Trump’s trade war risks splintering the Internet, experts warn

Trump urged to rethink trade policy to block attacks on digital services.

In sparking his global trade war, Donald Trump seems to have maintained a glaring blind spot when it comes to protecting one of America's greatest trade advantages: the export of digital services.

Experts have warned that the consequences for Silicon Valley could be far-reaching.

In a report released Tuesday, an intelligence firm that tracks global trade risks, Allianz Trade, shared results of a survey of 4,500 firms worldwide, designed "to capture the impact of the escalation of trade tensions." Amid other key findings, the group warned that the US's fixation on the country's trillion-dollar goods deficit risks rocking "the fastest-growing segment of global trade," America's "invisible exports" of financial and digital services.

Tracking these exports is challenging, as many services are provided through foreign affiliates, the report noted, but recent estimates "reveal a large digital trade surplus of at least $600 billion for the US, spread across categories like digital advertising, video streaming, cloud platforms, and online payment services."

According to Allianz Trade, "the scale of this hidden trade is immense." These "hidden" exports have "far" outpaced "the growth of goods exports over the past two decades, their report said, but because of how these services are delivered, "this trade goes uncounted in traditional statistics."

If Trump doesn't "rethink trade policy and narratives" soon to start tracking all this trade more closely, he risks undermining this trade advantage—which Allianz Trade noted "is underpinned by America’s innovative firms and massive data infrastructure"—at a time when he's in trade talks with most of the world and could be leveraging that advantage.

"US digital exports now represent a significant share of world trade (about 3.6 percent of all global trade, and growing fast)," Allianz Trade reported. "These 'invisible' exports boost US trade revenues without filling any container ships, underscoring a new reality: routers and data centers are as strategically important as ports and factories in sustaining US leadership."

Without a pivot, Trump's current trade tactics—requiring all countries impacted by reciprocal tariffs to strike a deal before July 8, while acknowledging that there won't be time to meet with every country—could even threaten US dominance as "the world’s digital content and tech services hub," Allianz Trade suggested.

US trade partners are already "looking into tariffs or taxes on digital services as a retaliation tool that could cause pain to the US," the report warned. And other experts agreed that if such countermeasures become permanent fixtures in global trade, it could significantly hurt the US tech industry, perhaps even splintering the Internet, as companies are forced to customize services according to where different users are located.

Jovan Kurbalija, a former diplomat and executive director of the DiploFoundation who has monitored the Internet's impact on global trade for more than 20 years, warned in an April blog that this could have a "more profound impact" on the US than other retaliatory measures.

"If the escalation of trade tensions moves into the digital realm, it could have far-reaching consequences for Silicon Valley giants and the digital economy worldwide," Kurbalija wrote.

“The silent war over digital services”

The threat of retaliatory tariffs hitting the digital services industry has loomed large since European Commission President Ursula von der Leyen confirmed to the Financial Times last month that she was proactively developing such countermeasures if Trump's trade talks with the European Union failed.

Those measures could potentially include "a tax on digital advertising revenues that would hit tech groups such as Amazon, Google and Facebook," the FT reported. But perhaps most alarmingly, they may also include "tariffs on the services trade between the US and the EU." Unlike the digital sales tax—which could be imposed differently by EU member states to significantly hurt tech giants' ad revenues in various regions—the tariff would be applied across a single EU-wide market.

Kurbalija suggested that the problem goes beyond the EU.

Trump's aggressive tariffs on goods have handed "the EU and others both moral and tactical pretexts to fast-track digital taxes" as countermeasures, Kurbalija wrote. He's also given foreign governments an appealing narrative of "reclaiming revenue from foreign tech 'free riders,'" Kurbalija wrote, while perhaps accelerating the broader "use of digital service taxes as a diplomatic tool" to "pressure the US into balanced negotiations."

For tech companies, the taxes risk escalating trade tensions, potentially perpetuating the atmosphere of uncertainty that, Allianz Trade reported, has US firms scrambling to secure reliable, affordable supply chains.

In an op-ed discussing potential harms to US tech firms and startups, the CEO of CareYaya Health Technologies, Neal K. Shah, warned that "tariffs on digital services would directly reduce revenues for American tech companies."

At the furthest extreme, the "digital trade war threatens to splinter the Internet’s integrated infrastructure," Kurbalija warned, fragmenting the Internet in a way that could "undermine decades of gradual development of technological interconnectedness."

Imagine, Shah suggested, that on top of increased hardware costs, tech companies also incurred costs of providing services for "parallel digital universes with incompatible standards." Users traveling to different locations might find that platforms have "different features, prices, and capabilities," he said.

"For startups and industry innovators," Shah predicted, "fragmentation means higher compliance costs, reduced market access, and slower growth." Such a world also risks ending "the era of globally scalable digital platforms," decreasing investor interest in tech, and reducing the global GDP "by up to 5 percent over the next decade as digital trade barriers multiply," Shah said. And if digital services tariffs become a permanent fixture of global trade, Shah suggested that it could, in the long term, undermine American tech dominance, including in fields critical to national security, like artificial intelligence.

"Trump’s tariffs may dominate today’s headlines, but the silent war over digital services will define tomorrow’s economy," Kurbalija wrote.

Trump’s go-to countermeasure is still tariffs

Trump has responded to threats of digital services taxes with threats of more tariffs, arguing that "only America should be allowed to tax American firms," Reuters reported. In February, Trump issued a memo calling for research into the best responsive measures to counter threats of digital service taxes, including threatening more tariffs.

It's worth asking if Trump's tactics are working the way he intends, if the US plans to keep up the outdated trade strategy. Allianz Trade's survey found that many US firms—rather than moving their operations into the US, as Trump has demanded—are instead rerouting supply chains through "emerging trade hubs" like Southeast Asia, the United Arab Emirates, Saudi Arabia, and Latin American countries where tariff rates are currently lower.

Likely even more frustrating to Trump, however, is a finding that 50 percent of US firms surveyed confirmed they are considering increasing investments in China, in response to the US abruptly shifting tariffs tactics. Only 8 percent said they’re considering decreasing Chinese investments.

It's unclear if tech companies will be adequately shielded by the US threat of tariffs as the potential default countermeasure to digital services taxes or tariffs. Perhaps Trump's memo will surface more novel tactics that interest the administration. But Allianz Trade suggested that Trump may be stuck in the past with a trade strategy focused too much on goods at a time when the tech industry needs more modern tactics to keep America's edge in global markets.

"An economy adept at producing globally demanded services—from cloud software to financial engineering—is less reliant on physical supply chains and less vulnerable to commodity swings," Allianz Trade reported. "The US edge in digital and financial services is not just an anecdote in the trade ledger; it has become a structural advantage."

How would digital services tariffs even work?

Trump's trade math so far has been criticized by economists as a "trillion-dollar tariff disappointment" that at times imposed baffling tariff rates that appeared to be generated by chatbots. But part of the trade math moving forward will also likely be deducing if nations threatening digital services taxes or tariffs can actually follow through on those threats.

Bertin Martens, a senior fellow at a European economics-focused think tank called Bruegel, broke down in April how practical it could be for the EU to attack digital platforms, noting, "there is a question of whether such retaliation is even feasible."

The EU could possibly use a law known as the Anti-Coercion Regulation—which grants officials authority to lob countermeasures when facing "foreign economic coercion"—to impose digital services tariffs.

But "platforms with substantive presence in the EU cannot be the target of trade measures" under that law, Martens noted. That could create a carveout for the biggest tech giants who have operations in the EU, Martens suggested, but only if those operations are deemed "substantive," a term that the law does not clearly define.

To make that determination, officials would need "detailed information on the locations or nationalities" of all the users that platforms bring together, including buyers, sellers, advertisers and other parties, Martens said.

This makes digital services platforms "particularly difficult to target," he suggested. And lawmakers could risk backlash if "any arbitrary decision to invoke" the law risks "imposing a tax on EU users without retaliatory effect on the US."

While tech companies will have to wait for the trade war to play out—likely planning to increase prices, Allianz Trade found, rather than bear the brunt of new costs—Shah suggested that there could be one clear winner if Trump doesn't reprioritize shielding digital services exports in the way that experts recommend.

"A surprising potential consequence of digital tariffs could be the accelerated development and adoption of open-source technologies," Shah wrote. "As proprietary digital products and services become subject to cross-border tariffs, open-source alternatives—which can be freely shared, modified, and distributed—may gain significant advantages."

If costs get too high, Shah suggested that even tech giants might "increasingly turn to open-source solutions that can be locally deployed without triggering tariff thresholds." Such a shift could potentially "profoundly affect the competitive landscape in areas like cloud infrastructure, AI frameworks, and enterprise software," Shah wrote.

In that imagined future where open source alternatives rule the world, Shah said that targeting digital imports by tariff systems could become ineffective, "inadvertently driving adoption toward open-source alternatives that generate less economic leverage."