## Why Digital Trade Should Remain Open

_IMF Blog, December 13, 2023_

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**Canonical URL:** [Why Digital Trade Should Remain Open](https://www.imf.org/en/blogs/articles/2023/12/13/why-digital-trade-should-remain-open)

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## Bibliographic details
- Authors: Michele Ruta, Adam Jakubik
- Published: December 13, 2023

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### Overview
- 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.

### Importance and key statistics
- 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.

### Digital trade in developing economies: challenges and opportunities
- 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.

### WTO moratorium on customs duties on electronic transmissions
- 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.

### Evidence on fiscal impacts and taxation options
- 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.

### Policy implications and recommendations
- 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*

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## References

- [Recent IMF staff analysis](https://www.imf.org/en/Publications/IMF-Notes/Issues/2023/09/07/Fiscal-Revenue-Mobilization-and-Digitally-Traded-Products-Taxing-at-the-Border-or-Behind-It-538487)
- [IMF trade site](https://www.imf.org/en/Topics/Trade)

_Source: https://www.imf.org/en/blogs/articles/2023/12/13/why-digital-trade-should-remain-open_