 percent and 0.33 percent of overall government revenue on average.
- Explanation: low existing tariffs on digitizable products, especially in advanced economies where digital trade has expanded most.
Domestic consumption taxes (such as VAT) are more efficient instruments for taxing digital trade and can generate higher government revenues.
- IMF staff analysis indicates imported digitized products within the scope of the moratorium are best taxed through existing domestic consumption taxes, where collection methods 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 mostly driven by advanced economies that have higher VAT than tariff rates.
- For virtually all emerging market and developing economies, VAT revenue potential is either larger or roughly equivalent to that of tariffs.
Advantages of VATs cited:
- Broad-based and exclude intermediate inputs, creating less distortions per dollar raised.
- Easier to administer as they build on existing tax infrastructure.
- Easier to implement, with extensive experience across all income groups.

Retain the WTO moratorium on customs duties on electronic transmissions to preserve a stable, predictable environment for digital trade.
Use the moratorium to help channel developing countries’ tax reform efforts toward more efficient instruments like VAT rather than tariffs.
Pursue domestic reforms to:
- Expand connectivity and ICT infrastructure.
- Build digital skills.
- Create predictable, transparent legal and regulatory frameworks that facilitate remote transactions, consumer protection, data privacy, and cybersecurity.
- Strengthen competition policy and ease market entry and exit for firms.
Deepen international cooperation to establish common rules that enhance inclusiveness and enable developing countries to better participate in global digital markets.

Source: Why Digital Trade Should Remain Open