Why rules on digital trade are being negotiated

The internet has changed the way through which we all communicate, work, shop, and learn. It might have changed literally every single aspect of our lives. We are now able to hold conferences between Panama and Fiji without any disruptions or buy products from Madagascar without leaving your sofa in London. Things that seemed impossible thirty years ago, are currently possible thanks to the digital connectivity of consumers and producers. The impact of the ongoing COVID-19 pandemic would have been far more pronounced if workers had not been able to work remotely, and if consumers could not shop online.

However, the surge in progress in digital markets, has not always been followed by the necessary regulations and legislations of countries across the world, and particularly those in developing countries. Similarly, countries have different approaches to policing the internet, which might, in some cases, cause disruptions to businesses, investments, and, specifically, to trade.

With the aim of creating a level playing field and avoiding unnecessary disruptions to trade, Member States of the World Trade Organisation (WTO) started to negotiate on how to regulate the different aspects that impact digital trade – or e-commerce, through the work programme on electronic commerce. This work programme, which started back in 1998, evolved into a Joint Statement Initiative on e-commerce in December 2017, where 71 Members of the WTO agreed to start “exploratory work together toward future WTO negotiations on trade-related aspects of electronic commerce”.[1]

Taxing the internet

One of the most controversial aspects of the negotiations is the application of customs duties to electronic transmissions – such as a book that is downloaded from the internet, or a videogame that is played on-line. Currently, there is a moratorium in place, which prohibits WTO Member States from imposing customs duties to electronic transmissions. However, a clear divide has arisen between developed regions, such as the European Union (EU) and the United States (US) , which want to make the moratorium permanent, and developing ones, led by India and South Africa, which want to phase out the moratorium.

From a fiscal perspective, it is estimated that making the moratorium permanent would have a significant impact in terms of potential tariff revenue loss, with developing countries experiencing much of the hypothetical tariff revenue loss, estimated to be potentially as high as USD 5.4 billion.[2] However, the impact of imposing tariffs on electronic transmissions must be considered on the businesses, with some authors arguing that the current moratorium prevents a combined economic loss of USD 10.6 billion in gross domestic product annually for developing countries.[3]

The impact of such negotiations on businesses might be significant. Organisations such as the International Chamber of Commerce (ICC) have expressed strong opposition to the adoption of such measures, arguing that custom duties might have distortive effects on growth of the digital economy and be cost-prohibitive and technologically unfeasible, amongst others.[4]

Limiting the free flow of information

Another area under discussion is the freedom of “data transit”, which is one of the areas attracting most attention in the e-commerce discussions and creating a visible North-South divide. Countries like Japan and the US argue that the application of policies limiting international flows of data would limit the ability of Micro, Small and Medium Enterprises (MSMEs) to participate in global value chains, as data localisation measures may force foreign companies to establish commercial presence in all countries where such measures are imposed.[5] The proponents of data localisation measures argue that there are several valid reasons to apply data localisation and restrictions to the free flow of data, particularly in the public interest, such as to protect the population from criminal activities, intellectual property infringement, etc.

For example, forced localisation/local storage entails potential costs as companies must be able to guarantee local storage in several places worldwide, as well as fulfilling multiple supports for multiple laws and regulations. This would potentially lead to the need to renegotiate existing contracts and to find new subcontractors. Additionally, restrictions on data movement could lead to a situation where processing has to be done in several locations, instead of preferably in one central location.[6]

Keeping the internet open and transparent for all

The third key area under discussion that is important to keep an eye on are the rules on network neutrality. Network neutrality simply means that “a broadband internet provider should not block, slow, or otherwise unfairly discriminate against any websites or online services.”[7] There are major implications of not having free and fair access to the network, particularly in the context of e-commerce. Currently the largest markets in e-commerce are China and the US, both of which oppose to measures banning network neutrality. Undistorted access to those markets is crucial for MSMEs across the world, and particularly developing countries, to be able to grow and benefit not only from the opportunities in such markets, but also to access the e-commerce market places that are run in those countries.

Under net neutrality rules, service providers “shouldn’t be able to slide some data into “fast lanes” while blocking or otherwise discriminating against other material. In other words, these companies shouldn’t be able to block you from accessing a service like Skype, or slow down Netflix or Hulu, in order to encourage you to keep your cable package or buy a different video-streaming service”.[8]

What this means for businesses?

Whilst e-commerce is not a panacea for market entry and trade, it does represent an unparalleled channel for MSMEs to seize and exploit. As a famous study demonstrated, electronic platforms have eliminated the barriers of geography to markets[9]. Existing and upcoming marketplaces, combined with data analytic tools, also provide insights into users and their preferences to effectively customise services and products to meet buyer requirements.

Governments from across the World, through their participation in the WTO negotiations on e-commerce, can leverage the opportunities provided by predictable global trade rules and disciplines in e-commerce. MSMEs need to secure market access for their goods and services for them to be able to competitively export to both developed and developing country markets.[10]

International Economics Consulting Ltd (IEC) works on WTO negotiations by supporting a group of 78 countries in their e-commerce negotiations. It also works with G7 and G20 countries on free trade negotiations covering digital trade and e-commerce in multilateral and regional negotiations. It supports the AfCFTA negotiations by building country strategies, and works with companies in Southeast Asia, Pacific and Eastern and Southern Africa on e-commerce readiness and digital trade. It is currently engaged in advising on e-payments, blockchain technologies, 3D printing and single digital markets globally. IEC can support your businesses, associations and chambers of commerce to understand what the existing e-commerce measures mean for you, draft and submit position papers that defend your interests. IEC can also support your business through impact assessments and regulatory reviews.

Paul Baker is the founder and CEO of IEC. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. He is an Expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on AI, IOT, Blockchain and Digital Identities for trade, and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence Negotiation Adviser.

References:

[1] WTO (2017). Joint Statement on Electronic Commerce. World Trade Organization, WT/MIN(17)/60. Available from: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/MIN17/60.pdf&Open=True

[2] UNCTAD (2017). Rising Product Digitalisation and Losing Trade Competitiveness. United Nations Conference for Trade and Development, UNCTAD/GDS/ECIDC/2017/3; Banga, R. (2019). Growing Trade in Electronic Transmissions: Implications for the South. United Nations Conference for Trade and Development, UNCTAD Research Paper No. 29, UNCTAD/SER.RP/2019/1, February.

[3] This discrepancy is mainly due to the fact that tariffs on electronic submissions are likely to affect the productivity and efficiency of companies across the world, thereby reducing revenue, profits, and, therefore, taxes collected by the governments through income and value-added taxes. See Makiyama, H-L (2019). The Economic Losses from Ending the WTO Moratorium on Electronic Transmissions. European Centre for International Political Economy, Policy Brief No. 3/2019.

[4] ICC (2019). The WTO Moratorium on Customs Duties on Electronic Transmissions. International Chamber of Commerce, Paris.

[5] WTO (2018). World Trade Report 2018: The future of world trade: How digital technologies are transforming global commerce. World Trade Organisation, Geneva. Available from: https://www.wto.org/english/res_e/publications_e/wtr18_4_e.pdf

[6] Kommerskollegium (2014). No Transfer, No Trade – the Importance of Cross-Border Data Transfers for Companies Based in Sweden. Kommerskollegium, National Board of Trade.

[7] Dowes, L. (2017). The Tangled Web of Net Neutrality and Regulation. Harvard Business Review, March 31. Available from: https://hbr.org/2017/03/the-tangled-web-of-net-neutrality-and-regulation

[8] Finley, K. (2018). The Wired Guide to Net Neutrality. Wired online. 5 September. https://www.wired.com/story/guide-net-neutrality/

[9] Lendle, A., Olarreaga, M., Schropp, S. & Vézina, P-L. (2015). There Goes Gravity: eBay and the Death of Distance. The Economic Journal. 126. 10.

[10] For further information on the e-commerce negotiations, see: Baker, P. (2019). The Implications of Potential Multilateral Rules on E-Commerce for Commonwealth Small States’ Development Objectives. The Commonwealth Secretariat, London.