Digital trade, encompassing everything from software downloads to streaming movies, is booming, driving growth and sparking innovation across the globe. But amidst this digital gold rush, many developing countries risk being left behind. To bridge this gap and foster inclusive prosperity, policymakers must prioritize key reforms, starting with one crucial step: preserving the current tariff-free environment for digital goods.
Digital trade isn’t just about convenience; it unlocks unique benefits beyond traditional trade. Software trade fuels economic digitization, boosting efficiency and productivity. Access to foreign digital media, like online journals, fosters knowledge sharing and innovation. And digital marketplaces empower small businesses and women entrepreneurs by lowering barriers to entry.
Despite the potential, developing economies, especially low-income countries, face hurdles. Limited connectivity, inadequate digital infrastructure, lack of digital skills, and unclear legal frameworks hold them back. A new report by the IMF, WTO, and other institutions, “Digital Trade for Development,” sheds light on how global solutions can make digital trade more inclusive.
Key areas for action include:
- Domestic reforms: Policies should enable remote transactions, build trust in online markets, ensure affordable internet access, and support cross-border deliveries. Robust cybersecurity measures, data privacy regulations, and consumer protection frameworks are also vital.
- Competition-friendly environment: Fair and transparent laws promoting easy entry and exit for businesses, strong anti-trust enforcement, and open trade policies will foster healthy competition and attract investment.
- Global cooperation: Common “rules of the road” established through international cooperation are crucial for continued growth and shared benefits. The upcoming WTO Ministerial Conference in February presents a key opportunity to advance this agenda.
One such rule, the moratorium on customs duties on electronic transmissions, stands at the center of the debate. This moratorium, periodically extended since 1998, prohibits tariffs on digital imports, providing stability and predictability for digital trade. Extending it again should be a priority for the WTO.
Opponents of the moratorium raise concerns about lost revenue for developing countries. However, recent research debunks this claim. Studies show the moratorium’s impact on fiscal revenue is minimal, between 0.01% and 0.33% of overall government income on average. This is due to low existing tariffs on digital products, especially in advanced economies where digital trade thrives.
Moreover, research suggests a better option: domestic consumption taxes like VAT are more efficient tools for taxing digital trade and can generate higher revenues. Implementing VAT on digitized products, adapted for digital transactions, offers significantly higher revenue potential compared to tariffs, benefiting both developed and developing economies.
The bottom line? The WTO moratorium isn’t hindering developing countries; it’s paving the way for their inclusion in the global digital landscape. By embracing open digital trade and implementing essential domestic reforms, developing economies can unlock the transformative power of the digital age. Open doors, not walled gardens, are the key to digital prosperity for all.
(IMF blog source: Michele Ruta, Adam Jakubik/IMF)
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