Digital economies must expand for countries to stay globally competitive – a situation that gets highly complicated in a global trade war. Mehdi Paryavi, Chairman and CEO of the IDCA explains why, and how the landscape might change
The world has recently witnessed the beginnings of a global trade war triggered by the current U.S. Administration. Other nations have taken countermeasures, and some retaliatory measures, including traditional U.S. economic allies. From the digital economy lens, what does this mean? How will the world’s nations and their digital economies be impacted by the trade war?
It’s clear that the global digital economy will be heavily impacted, but how, and why, are the key questions. Today, we have reached a stage whereby the consequences of a slowed digital economy will be immeasurable – so it must expand and sustain its growth.
What are the possible effects of a global trade war?
Inflation
The global trade war creates inflation across the board. When you raise prices on foreign goods, manufacturers are left with only two options: increase prices, or decrease the quality of the goods. In the first case, once foreign manufacturers raise prices, U.S. manufacturers will also increase their rates simply because they will make more profits and still stay competitive. That leaves the consumers with less for the money. In this case, both options will be triggered and implemented in tandem. U.S. consumers will pay more for goods and obtain lesser-quality products. The situation becomes more complicated in the world of digital, as a considerable number of electronic components and other key elements are manufactured or supplied from outside the U.S. Even though, the current rounds of tariffs include temporary exceptions and loopholes specifically for high-tech products such as iPhones and semiconductors, as a rule, imposing tariffs will increase the cost of running digital economies, worldwide. Because the U.S. is the world’s largest digital economy, it will take the hardest hit.
Unpredictability
If you could name one element that drives investment and maintains the flow of capital towards an economy, it’s predictability. Without predictability, projections become irrelevant, and the creditworthiness of a nation could be tarnished. The U.S. has long led the global economic arena because its word and its presence meant confirmation of trust and dependability. In the absence of such trust and reaffirmation of mid to long-term trajectories, the global digital economies become more siloed and, therefore, more fragile. Due to the global interdependence that exists among nations, the global digital economy can be shaken as the markets react to the day-to-day implications of the tariffs as well as the volatilities of the policies that may change at every turn of every negotiation.
Reduced competition
Competition is not only healthy, but also an absolute necessity for the upkeep of a stable economy. Tariffs, intrinsically, introduce an invisible iron wall around the economic borders of nations that restrict innovative and competing products from other nations from being made available in local markets at compelling rates. One key reason for America’s might and global edge was that it attracted the brightest ideas and technologies to its borders. That notion not only allowed the taxpayers to have a wider pool of choices, it also kept the U.S. producers on their feet, ensuring that they continuously innovate and evolve. The digital economy is more impacted in the absence of competition than any other form of economy. The economy of bytes and bits is more connected with the rest of the world on a real-time basis, and thus more fragile.
“Blanket tariffs aren’t wise, as they undermine the diversity of goods and services that each nation brings to the global economy”
Shift of consumer markets
Much of an economy depends on its ability to export. In the case of digital economies, the products and services that are exported to other nations are the most valuable commodities that are being transacted today. When the U.S. introduces tariffs, in due reaction, it makes its consumer markets turn away from its products – basically pushing them towards competing digital markets. In many cases that unleashes more sovereign agendas. From an economic standpoint and simply explained, as the world’s leading data renderer and exporter, the U.S. is making its customers produce their own data and not buy from it as they used to. Additionally, to protect their national empowerment agendas, nations will tariff U.S. products and services which makes the U.S. cloud and AI services more expensive to their local markets. But that’s just a start. As other nations build more capable data centres and cloud computing capabilities as well as implement winning AI strategies, they will eventually turn around and sell U.S. consumers the data that they produce at high tariffed rates.
Blanket tariffs
Blanket tariffs aren’t wise, as they undermine the diversity of goods and services that each nation brings to the global economy. There might be goods that simply can’t be produced in the United States or Europe. It has long been decided that such goods must be provided by other nations that have the natural terrain for the volumes of production required at affordable prices. Therefore, every single item in an import basket must be carefully evaluated with a full spectrum of cost factors – including production and delivery costs to the consumer to the environmental costs and opportunity costs of producing one item vs. another. At the end of the day, every nation has limited resources and must prioritise what it chooses to produce. Tariffs, therefore, must be engineered for all specific items in such a way that they don’t inflate prices nor cause reactionary and retaliatory measures for the products that a nation desperately needs. In the case of digital economies, transparent and smooth global interaction and exchange is a must for optimal utilisation of their merits.
Taxing your own citizens
One simple look at the trade deficit is a good indicator of realising who the real winners of higher tariffs will be. In 2024 the U.S. had a $295bn trade deficit with China. This means by imposing new tariffs, the U.S. consumers/taxpayers are being taxed as opposed to China. This is assuming that China didn’t tariff its U.S. imports (which it did), further hampering U.S. exports. Meanwhile, other nations are actively seeking new economic allies and trade partners, which collectively could put U.S. companies in a competitive disposition. This in turn deepens the case for higher consumer rates and lower economic gains.
In this midst, the close geophysical proximity of TSMC with China, and the U.S.-China Al race should not be ignored where emerging cutting-edge solutions and the amassed global drive for alternatives, can push NVIDIA off its premiership position.
Lose-lose
The tactic of taking the upper hand and settling somewhere more practical, can work on some deals at first but eventually others will become numb to it and just refuse to settle until your guards are lowered. Win-win deals create a trust factor and develop harmony throughout economies which are necessary in both nation-building and global alliances. For over a century, this positioned the U.S. in a leading role and enabled it to develop the world’s largest economy. Pushing one’s counterparts into a losing game, even if they accept to sign the dotted lines today, will spark the urge to plan an exit as soon as they can. By ending the long tradition of win-win negotiations, the U.S. will lose committed, passionately invested trading partners to new alliances that will no longer focus on trading relationships with the U.S. This will affect technology and digital economies as strongly as it will affect all products and services.
Data warfare
The core commodity of a digital economy is “data”. Data is the new oil. As with any other product or service, the production and distribution of data are bound for mandates that are underway. The global tariffs will only inflate the cost of data being manufactured for their consumer markets. Because the digital economy now empowers all industries, any shortage in its means and resources can hurt all industry verticals. Meanwhile, the global digital economy is already faced with its own challenges: an immense lack of energy, a shortage of skilled workforce, supply-chain delays, regulatory and policy hurdles, environmental uncertainties and concerns, and simply not enough data centers to buy enough chips to render enough data. Addressing these concerns successfully requires global collaboration and a sharing of resources. This calls for openness and relaxed constraints, rather than further restrictions and higher cross-border expenditures.
“This in turn creates a lucrative window of opportunity for local startups and national champions who now see a chance to compete
in their own markets”
Global sovereignty
Thinking globally, many nations are already taking a nationalist approach toward their economic agendas. On the digital economy scale, this would mean a higher cost of procuring U.S. digital goods and services. This in turn creates a lucrative window of opportunity for local startups and national champions who now see a chance to compete in their own markets, while potentially being endorsed and supported by their own governments. With about three-quarters of global GDP produced outside the U.S., even the world’s biggest economy has its limits. As other nations collectively gear up, they may reach a breakpoint, at which collaboration with the U.S. is no longer a high priority. When breaching a breakpoint where it just puts too much pressure and sovereignty crisis on decision-making to collaborate, the U.S. will simply lose favourable markets. That is the point where the U.S. digital economy shareholding will begin to decline. As the global digital economy footprint of the U.S. shrinks, U.S. companies are forced to produce their products locally. This entices certain industries that have long been outsourced to fill the gaps in the digital economic market share they’ve lost, relegating the U.S. back into a 19th-century economy.
In conclusion, for the foreseeable future, digital economies need to expand for countries to stay competitive in global markets. However, the stakeholders and beneficiaries will vary, and the global terrain is such that competing nations will take advantage of a nation’s mistake to secure deeper resources and a wider audience for their digital economies.
About the author
Mehdi Paryavi is the Chairman and CEO of the International Data Center Authority (IDCA), the world’s leading digital economy think tank and prime consortium of policymakers, investors, and developers in AI, data centres, and cloud.