Many developing economies risk falling behind in digital trade according to a new report by the International Monetary Fund (IMF). The global lender says developing economies might not fully benefit from growing digital trade whose value continues to rise.
Despite the huge potential within the digital space, the IMF says developing countries, mostly spread across Asia and Africa, will struggle to harness the available potential. The report was a joint effort between the IMF and the World Trade Organization (WTO).
“Despite available opportunities, many developing economies, in particular low-income countries, risk falling behind. This is due to gaps in connectivity, information and communication technology infrastructure, and digital skills, as well as the lack of a predictable and transparent legal and regulatory environment,” the report reads in part.
The report recommends a lessening of domestic policies and regulations to enable remote transactions, enhance trust in digital markets, promote affordable access, and support cross-border deliveries. This would then provide appropriate safeguards related to online transactions such as data privacy, consumer protection, and cybersecurity which is essential for the digital trade ecosystem to thrive.
Moreover, the joint report on digital trade calls for laws and regulations that ensure easy entry and exit of firms, strengthening enforcement against anti-competitive conduct, and an open trade regime that would promote healthy competition.
International cooperation on digital trade is also crucial to promote common “rules of the road”—a precondition for digital trade to continue to grow and deliver its benefits.
The IMF notes that digital trade has several unique benefits beyond traditional gains, saying software trade, for instance, helps to digitalize the economy, increase efficiency, and boost productivity. Digital trade, including subscriptions to foreign journals, promotes interconnectivity, communication, and the transmission of knowledge and innovation across cultures, continents, and societies.
The IMF says emerging economies must embrace policy reforms that promote inclusion, starting with the current tariff-free environment under WTO agreements.
Although the agreements cover all types of trade, the only multilateral rule specific to digital trade is the moratorium on customs duties on electronic transmissions.
The moratorium, which has been periodically extended since its introduction in 1998, prohibits tariffs on digital imports, thereby contributing to a stable and predictable policy environment for digital trade.
Existing studies show that the moratorium has a relatively small impact on fiscal revenues—between 0.01 percent and 0.33 percent of overall government revenue on average. This is explained by low existing tariffs on digitizable products, particularly in advanced economies where digital trade has expanded the most.
Moreover, domestic consumption taxes are more efficient instruments for taxing digital trade and can generate higher government revenues. Recent IMF surveys show that imported digitized products within the scope of the moratorium are best taxed through existing domestic consumption taxes, such as value-added tax (VAT), 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.
Global cooperation is also highlighted in the report as necessary for ensuring that small businesses, women and young entrepreneurs, and consumers in all economies can reap the benefits of digital trade. “International organizations can support these efforts by strengthening their cooperation with governments, stakeholders, and each other, and this joint report is a step in this direction,” the report says.
Regulations around foreign direct investment (FDI), profit repatriation, and ownership rights are some of the key challenges hindering investment and expansion by foreign players into digital trade in developing economies. Besides that, local players face constraints related to a lack of investment directed towards last-mile delivery and scaling up technologies for growth.
Given the diversity of developing economies and their uniqueness, no one-size-fits-all strategy exists to establish a presence and expand in all of them. Understanding market dynamics is vital to have a locally relevant strategy that allows for active participation in the overall digital ecosystem, support for the expansion of digital services, and partnerships with governments and local players.
Perfectly said, 🥀💮
Harsh entry and exit regulations have kept away investors