International trade is facing a crisis of confidence in these globally fraught times. For decades until the financial crisis in 2008, trade in goods and services grew at twice the rate of the global economy, but 2018 is expected to be the seventh year in a year in row in which trade has failed to grow at its historic rate. Trade has traditionally been viewed as a driver of development, but conceptions of inequitable globalization that have fueled protectionism across the globe have weakened trade as a means of implementation for economic growth. The United States has imposed $250 billion trade measures through three tariff rounds on Chinese products in 2018 to stop the “unfair transfer of American technology and intellectual property to China.” It has also imposed levies on imports of steel and aluminium from Canada, European Union and Mexico. All of these countries have retaliated, sparking fears of a global trade war that could destabilize some of the economic expansion since 2016. Trade policy has never been so vulnerable, yet one aspect of trade holds promise for the future – the surge of cross-border activity in the digital world.
The US International Trade Commission (USITC) defines digital trade as the delivery of goods and services or commerce in products and services online by firms in any industry sector. In 2018, global e-commerce was worth $28 trillion, increasing by 44 per cent since 2013. Small and large firms alike are leveraging cloud computing, machine learning, data-driven algorithms and the internet of things to drive productivity and efficiency in the global economy. As economies become increasingly digitized, goods, services, finance and information can traverse borders and boundaries more frequently and more easily than ever before. Small businesses that lacked access to a large customer base due to geography and capacity constraints have the option to trade goods on digital platforms like Alibaba and Amazon, giving them the ability to take their goods from the local to the national and global scale.
Services too are becoming easier to trade online with digital platforms seamlessly connecting customers with digital providers in different geographic locations, which would not have been possible had they been required to be rendered in person. For example, Upwork, a freelancing website, can find providers for a wide range of services like teaching, accounting, programming, translating etc. from across the globe. Individuals benefit from the increased access to digital trade as well. In 2017, an estimated 1.66 billion people worldwide purchased goods online, contributing to global e-retail sales of USD $2.3 trillion. Growth in these sales is expected to double by 2021. The buyers are not only in western countries, but also in Asia-Pacific: in 2016, e-retail sales in the region accounted for 12.1 per cent of total retail.
Despite the potential of digital trade to unlock revenue generation, productivity, efficiency, and inclusivity for businesses and individuals, many governments have responded to the positive trends in cross-border digital flows by seeking to control them and place restrictions on data leaving their borders, which underpins digital trade.There are a growing number of laws and rules to block the flow of data and digital goods and services across borders, which restrict the ability of firms to extract maximum profit out of their digital businesses. A number of laws that exist currently seek to address legitimate policy goals, like the General Data Protection Rule (GDPR), which protects the data and privacy for all individuals in the European Union (EU). However, many of the laws are protectionist and counter-productive in nature. The digitization of the trade realm poses difficult governance challenges both domestically and internationally. Governance frameworks, trade agreements, and rules governing the flow of cross-border activity will need to evolve to harness the full potential of the global digital economy.
The World Trade Organization (WTO) has been the traditional custodian of the multilateral trading system, but it has failed to adequately cover the rules governing digital trade, at the same time as multilateralism is challenged in the face of increasing bilateralism. A few agreements like the Trans-Pacific Partnership (TPP) and the US-Korea Free Trade Agreement (KORUS) contain certain rules around transactions involving data exchanges, but these are not necessarily replicable to other transactions involving cross-border flows. There are a number of reasons contributing to difficulties in framing rules of the digital economy.
Firstly, there does not seem to be a consensus around whether current trade frameworks (multilateral, bilateral and others) are adequate to govern digital transactions. There is also a definitional challenge to digital trade. Should the rules apply to all e-commerce transactions, encompass the digital economy, or any type of transaction involving data?
Secondly, uniform trade governance and trade investment frameworks to direct rules will be difficult to attain because of heterogeneity. Traditional trade agreements and their frameworks have been determined on the basis of mercantilist dynamics of negotiations with an exchange of concessions, mostly to try to manage spillovers caused by domestic politics. These agreements are negotiated between countries that are heterogeneous in terms of their capabilities to absorb uptake of technologies, so they will have different strategic incentives for digital trade policy.
Lastly, countries may not have the capacity to organize the governing frameworks to upgrade their business models and value chains or to leverage the opportunities from a macroeconomic perspective. This challenge is exacerbated by the rapid change in costs of technology, barriers related to frictions in digital environments, and regulatory concerns including privacy, intellectual property rights and access restrictions. An ideal framework would be established though a cross-sector partnership of policymakers, digital businesses, and regulatory bodies that will create an environment to fully unlock the potential of digitization while mitigating the negative consequences that accompany the digital realm.
The trading system has come under fire in the last few years, and especially in 2018. Digital trade presents an unbounded frontier through which economic activity can be stimulated and trade of goods and services across borders can be resuscitated. The next decade will determine whether we can use the opportunity to either refine current global trade policies to adapt them to the digital sphere, or reform them completely to make them more relevant to the state of the field of digital trade. The question for the international trade governance system to answer is which activities will be unleashed and which ones restricted, and how this will serve the power dynamics of the existing rules framework today. Digital trade can be fully harnessed if the rules surrounding it are determined by bottom-up, consensus-building processes, and through a re-establishment of trust in the system to uphold the values that traditional trade rules have sought to uphold, which is to promote a fair, open, transparent, and inclusive trading system.
Poorvi Goel is the President of Technology and Innovation Student Association and an MPA candidate at Columbia University. Poorvi is an economist, with experience working in central government ministries and international organizations in India and UK. She has authored publications on topics spanning multilateral trade, sustainable development, fiscal and monetary policy, and other issues in international development and macroeconomic policy.
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