Addressing Barriers to Digital Trade

The Internet economy has grown exponentially since the first Internet domain was registered in 1985. Globally, e-commerce accounts for roughly US$8 trillion in goods and services sold.1 Among G20 countries alone, the Internet contributed an estimated 4.1 percent of GDP, or US$2.3 trillion, in 2010. Recent estimates suggest that figure will almost double by 2016 to US$4.2 trillion.3 At that point, the Internet in the G20 economies will help to employ an additional 32 million people. 

Several factors have driven the Internet economy’s growth, but the single most powerful remains the accelerating pace of innovation in information and communication technologies. When the first domain was registered in 1985, for example, a state-of-the-art Intel 80386 microprocessor held 275,000 transistors. Less than 30 years later, Intel’s Core i7 Sandy Bridge-E processor holds 2.27 billion transistors — nearly 213 times as many as its predecessor.

Technological innovations, like the microprocessor, have contributed to the widespread adoption of the Internet by dropping the cost of access. The revolution in processing power, for example, enabled the development of mobile devices, which, by some estimates, will account for four out of five broadband connections by 2016. The lower cost and widespread availability of smartphones and tablets as a means of access has had a particular impact on Internet adoption and the growth of e-commerce in developing countries.

With widespread availability, the number of Internet users worldwide has risen sharply. In the United States (US), for example, the number of Internet users more than doubled from 2000 to 2012, from 95.4 million to 245.2 million or roughly 78.1 percent of the US population. Similarly, in China, an estimated 40.1 percent of the population had access to the Internet by 2012, compared with only 1.8 percent of China’s population in 2000. Globally, there are now more than 3 billion people connected to the Internet.

Internet access speeds have increased sharply, magnifying the Internet economy’s potential. Milestones in the Internet’s development from its earliest days reflect an exponential increase in Internet data transmission rates. Moreover, as broadband speed has improved, prices have fallen. More widespread adoption of broadband has dramatically improved the Internet’s use as a vehicle for e-commerce, as well as the user’s experience.

Wider network coverage, expanding data transfer capacity, and the increasing affordability of devices and broadband connections have created opportunities for new business concepts geared directly to the Internet. One of the leading examples involves the dramatic growth of mobile banking, particularly in Africa, where developers in Kenya are targeting M-PESA customers with money management apps that help business customers keep track of transactions and generate monthly statements. The growth in the Internet economy has driven similar developments in a variety of other business sectors from alternative methods of sourcing investment capital by crowd funding firms, like Kickstarter and Crowdfunder, to cloud computing services that supplant the need for individually owned business infrastructure, like Amazon, Rackspace, and Salesforce. 

While new business models are undoubtedly redrawing the business landscape globally, traditional industries, according to Mckinsey Global Institute, account for 75 percent or more of the value created by the Internet. That reflects the fact that businesses were among the earliest adopters of the technology. OECD statistics indicate more than 95 percent of all companies in the majority of OECD countries are now connected to the Internet and make use of it as an integral part of their business.

Moreover, businesses are incorporating the Internet into their operations at far deeper levels than simply using it as a means of sourcing or marketing. One particularly indicative example is Procter & Gamble’s (P&G) use of crowdsourcing as a means of developing new product concepts. P&G has created an “open innovation” Web platform that allows it to collaborate with small and medium-sized enterprises, universities, and other research institutions on a global basis to drive its own innovation. Through its platform, P&G coordinates with scientists and engineers globally to create and commercialize innovations that benefit P&G, its partners, and consumers. 

In other words, rather than being a novelty act, the Internet has become the main attraction. It is central to how markets and enterprises are organized today, and that affect will be amplified as access expands in the future. The continuing growth of the trade in both ICT goods and services, despite the presence of significant barriers to trade, reflects a recognition by businesses and consumers that access to the Internet and its content is an essential part of remaining connected and competitive in today’s global economy.

For all that, the Internet economy remains in its infancy. The Internet’s contribution to GDP remains below 4 percent even among G20 countries, although it represents upwards of 6 percent of GDP in Internet-intensive economies, like Sweden and the UK. That leaves enormous room for growth, particularly among developing countries where adoption lags the G20.

Based on experience to date, the world welfare gain from deeper integration of the Internet into the sinews of the global economy could be enormous. The US International Trade Commission estimates that removing foreign barriers to exports by “digitally intensive industries” in the US would increase US GDP from US$16.7 billion to US$41.4 billion and add measurably to US employment.Estimates of the potential from liberalising barriers to Internet access and digital trade across the G20 suggest the opportunity it creates may be as high as US$4.2 trillion. Given what we know of demographics, those estimates are likely to be on the low side by a wide margin, given that most of the growth in the global economy and, as a consequence, in the Internet economy is likely to flow from the developing world, owing to a combination of growing youth-aged populations, rising incomes, and urbanization, which itself will reduce the marginal cost of extending access to a wider population.

Seizing that opportunity, however, depends heavily on removing the existing constraints inhibiting universal Internet access, while, at the same time, preventing the growth of a new generation of barriers to digital trade.

The varying nature of the constraints in different markets creates a mosaic of barriers that do not lend themselves to either easy quantification or reduction, at least in ways that marry well with conventional approaches to trade liberalization. There is no easy reference point, like tariff rates or algorithm-like gravity equations, to measure the full impact of the barriers to realizing the Internet economy’s potential.

There is a need to explore new approaches both to measurement and the methodology for liberalizing the remaining barriers. The primary means by which the Internet affects the markets it touches is through its impact on transactions costs (i.e., the costs of participating in market- based transactions). By reducing the cost of access, search, payment, and distribution, the Internet reduces the “friction” that all market participants face in their efforts to benefit from specialisation and exchange. 

What that suggests is an alternative way of measuring progress toward the liberalisation of digital trade. The real measure – and, indeed, the target – of any effort to liberalise digital trade ought to be its effect on the friction that inhibits access. That will require further work along the lines already under way in organisations like the World Trade Organization (WTO), the OECD, the International Telecommunications Union, and others on measuring barriers to trade.

Beyond the conventional barriers to trade in goods and services that prevent nations, particularly developing countries, from taking full advantage of the Internet and e-commerce, there are a range of novel impediments to digital trade that have arisen as the Internet has grown. Those include forced localisation barriers, inconsistent approaches to data privacy and protection, shortcomings in achieving a balanced intellectual property regime for the digital environment, legacy financial services regulations, and increasing instances of online censorship.

This paper is a survey of the wide variety of trade barriers that currently affect the Internet economy. The paper is divided into four sections. Part 1 looks at how traditional trade issues need to be rethought in light of the Internet, dividing traditional trade issues into goods and services. Part 2 suggests two new areas of trade policy that ought to be considered in order to further liberalise digital trade. Part 3 provides a methodology for liberalising digital trade. Part 4 concludes.

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