Griffin on Tech: Will digital products remain the last bastion of free trade?

Liberation Day arrived yesterday with a gaudy celebration of American industry in the Rose Garden of the White House, followed by a market sell-off that wiped away nearly US$1.5 trillion in the value of US equities.

If that’s the price of liberty for Americans, it's already a steep one for any American with a 401(k) pension plan. That’s before Americans feel the impact of higher prices on goods sold in the US as importers face paying tariffs of 10% for New Zealand goods to 54% for Chinese goods (including the previously announced tariffs).

Virtually every company worldwide that does business with the US is now trying to figure out what this will mean for them. They face a complicated process of working with their customers to determine how the tariff is paid and the dilemma of whether to absorb the cost themselves or pass it on to importers and risk losing business.

The Nasdaq took a massive hit overnight, dropping around 5% because tech companies that rely on highly integrated supply chains with other countries will face higher costs. Those costs will likely be passed onto consumers in the form of higher prices for iPhones, laptops, and virtually any kind of electronics that include components bought from Asian and European manufacturers.

The Temu tax

It extends to online shopping. For instance, if a US-based consumer bought a selfie stick on Temu, they were previously exempt from paying duty on the import if the value was below US$800. 

That loophole has been closed, effective of May 2. It means, according to The Conversation, that the US Postal Service will be responsible for policing the 100,000 parcels that arrive in the US every hour to make sure the duty (either 30% of their value or a charge of $25 per item, increasing to $50 in June) is being applied. 

But there’s one area that appears to have been left unmolested by the tariff frenzy - the digital economy. Tariffs on physical goods have existed for hundreds of years, but free trade has reigned in cyberspace since the rise of the internet and the shipping of digital software, apps, games, video and online services around the world. 

The biggest beneficiary of that trade is the US. According to the US-based Progressive Policy Institute, the U.S. digital economy, on its own, would be the world’s eighth-largest economy, worth US$2.57 trillion.

As of 2022, US digitally delivered services exports totalled US$719 billion, a quarter of the US $3.02 trillion in total exports. 

“This included US$93 billion in exports of ‘ICT’ services (telecommunications, computer services, and software licensing payments) plus US$626 billion in ‘digitally deliverable’ services, such as financial wires, telemedicine diagnoses, music downloads, Chatbot fails, memes, distance education, and so forth,” the PPI points out.

“The US is easily the world’s largest supplier of these things — as an index, the WTO’s somewhat different overall “commercial services” total for the U.S. was US$900 billion in 2022, about an eighth of the world’s US$7.04 trillion total, and just about equal to the $492 billion of second-place UK and US$422 billion of third-place China put together.

Silent on digital tariffs

This explains why Trump was completely silent on the digital economy in the Rose Garden - any sort of reciprocal tariffs on banking services, cloud subscriptions, or Netflix streaming would disproportionately hit the US economy.

As tech writer Juha Saarinen points out at Interest.co.nz, it’s only in recent years that we’ve even started adding GST to digital economy services sold here, such as AirBnB bookings and Amazon.com purchases. 

“Traditional direct tariffs on the “weightless economy” with intangible goods and services being traded online would be awkward to implement and collect. Imagine having to fill in customs declarations and pay a tariff before downloading an application, or on software-as-a-service, ChatGPT, Starlink and Netflix subscriptions,” writes Saarinen.

It’s complicated further by the fact that software often isn’t a direct import from the country where its code is created. It’s often developed by a globally distributed team, with the company operating a US division and serving the software from infrastructure based in the US. 

The answer in the eyes of many governments to the complexities of applying tariffs to digital services is a digital services tax, which the Labour Government floated before it was elected out of office. Digital services taxes (DSTs) have already been implemented or are in the process of being introduced in the UK, Canada and the European Union, sparking the wrath of Donald Trump and contributing to his antipathy towards the Europeans.

They have done this because the US has failed to cooperate on international tax reform that would ensure multinationals pay tax on the profits generated in each territory rather than transferring profits to low-cost jurisdictions, a practice that has been heavily employed by Big Tech companies.

Apart from reciprocal tariffs on physical goods, the imposition of DSTs is really the only leverage other countries have over the US. France said yesterday that in addition to matching the new US tariffs, it would look to introduce tariffs on digital services.

GAFAM in the EU’s sights

"The second response will cover all products, and I want to stress this—services will be included," French government spokesperson Sophie Primas said.

She included digital services, “including those provided by the GAFAM," referring to Google, Amazon, Facebook, Apple, and Microsoft.

But the digital supply chain is also heavily integrated. If a German company offers an AI customer service agent underpinned by ChatGPT, it could face having to increase its price to pay for a DST levied on OpenAI.

The compliance nightmare of trying to impose the equivalent of tariffs in the digital world will just force up the price of software, cloud services and streaming subscriptions. The real answer is genuine global tax reform that creates a fairer tax environment, something the US has been resistant to. 

The World Trade Organisation currently has a moratorium on digital tariffs. But now the gloves are off, as Saarinen explains.

“It’s a temporary moratorium that was renewed in March last year at WTO’s 13th ministerial conference. The way the world is tilting towards trade war, the moratorium might not be renewed at the next WTO ministerial conference in March 2026,” he writes.

So while digital services enjoy relatively frictionless trade which is good for our software exporters, but even better for US companies, that may not be the case for much longer as the tremors caused by Donald Trump’s tariff push reverberate around the world.