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Regulating the digital economy: Reflections on the trade & innovation nexus

Published onDec 06, 2021
Regulating the digital economy: Reflections on the trade & innovation nexus
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This note considers the scale of the global digital economy including cross-border activity. Digital trade is challenged by an inconsistent and incomplete multilateral regulatory framework anchored by the WTO and an emerging patchwork of regional and bilateral accords with multiple points of convergence and divergence. To gauge the economic implications, the analysis examines an illustrative case of digital services market openness and intellectual property protection, seen in relation to innovation indicators. Conclusions point to possible steps to advance liberalization within the bounds of regulatory guardrails.

Starting point

The international digital economy has grown to a massive scale, operating in the context of an inconsistent and incomplete governance framework cobbled together at the multilateral, regional and bilateral levels. Concerns from government, civil society and business about some aspects of cross-border digital trade have fueled interest in closing regulatory gaps, aligning requirements, and facilitating digital trade, while maintaining an appropriate balance of interests. The scope, dynamism and transformative potential of digital trade lends urgency to the construction of an improved regulatory framework for liberal, lean, rules-based market access. This matters for promotion of innovation and sustainable economic growth.

Digital dynamics

The charts below present a few data points to illustrate the scale and dynamics of the international digital economy. Per UNCTAD, nearly 1.5 billion consumers shopped on-line in 2019 up 16% from 2017.1 Some 360 million people were cross-border e-shoppers in 2019 (Chart 1). And while UNCTAD estimated worldwide e-commerce retail sales to be US$3.4 trillion in that year, business-to-business e-commerce sales were estimated to be some 3.5 times greater at roughly US$12.2 trillion.2 Chart 2 highlights the growth in digitally deliverable services trade, which grew by more than 2.5 times between 2005 and 2020 to reach nearly US$3.2 trillion.3 And, Chart 3 highlights the scale of leading players in e-commerce as of 2019. The US accounts for more than one-third of the total global e-commerce sales volume of US$26.7 trillion.4 The US e-commerce sales of US$ 9.6 trillion equate in value to some 45% of US GDP. The goal of these illustrations is not a comprehensive treatment of the digital economy, but rather to give a sense of its dynamism and scale. Digital trade is large enough that its facilitation or disruption can have substantial repercussions for the world.

Chart 1. Worldwide online retail shoppers, billions, 2017-2019

Source: UNCTAD (2021), “Estimates of global e-commerce 2019 and preliminary assessment of COVID-19 impact on online retail 2020”, May, UNCTAD Technical Notes on ICT for Development, #18; author’s presentation of the data.

Note: Based on national data and UNCTAD estimates. Cross-border shoppers refers to those who purchase from websites located abroad for delivery from abroad.


Chart 2. World digitally-deliverable services trade (Imports + Exports), Index (2005=100)

Source: UNCTADstat, Digital Economy, online data viewed on 2 October 2021.

Note: Underlying data are in USD terms. Digitally-deliverable services include insurance and pensions, financial services, charges for use of intellectual property, telecommunications, computer and information services, audio-visual services, and other business services.

Chart 3. Total e-commerce sales (B2B+B2C) by country, US$ bn and % of global total, 2019

Source: UNCTAD (2021), “Estimates of global e-commerce 2019 and preliminary assessment of COVID-19 impact on online retail 2020”, May, UNCTAD Technical Notes on ICT for Development, #18; author’s tabulations.

Note: The underlying UNCTAD data are based on national sources. Dollar amounts for US, China, South Korea, France, Italy and Australia are UNCTAD estimates. ROW=Rest of world; B2B = Business to business; B2C = Business to consumer.

Digital trade governance

When considering governance of the trading system, trade economists have traditionally tended to favor development of a global non-discriminatory set of rules that supports market openness and regulatory transparency, while imposing disciplines to rein in harmful actions and costly economic distortions. Yet, digital trade remains governed in a rather fragmented and incomplete manner by institutions at the global level. Progress at the World Trade Organization, with its large and diverse membership, has been slow. To close the gaps, policy-makers in leading economies have turned their attention to regional and bilateral deals. These smaller groups of economies have found it less difficult to build consensus and advance. On the other hand, some nations have threatened unilateral actions where their concerns are not addressed.

The World Trade Organization (WTO) plays a key role as a forum for discussion, negotiation, policy review, trade statistics, and dispute resolution with respect to WTO commitments. Concrete instruments include the Information Technology Agreement (duty-free treatment for most electronics products) and the General Agreement on Trade in Services (e.g., supporting access in some markets for information and communication technology (ICT) services).5 In relation to data transmissions, since 1998 WTO members have so far prevented imposition of duties via a temporary moratorium generally renewed biennially.6 The WTO Trade Facilitation Agreement is supporting digitization of some customs processes, as well as improving transparency and streamlining red tape.7 Soon perhaps, the WTO’s Joint Statement Initiative on e-commerce, with 86 members currently participating, may deliver an “opt-in” accord for improved procedural and regulatory transparency, and e-trade facilitation.8

The United Nations system has played a complementary role with measures to facilitate digital trade and monitor developments. The UN Commission on International Trade Law (UNCITRAL) has developed legal tools such as the Model Law on Electronic Commerce (1996, 1998).9 The UN Conference on Trade and Development (UNCTAD) provides: an important digital economy monitoring function on issues such as e-commerce preparedness (i.e., availability of personal financial accounts, on-line experience of the population, access to secure internet, and postal service reliability); policy recommendations; and digital trade statistics.10 The UN regional commissions such as UNECE (the UN Economic Commission for Europe) have also supported rule-making, analysis and statistics in areas such as cybersecurity.

The G20 provides an annual forum for high-level policy development and co-ordination for government leaders among the large economies. Key stakeholder groups provide annual input reports outlining prioritized analytical and advocacy perspectives, often covering digital economy issues. The groups represent labor (L20), business (B20), and think-tanks (T20), among others. With its light and agile structure and its de facto convening power, the G20 is likely to remain at the leading edge for international coordination on substantial digital-economy policy developments.

The G7 serves as an informal forum for the leaders of seven advanced, democratic economies (Canada, France, Germany, Italy, Japan, the UK, the US), plus the European Union. It operates on an annual cycle with a rotating presidency among the members. While its decisions are not legally binding, they do have political influence. The digital economy has been a recurrent item on the G7 agenda. On 22 October 2021, the G7 Trade Ministers issued a set of Digital Trade Principles. These consolidate elements from digital trade chapters of G7 trade agreements (discussed below). The principles affirm open digital markets; free data flow with trust (i.e., with data protection); safeguards for workers, consumers and businesses; digital government services; and fair and inclusive global governance engaging the WTO, OECD and the World Customs Organization. The G7 principles promote shared regulatory approaches, interoperability of government systems, and disciplines on government access to personal data.11

The OECD provides policy support for most areas of government except culture and defense. The digital economy is a cross-cutting concern.12 OECD methods include soft law and policy recommendations, policy monitoring and analysis, peer review, statistical tracking, and outreach. Members have promulgated formal recommendations on issues such as Electronic Authentication (2007), Consumer Protection in E-Commerce (2016), and Enhancing Access to and Sharing of Data (2021).13 In a major achievement in 2021, negotiations held at OECD in cooperation with the G20 resulted in an accord among 136 jurisdictions on the taxation of cross-border digital services, fixing a minimum corporate tax rate, and apportioning the right to tax profits made in an economy even if the firm lacks a physical presence.14 This accord should reduce tensions on these issues, with entry into force expected in 2023.

In 2021, an OECD inventory of legal instruments related to international e-commerce found 52 different instruments administered in 24 different bodies.15 The most active rule-making bodies included the WTO, OECD, ISO/IEC, UNECE/UNCEFACT, and UNCITRAL.16 Other organizations especially active in digital trade matters include the World Customs Organization, World Bank, IMF, APEC and ITU.

Regional and bilateral trade agreements

Our review of seven recent trade accords touching on digital trade (Table 1)17 revealed three main approaches emerging, albeit with points of alignment and divergence. The US, the EU and China are leading advocates that emphasize, respectively: 1) market openness with regulated, business-led control of data; 2) commercial openness with user-led control of privacy and data; and 3) commercial openness with state-defined privacy protection, and some elements subject to subordination to national security interests.18, 19 Across the accords, one finds some points of convergence on duty-free treatment for electronic transmissions, consumer protection, e-trade facilitation, exclusion of government procurement, and cooperation on digital trade. Most of the agreements were also fairly close on cross-border transfer of data for the conduct of business, non-discrimination for digital products, protection for software source code, cybersecurity, and prohibition of data localization requirements, albeit subject to various carve-outs and exclusions. In the case of RCEP, however, negotiators agreed to expansive exceptions to the liberal cross-border flow of data and disciplines on data localization, and the non-discrimination terms are less stringent. And, RCEP does not provide protection of source code. Differences also remain between the EU and US on privacy matters. They have struggled to find a legally solid standard on data transfers and protection of personal information.20

Interestingly, some third countries have found means to bridge among the leading nations. Japan, for example, is party to a bilateral trade deal with the EU, an Asian regional trade deal anchored by China (RCEP); a bilateral digital trade agreement with the US; and a formerly US-led Pacific Basin trade deal (CPTPP). And, Canada has a deal with the US and Mexico (USMCA), another with the EU, and is a party to CPTPP.21 The experience of Japan and Canada, along with a few others, may provide an indication that some increased alignment across regional trade agreements, perhaps even multilateralization of some provisions, may be feasible with further negotiation. And there are further high-standards accords in the works (e.g., EU-Australia).

Private sector

The private sector is of course the central player in the conduct of digital trade. Geopolitical tensions, new technology, economic turbulence, and the pandemic have fueled expanded regulatory standards22, driven digitization of processes, and increased economic pressure on firms. Businesses are responding. Trade finance provision is being digitized to offer greater security (“know your client”), new client services, and timeliness.23 Global value chain operations are shifting focus from efficiency to also include resilience and robustness.24 These developments are requiring deeper integration of digital functionality. This is still a work in progress, in part because regulators are not all on the same page (e.g., in acceptance of e-documentation). The key point here is that the private sector stakeholders are critical counterparts to government in the emerging governance framework for digital trade.

Table 1. Illustrative list of areas of convergence across various current digital trade-related agreements

 Accord (year of entry into force) =>

Policy codified

CPTPP

(2018)

AUS-SGP DEA (2020)

DEPA (2020)

EU-Japan EPA/GDPR (2019/2018)

RCEP (ratification

pending)

US-Japan Digital Trade Agreement (2020)

USMCA (2020)

Duty-free electronic data transmission

Liberal cross-border data transfer rules

(Parties to review need by 2022)

√ (with significant national security exceptions)

Non-discrimination in treatment of digital products (with toleration of national regulation for legitimate policy objectives, exceptions)

Legal protection of personal information

Protection of source code (may have toleration of exceptions, e.g., for regulatory or judicial processes)

(A matter for further dialogue among members)

Consumer protection (e.g., from spam, fraud, harm, and/or misinformation)

Co-operation on cybersecurity (e.g., incident response)

Restriction on use of data localization

√ (with significant national security exceptions)

Digital economy facilitation (e.g., UNCITRAL model law, paperless trade, e-payments, e-authorization, and/or interoperability)

Exclusion of government procurement


Sources: Official texts of the accords; Leblond, P. (2020), Digital Trade: Is RCEP the WTO’s Future?, CIGI, 23 November; Morita-Jaeger, M. (2021), Accessing CPTPP without a national digital regulatory strategy?, UKTPO Briefing paper 61, July.

Notes: Regional Comprehensive Economic Partnership (RCEP) members include the 10 ASEAN nations, Australia, China, Japan, New Zealand & South Korea. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) members include Japan, Vietnam, Malaysia, Australia, New Zealand, Singapore, Chile, Peru, Mexico, Canada; Chile, Peru & Malaysia have not yet ratified. The General Data Protection Regulation (GDPR) covers EU members, Iceland, Lichtenstein, Norway. The EC has recognized GDPR equivalence for Andorra, Argentina, Canada (commercial organizations), Faroe Islands, Guernsey, Israel, Isle of Man, Japan, Jersey, New Zealand, Switzerland, the UK & Uruguay. Digital Economy Partnership Agreement (DEPA) members include Chile, New Zealand & Singapore. EPA = Economic Partnership Agreement. USMCA = US, Canada and Mexico Agreement (= also CUSMA & T-MEC).

Empirical assessment

Drawing on an OECD policy indicator, Map 1 highlights variation in the extent of digital services market openness across 50 countries. Using a data set covering firm-level R&D in top firms globally during the period 2014-201925, we examined the relationship to digital services market openness, controlling for other factors. Both R&D expenditure and intensity26 were found to have a strong, statistically-significant, positive association with national-level digital services market openness, controlling for other factors (Table 2). Our further analysis found a similar association of these R&D indicators with protection of intellectual property rights. Moreover, economic literature confirms that R&D expenditure is positively associated with innovation outputs such as patents (an indicator of technological progress), which unlock future economic growth potential. These positive effects hint at the economic importance of advancing rules-based digital services market openness within the bounds of regulatory guardrails and appropriate levels of intellectual property protection. While correlation in these regression assessments does not demonstrate causality, it does provide a useful starting point for further, more comprehensive analysis. This is a potentially useful observation for policy makers to consider.

Map 1. Digital Services Trade Restrictiveness Index, 2020 (lower scores = greater openness)

Source: OECD (2021), Digital Services Trade Restrictiveness Index (DSTRI) viewed on 12 September 2021; author’s tabulations; Microsoft Bing mapping.

Note: The DSTRI is scored from 0.0 (completely open market, dark green) to 1.0 (completely closed, dark red). Generally, a score of 0.1 or greater indicates the presence of significant impediments to trade. The index covers: infrastructure and connectivity, electronic transactions, payment systems, intellectual property rights (copyright, trademark, and enforcement provisions) and other barriers such as performance requirements. A number of the inputs taken into account for the DSTRI indicator score are among the issues raised in regional and bilateral trade agreements: discrimination, cross-border transfer of personal data, data localization, privacy and cybersecurity are referenced.

Table 2. Firm-level regression analyses summary table: Significant correlations, 2014-2019


Dependent variable=>

Key independent variable:

R&D expenditure level (EUR)

R&D intensity

(R&D expenditure as % firm revenue)

1

DSTRI and IPR-P

** and **


2

DSTRI

***


3

IPR-P

***


4

DSTRI


***

5

IPR-P


***

Source: Author’s calculations (see companion paper for details); R&D variables: European Commission, EU R&D Scoreboard, 2019 and previous years; DSTRI = OECD Digital Services Trade Restrictive Index; IPR-P = The Property Rights Alliance Intellectual Property Rights indicator.

Note: Grey indicates “not applicable”. N=ca 14,000 firm-level observations. These cover the top 2500 R&D firms globally each year, 2014-2019, excluding those with data omissions. Confidence interval: **=95%, ***=99%.

Next steps

In view of developments on digital economy issues at the WTO, OECD and regional levels, it may prove timely to push forward with a broadened policy reform agenda. Here are three potential areas for action:

  1. The proposed WTO e-commerce deal should be concluded on a priority basis. Areas of convergence may include transparency provisions, consumer protection and e-trade facilitation. A majority of members appears to support permanent duty-free treatment for electronic transmissions. The public policy symbolism of a WTO accord would argue for conclusion of a deal soon, even if more ambitious objectives must be set aside for now. Demonstration of even stepwise progress at the WTO would be beneficial in the face of current geopolitical tensions.

  2. With respect to digital trade, governments should accede to existing high-standards deals or form new regional and bilateral deals that offer digital market openness with liberal, lean, regulatory guardrails. The additional experience with provisions for free flow of data, non-discrimination for digital products, informed-consumer-consent models for privacy protection, and source code protection, among others, would help to establish facts-on-the-ground about costs and benefits. This may improve prospects for eventual multilateralization of such elements.

  3. A consistent, comprehensive and coherent data system should be implemented for the digital economy. Coverage should include digital trade, domestic digital economy activity, and relevant policy, regulations and standards. This should be coordinated by existing international organizations such as WTO, OECD, UNCTAD, and World Bank. Better visibility of developments may promote improved policy coherence and economic decision-making. It would be a useful complement to a global governance structure (e.g., a Digital Stability Board). 27

Enhanced governance can support a dynamic digital economy through a framework for market openness to digital trade, healthy competition, and appropriate regulatory guardrails. Given the scale and innovation performance of the international digital economy, its good governance is a matter of global importance.

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