Digital Trade and Market Openness
Digitalisation has significantly reduced the cost of engaging in international trade; facilitated the coordination of global value chains; helped diffuse ideas and technologies; and connected a greater number of businesses and consumers globally. But even though it has never been easier to engage in international trade, the adoption of new business models has given rise to more complex international trade transactions and policy issues.
In this rapidly evolving environment, governments are facing growing regulatory challenges in ensuring that the opportunities and benefits from digital trade can be realised and shared more inclusively. The aim of this paper is to help policy makers by providing a better understanding of the changes shaping digital trade with a view to informing how these might be reflected in trade policy design.
This paper has three parts. The first part discusses what we know about how digitalisation is changing international trade and the rules that govern it. The second part focuses on a more in- depth look at the evidence on trade in the digital era, drawing on available data and the illustrative findings from a tailored business questionnaire. Based on this, the third part provides an initial mapping of the types of measures that need to be considered when thinking about market openness and digital trade. The concluding section draws on these three parts to offer a perspective on what market openness means in the digital era.
Digitalisation has increased the scale, scope and speed of trade, posing new challenges for policy makers. With the emergence of new business models, a better understanding of the “what” and the “how” of the measures affecting digital trade is needed.
Existing multilateral rules and agreements under the World Trade Organization (WTO) cover important aspects of digital trade in goods and services. The General Agreement on Trade in Services (GATS) and its annexes remain of primary importance for enabling services that underpin the digital world (such as telecommunications) and digitally-enabled services. The General Agreement on Tariffs and Trade (GATT) and the Trade Facilitation Agreement (TFA) together provide important measures to support digitally enabled trade in goods, while the Information Technology Agreement has been key in eliminating tariff barriers for certain ICT products
However, regulation of digital trade issues is increasingly addressed in regional trade agreements (RTAs), covering broader issues ranging from the permanent prohibition of customs duties on electronic transmissions and non-discriminatory treatment in terms of domestic regulation to electronic authentication to data protection and paperless trade, among others. Nevertheless, there is a wide variance across agreements in terms of depth and breadth of the issues covered, and many provisions continue to be ‘best endeavours’ and not subject to dispute settlement. Despite these efforts, and those at the WTO, there are questions about how well adapted current frameworks are to the bundling of goods and services that is a feature of trade in the digital age.
Measuring digital trade is difficult, making it hard to understand the scale of the policy challenge ahead. Although efforts are underway, it will be some time before robust measurement is possible. In the interim, available data can shed light on certain aspects of trade in the digital era:
- Digital trade is not just about ICT goods and services; digitalisation is pervasive and involves all sectors of the economy.
- Digitalisation is linked with greater trade openness; selling more products to more markets; and less concentrated export baskets.
Digital connectivity, as proxied by measures of internet penetration, is:
- Associated with higher bilateral trade, and helps parties to better exploit trade benefits from trade agreements;
- Most important for trade in more complex manufactures and digitally deliverable services;
- Giving rise to new complementarities between goods and services; digital connectivity and imports of ICT goods are important for digitally deliverable services exports.
Responses from a tailored business questionnaire, while based on a small sample and subject to normal biases, provide some illustrative insights into aspects of firm engagement in digital trade. Respondents highlighted that while digitalisation is important for firms producing goods and services, the propensity to engage in cross-border digital sales appears to be higher in services. The questionnaire also revealed that digitalisation involves all segments of the value creation process, but appears to be most valued by firms at the production and design stages. Finally, responses show that firms that sell goods are also concerned by issues traditionally associated with services, and vice-versa, as firms that sell services are concerned by policy issues traditionally associated with goods.
Based on the analysis, a preliminary mapping of the types of measures that affect digital trade suggests the following important implications:
Digitalisation presents a number of regulatory challenges for trade rules, primarily stemming from the increasingly blurred distinction between goods and services, resulting in what some see as uncertainty as to the applicable trade rules.
What seem to be simple, cross-border, digitally enabled transactions in goods, services or bundled goods with services are actually underpinned by a range of measures that are horizontal to all transactions. This implies that making the most out of digital trade goes beyond removing measures that affect the final delivery of the digital trade transaction and requires thinking about measures affecting the full value chain, including the enablers of digital trade.
Engaging in digital trade in goods means paying attention to a broader range of supporting services, such as logistics. Similarly, the ability to engage in trade in services, particularly those digitally delivered, is affected by market access in goods.
As firms increasingly move towards trading bundled goods and services, in part as a result of digitalisation, the issues they will face accumulate, meaning that both traders and policy makers will need to consider a wide range of services and goods simultaneously for the potential benefits of digital trade to be realised.
Overall, this work suggests that market openness should be approached holistically, as the benefits of digital transformation for trade are contingent on a combination of factors that cross traditional distinctions between goods and services involve a range of issues related to digital connectivity.
Reaping the benefits of digital trade will also require more international co-operation and dialogue on approaches that ensure the interoperability of differing regulatory regimes and technologies. Digital infrastructures such as the Internet were born global. They offer new opportunities for scale, but they raise key challenges for domestic and international policy in a world where borders and regulatory differences between countries remain.
While there are different views about where and how such dialogue might take place and who should conduct it, basic market openness principles that underpin trade agreements can offer useful insights for policy makers. These principles underscore the importance of standards and regulatory approaches that are transparent, non-discriminatory and least trade restrictive as possible, while promoting competition and interoperability – all of which will be critical to realising the opportunities and benefits from digital trade.
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