Amid Donald Trump’s “Liberation Day” rants about countries ripping off the US by running trade surpluses, there was no mention of one thriving area of trade: digital services.
That may be because the US is the world’s biggest exporter of these services. According to the Washington-based Progressive Policy Institute, US digitally delivered export services totalled US$719 billion (NZ$1.3trillion) in 2022, a quarter of the country’s total exports of US$3.02 trillion (NZ$5.47tn).
Included are digital services like Netflix subscriptions, fees companies pay to Microsoft to host their data in the cloud, and audiobooks bought from Amazon’s Audible store. It also extends to certain financial services the US operates in Europe, Asia and elsewhere that are highly profitable for American banks and private equity firms but don’t involve goods crossing borders.
The World Trade Organisation, of which New Zealand is a member, has long maintained a moratorium on putting tariffs on digital goods and services. We do add goods and services tax (GST) to foreign digital services sold here. But apart from country by country licensing restrictions, which can cause our Netflix library to look very different to the one Americans enjoy, digital trade is essentially tariff-free.
That’s part of the reason why the late physicist Sir Paul Callaghan urged New Zealand 20 years ago to “get off the grass” and pivot away from primary production to a knowledge economy where we would ship ones and zeros to the world in the form of software, streaming movies and online services.
Digital goods are generally also better for the environment, though energy-hungry data centres are challenging that as artificial intelligence starts to pervade the digital economy. But tech-related services can also generate higher earning jobs for New Zealanders than the likes of tourism and agriculture.
We’ve risen to Sir Paul’s challenge. The Technology Investment Network estimates that the tech sector was the country’s second largest export earner behind dairy last year, generating nearly $18 billion, 77% of which was earned offshore. Financial technology was the superstar, generating nearly $2.64 billion alone. Much of that is down to Xero, the software accounting firm that has 4.2 million customers globally. Whacking even a 10% tariff on Xero subscriptions for US customers would hurt the software maker because consumers are sensitive to changes in subscription prices.
It would also be a logistical nightmare. Software development is geographically dispersed, and many digital services firms have setups in each country they operate. Services can be delivered from multiple countries, so deciding how to apply tariffs gets complicated very quickly.
But the Europeans are eyeing the US export surplus in digital services as leverage to hit back at Trump’s tariffs. Some European Union countries already charge US companies a digital services tax, typically 2-3%. That’s because of their frustration at the US failing to co-operate on tax reform that would see multinational companies pay more tax in the countries they operate in.
Many tech companies transfer their profits to lower tax regions, paying little tax where they generate the business. Changing that would hit US services companies hard, and Trump has signalled he’ll retaliate with tariffs on physical exports from countries that tax or place onerous regulations on US companies.
Given the pain many countries will experience in a high-tariff world, the WTO free digital trade agreement, due for renewal next March, looks shaky. Digital services enjoy relatively frictionless trade, which continues to be beneficial for our software exporters. But that may not be the case for much longer as the tremors caused by Trump’s tariff push reverberate around the world.
