Trade, taxes and the digitalization of the economy

by Juliana Cubillos


The discussions that took place at the “International Tax Governance and Digitalization of the Economy in a Broader Perspective Kick-off Seminar”, raised several issues that should be addressed from the trade, investment, tax and public international law perspectives, when dealing with the digitalization of the economy. One aspect that I would like to bring forward is that there is a strong connection between global trade goals and the digitalization of the economy. And to certain extent the latter could be the ultimate result of the former.

In the present entry it will be argued that digitalization of the economy is a progression of the global trade efficiency aim. Thereafter, despite that from a trade point of view no imperative need exist to regulate the digitalization of the economy, the changes in international tax law might steer states to retake international trade discussions covering digital economy matters.

According to Hayley Edwards[1] international trade borne down two different objectives in the past decades: a) economic interdependence; and b) global efficiency. On one side, world peace needed to be secure after the second world war, and therefore the global trade aim was to foster economic interdependence. It was desirable to sign international agreements and setting common standards for trade, as well as to agree on similar tariffs and rates for cross-border trade.

However, in the late 70’s the Global Gross Domestic Product started to stall its yearly growth of 7%[2] and the need of a new global trade goal emerged. The new tendency consolidated in accomplishing global efficiency in trade. Gaining awareness on the challenges faced by foreign products when being displayed alongside with domestic products (once they crossed the borderlines of a country) and the reduction of tariff barriers were two of the measures implemented to secure the efficiency aim.[3]

Now, internet-based interactions in trade might contribute to the same core purpose. This is to say, the efficiency of a business can be better achieved if interaction costs are lessened by using the digital tools available as of today (i.e. platforms to display products worldwide to customers). Literally, the digitalization of the economy fosters the achievement of global efficiency in trade, understood as to lessen the barriers to commercialize goods and to rely on specialization in production (i.e. use of component parts for further assembling) .

Yet, the evolution of digital tools was explosive and derived into a state of higher digital transformation of what in the past was considered to be e-commerce. Nowadays, many business around the world is enabled to apply algorithms to enhance their customers’ experience.

As an example of this situation retail businesses can use personalization algorithms for suggesting specific pieces of clothing to frequent consumers. Or a retailer can use massive data aggregation and shopping algorithms to harness new customers based on time spend by each one of them while browsing through the web.

Taking the digitalization of the economy to a higher stand, not only retailers, but several other businesses rely so much on the digitalization, for other purposes such as information sharing, information storage, swift communications for B2B and B2C interactions, and so on. Clearly, the simplification of commercial interactions around the world led to achieving much more than efficient global trade.

The fulfilment of global efficiency goals through digitalization, affected the trade commitments and regulations. However, finding a new agreement among states to amend the existent regulations has not been easy. The discussion about repealing the moratorium on  imposing custom duties on electronic transmissions is only one example of this struggle.

If the Global Gross Domestic Product is not negatively affected by the digitalization of the economy it is hard to question the necessity on establishing new measures to control these businesses from a trade perspective. Or even to recalibrate the global efficiency aim that still governs trade interactions.

Another hardship resides on the fact that states agreeing to provide guarantees for the efficiency of the market relied more on the trade efficiency rule, than on an uncontrolled development in trade. This rule provides that businesses will specialize their efforts into creating superior ways to produce goods that will be sold in the market. Basically, gaining from experience all the key knowledge that was needed to reduce costs and time burdens when producing goods.

Despite the former, the digitalization of the economy enabled businesses to interact with much more elements than those affecting production. To start to grasp the way in which digital businesses operate, one needs to have a fair knowledge on digital technologies, and even trace down the situations that affected the business structure in the past that were solved by introducing digital practices. The interdependence of some of this businesses with the digital tools provided for the consolidation of new terminologies such as “highly digitalized businesses”, applied in international tax law in reference to tech-giants.

The interest awaken by international taxation for taxing “highly digitalized businesses” on the grounds of recovering tax revenues that were foregone in the past, has also raised concerns in the field of trade, in as much the moratorium seems to be targeting at far lower levels of commercialization than those already pointed out in tax discussions.

Moreover, the moratorium was attempting to protect services interactions, without affecting goods trade. If the moratorium is decided to be repealed and new regulations have to be agreed upon, these will have to provide new terminologies and references to properly define what is to be considered as a good and what as a service.

Such task might not be as easy as it seems, since in the current trade practice no clear definition has been provided for terms such as “electronic transmissions” or “digital products transmitted electronically”, which should be defined as well. Although most of these terms are included in Preferential Trade Agreements (PTAs) around the world as of today.

Likewise, if the current moratorium is abolished there will still be the question on whether should states agree on a new moratorium that covers mainly “highly digitalized businesses”? In that case to operate as a counter measure for the tax impact caused on them based on new rules to tax such business models? Or even if, after defining proper definitions towards digital goods and services, the moratorium will be upheld for services only while providing for tariffs and duties on the goods?

The future will let us know which one of all these options will shine on international trade, when addressing the digitalization of the economy.


[1] Haley Edwards, TED Talk What global trade deals are really about, available at: https://www.youtube.com/watch?v=-v3uqD1hWGE

[2] Ibid; Haley Edwards TED Talk.

[3] Ibid; Haley Edwards.

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