Trade Wars in the Digitized Age

On January 18, 2025, TikTok, a short-form video platform owned by the Chinese technology company ByteDance, temporarily suspended its service in the United States for a day amid ongoing legal tensions with the U.S. government. This event reignited public and media discussions about digital bans and tariffs, especially as President Donald Trump assumed office once again. However, the use of tariffs and trade bans is not a novel phenomenon—it has been a fundamental aspect of economic history, dating all the way back to Ancient Greece and Rome. This article aims to explore the historical development of tariffs and trade restrictions and their economic consequences, investigate the emergence and implementation of modern digital tariffs and platform bans, and analyze the broader impacts and implications of digital trade restrictions in the context of traditional trade policies and economic theories. By tracing the evolution of these measures, it becomes evident that digital tariffs and bans have emerged as defining tools of modern trade wars. While these policies seek to protect domestic digital economies, they also undermine the benefits of free markets and create unnecessary deadweight loss by further deepening informational divides in an increasingly interconnected world where the free flow of information is crucial.

The implementation of tariffs and trade bans has played a significant role throughout economic history, primarily serving to protect domestic industries from foreign competition, exert political leverage over trading partners, and generate government revenue. However, these measures often come at an economic cost, introducing deadweight loss by distorting market efficiency and leaving resources underutilized. The US-China Trade War, initiated in 2018 and still ongoing today, is a powerful case study illustrating these consequences. This example highlights how tariffs and trade bans, while intended to safeguard domestic economic interests, have led to broader inefficiencies, retaliatory measures, and disruptions in global trade networks.

Two of the world’s largest economies, the US and China, initiated and exchanged a series of trade tariffs against one another starting in 2018. On January 22, 2018, President Donald Trump announced new tariffs on solar panels and washing machines from China, which his administration claimed were “aimed at protecting domestic production from cheap imports” These tariffs were soon joined by two new tariffs of 25% on steel and 10% on aluminum, targeting against imports from all countries.

In late March of 2018, the Trump administration had targeted China as its trade war opponent by listing approximately 1,300 categories of Chinese imports for tariffs, including aircraft parts, medical devices, batteries, etc. The Ministry of Commerce of China quickly responded by imposing a series of tariffs on 128 commonly imported products from the US in the beginning of April. The trade war escalated from here. The initial tariffs mentioned above were rapidly followed by other trade barriers and diplomatic restrictions. These included the revocation of about 1,000 visas of Chinese graduate students and researchers in the STEM fields, under a vague presidential proclamation aimed at suspending visas of individuals with current or past ties to entities in PRC that support or implement civil-military fusion.

Even though the US and Chinese administrations proclaimed that actions of tariffs and trade restrictions were taken to protect their respective domestic economies and national security interests during this trade war, their outcomes had unsurprisingly dealt economic damage to both sides. Economist Ken Itakura from Nagoya City University conducted a study investigating the impacts of the US-China trade war by using a dynamic computable general equilibrium (CGE) model of global trade. Itakura not only found that the escalation of the trade war reduced gross domestic product (GDP) in China and the U.S. by -1.41% and -1.35%, respectively, with both economies experiencing contractions across nearly all sectoral imports and outputs, but also that it led to a $450 billion reduction in global GDP when accounting for the global value chains (GVCs). Thus, though the trade restrictions may have been purported to protect domestic economic stability, it had rather the opposite effect, bringing reductions to the domestic economies of the US and China, and incurring broader inefficiencies in the global economic network.

Unlike the traditional trade restrictions that primarily target physical commodities and services, another aspect of the trade war was restrictions on digital trade. As its name implies, digital trade is a relatively new concept that incorporates “all international trade that is digitally ordered and/or digitally delivered.” Given its broad definition, digital trade restrictions can be applied across multiple dimensions of the global digital economy, ranging from online marketplaces to cloud computing and social media platforms. These measures have emerged in response to the rapid expansion of the global digital market, allowing governments to regulate data flows, restrict platform access, and impose tariffs on digital services.

Since digital trade depends on the seamless exchange of information, these restrictions can create impacts at a much faster rate than conventional trade barriers by controlling access to data as well as interrupting the transmission of information. More specifically, if a digital trade restriction on cross-border data flow is enacted, companies that rely on such data access may experience instant operational losses and further economic impacts before they can find alternative means.

When placed in the broader context of traditional trade restrictions, digital trade tariffs and bans remain in an exploratory phase since the digital market is newly emerged and still expanding. But their application is expected to become more prevalent. As countries form alliances to grant one another exemptions from digital trade barriers while simultaneously alienating their competitors, these policies not only replicate the inefficiencies of traditional trade restrictions but also deepen global informational divides. This fragmentation leads to a unique additional deadweight loss beyond that caused by direct trade barriers, particularly due to the loss of access to the network of cross-border data exchange and market foresight.

Beyond the aggregated prevalent inefficiencies, these restrictions on digital trade also have unequal effects across firms, markets, and economies. They create disruption to the free digital market by limiting access to comprehensive and thorough information, which is a critical resource for competitiveness. In the research conducted by Haehean Park, Po-sang Lee, and Yun W. Park on information asymmetry and firm performance, the authors argue that “financial openness favors firms with lower information asymmetry (larger firms, cross-listed firms, export-intensive firms), which grow faster than firms with higher information asymmetry.” Business entities in countries that impose digital trade restrictions on each other may face this threat of emerging information asymmetry since they no longer have access to data and market information that is shared by the outside world.

One useful case study of impacts is the DEPA (Digital Economy Partnership Agreement) to further investigate how the newly emerged digital trade restrictions shape the economic and political landscapes in this increasingly digitalized world. Written and signed initially by Singapore, Chile, and New Zealand in June 2020, the DEPA aims to allow its members to collaborate and to “promote interoperability between different regimes.” Multiple countries have joined or expressed their interest in this niche community of digital trading since then. To facilitate digital trade within the community and align the digital economy, members of DEPA mutually agree to reduce barriers on digital trades among themselves, effectively granting mutual exemptions and providing competitive advantage to each other. For instance, DEPA members are more likely to prioritize digital business partnerships with other member countries over non-members. This newly established agreement is not an implementation of digital trade restrictions but an alliance.

While DEPA does not explicitly claim to impose barriers on other non-member nations, the preferential treatment among signatories can lead to indirect or unintentional competitive disadvantages for external digital firms since they may encounter higher standards of entry and more detailed investigations. Due to the rapid transmission of information and the increasing dependence on digitalized economic activities, implicit barriers created by such agreements can rearrange the global digital market by incentivizing nations or entities to either join such agreements or develop digital trade frameworks in response. Either way would burden the transmission of information and market insights between countries and entities. Connecting to the discussion above regarding the immediacy of information transmission, such digital trade restrictions can almost instantaneously create informational divides that bring economic losses.

Today, we stand at the crossroads of a new era: with the continued advancement of technological innovation, digital trade barriers may become a weapon in future trade wars. Intended to protect domestic digital economies, these restrictions could inevitably disrupt the free digital market through government intervention. Moreover, they may lead to unnecessary deadweight loss, not only by increasing production costs for digital products, similar to how traditional tariffs increase costs for physical goods, but also by deepening informational divides, causing entities to make misguided economic decisions due to limited market information. Ultimately, while digital trade restrictions may serve short-term strategic interests, they risk eroding the foundation of the global digital economy: the free and seamless exchange of information. Without collective regulation and cross-nation collaboration, these policies may one day stifle innovation, hinder economic growth, and create new barriers to humanity’s technological progress. As nations and entities navigate this evolving landscape, it remains crucial to find a balance between protecting domestic interests and fostering a global digital ecosystem that thrives on openness, healthy competition, and shared knowledge.