The World Trade Organization (WTO) recently released its latest global trade projections. The headline: sluggish global trade growth of 1.7% projected this year, well below the average of the past two decades.
That’s not good news for a global economy beset by crises. The value of world merchandise trade was $25.3 trillion last year, a record, though inflated by high global commodity prices. The value of world commercial services trade hit $6.8 trillion, of which digitally delivered services exports accounted for more than half, or $3.8 trillion.
That last item bears a closer look: According to WTO estimates, global exports of digitally delivered services have grown in value nearly fourfold since 2005, rising 8.1% on average per year in the period 2005-2022, outpacing goods (5.6%) and other services exports (4.2%).
This growth can be attributed to a number of factors, but unquestionably, the longstanding WTO moratorium on the application of tariffs on electronically transmitted digital products has played a catalytic role. This is exactly what it was intended to do, for countries across the development spectrum. It’s also why moves by countries such as Indonesia to end this moratorium are so deeply troubling.
Indonesia’s Ministry of Finance issued a decree earlier this year which sets out the mechanisms for the application of tariffs to electronically transmitted digital products. And while they are quick to point out that such tariffs remain set at zero, Indonesian officials have publicly expressed their interest in collecting these duties.
The move was foreshadowed in a December 2022 submission to the WTO General Council on this topic, which dubiously claimed that developing countries are losing billions of dollars in tax revenue as a result of the moratorium. It was accompanied by official public commentary suggesting the hand of other domestic interests was at play.
Just as forgoing tariffs fueled the growth of the digital economy, applying them will now slow that growth via higher prices and reduced consumption. Lower GDP growth will be one result; perhaps counterintuitively, shrinking tax revenue will be another.
As the European Centre for International Political Economy (ECIPE) has demonstrated, countries that apply tariffs on electronically transmitted products will stand to lose considerably more in GDP than they would gain in tariff revenue.
By ECIPE’s reckoning, if tariffs imposed by one country led to widespread reciprocal tariffs, South Africa would lose 25 times more in GDP than it would gain in tariff revenue; the figure for India is 49 times; and for Indonesia, the figure is a startling 160 times. In short, the fiscal policy case simply does not hold water.
Jakarta’s WTO submission also framed this tariff policy as a measure to support the development of micro- and small and medium sized enterprises (MSMEs). However, shifting trade to digital means is ultimately a productivity improvement, tantamount to a reduction in transport and logistics costs, which in Indonesia’s case are a high percentage of overall trade costs. Indonesia’s growing number of digital unicorns no doubt themselves owe their success in part to the moratorium.
According to the Indonesian Services Dialogue, Indonesian MSMEs — nearly half of which sell products through online marketplaces like Tokopedia or Shopee — that have used digital tools have, on a monthly basis, been able to reduce marketing costs by an average of 20%, cut shipping costs an average of 17%, and trimmed other logistics costs by 16%.
ISD further found that, after adopting and using digital goods and services, 79% of Indonesian MSMEs reported increased revenue, 63% reported lower operational costs, and 85% were able to expand their business.
The U.S. Chamber, along with 28 other major business associations from around the world, wrote to the Indonesian government on this issue last week, noting in particular the negative impact that digital duties would have on Indonesian MSMEs.
At the launch of the WTO report, Director-General Ngozi Okonjo-Iweala said: “Trade continues to be a force for resilience in the global economy, but it will remain under pressure from external factors in 2023. This makes it even more important for governments to avoid trade fragmentation and refrain from introducing obstacles to trade.”
The WTO moratorium has been an all-too-rare success story for that organization in recent years. WTO members should allow digital trade to flourish, not constrain it.
About the authors
John Goyer
John Goyer is executive director of Southeast Asia at the U.S. Chamber of Commerce. Goyer focuses on issues of market access, investment barriers, regulatory and other issues that pose challenges for U.S. business in Southeast Asia.
