Adapting to the Digital Trade Era: Challenges and Opportunities

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WTO Chairs Programme Adapting to the digital trade era: challenges and opportunities

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Disclaimer The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of the WTO or its members. The designations employed in this publication and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the WTO concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. Adapting to the digital trade era: challenges and opportunities

Edited by Maarten Smeets 4 CONTENTS

Contents

Foreword 6 Note on the WTO Chairs Programme 8 Note on contributors 10 Acknowledgements 15 Introduction 16

The digital trade era – challenges and opportunities for developing countries 1 Chapter 1 The impact of digital technologies on developing countries’ trade Eddy Bekkers, Robert Koopman, Giulia Sabbadini and Robert Teh 36

Strategic directions and policy implications for developing countries 2 Chapter 2 Global value chains in the age of internet: what opportunities for Africa? Leila Baghdadi and Insaf Guedidi 54 Comments: Richard Newfarmer 66

Chapter 3 Opportunities and challenges of e-commerce in Mauritius Boopen Seetanah, Kesseven Padachi, Sheereen Fauzel, Vinesh Sannassee and Sunil Boodoo 70 Comments: Trudi Hartzenberg 88

Chapter 4 The digital trade era – opportunities and challenges for developing countries: the case of Kenya Tabitha Kiriti Nganga and Mary Mbithi 92 Comments: Nassim Oulmane and Mustapha Sadni Jallab 110

Chapter 5 E-commerce in Africa: issues and challenges Charlemagne Igue, Alastaire Alinsato and Toussaint Agadjihouédé 116 Comments: Pierre Sauvé 132

Chapter 6 China’s e-commerce development and policy relevance Yue Jiang, Lei Zhang and Yunhang Jin 140 Comments: Qing Ye 154

Chapter 7 Engaging in the digital economy: issues and agenda in the quest to adopt of Indonesia’s e-commerce roadmap Riza Noer Arfani, Maharani Hapsari and Putra Perdana 158 Comments: Marcelo Olarreaga 174 CONTENTS 5

Chapter 8 Taxation of international e-trade: Russian particularities Alexander Pogorletskiy and Sergei Sutyrin 178 2 Comments: Désirée van Gorp 192 Chapter 9 Assessing trade facilitation implementation in the era of e-commerce: a comparative analysis of Jordan, Oman and Hong Kong, China Taleb Awad-Warrad, Houcine Boughanmi and Youwon Hwang 194 Comments: Alexandros Sarris 210

Chapter 10 The new rules on digital trade in Latin America: regional trade agreements Dorotea López, Bradly Condon and Felipe Muñoz 214 Comments: Rohinton P. Medhora 228

Chapter 11 Convergence on e-commerce: the case of Argentina, Brazil and MERCOSUR Vera Thorstensen and Valentina Delich 232 Comments: Mark Wu 250

Chapter 12 The digital creative economy and trade: strategic options for developing countries Keith Nurse 254 Comments: Wolf R. Meier-Ewert 274

Making the most of the digital trade era – inclusiveness, gender and development 3 Chapter 13 Are digital advances and inclusive growth compatible goals? Implications for trade policy in developing countries Ali Parry, Adelia Jansen van Rensburg, Wilma Viviers and Emmanuel Orkoh 280 Comments: Roberta Piermartini 296

Chapter 14 Blockchaining international trade: a way forward for women’s economic empowerment? Amrita Bahri 300 Comments: Emmanuelle Ganne 316

The ways forward 4 Chapter 15 Data regulation in trade agreements: different models and options ahead Henry Gao 322

Chapter 16 Converging thoughts on digital trade in preparing for the future Maarten Smeets 336 6 FOREWORD

Foreword

We are pleased to deliver preliminary is no more: consumer choices are remarks to this compilation of research no longer restricted by and limited to work on digital trade prepared by the the goods found in local stores or in WTO Chairholders, Advisory Board nearby towns. E-commerce platforms members and the WTO Chairs provide consumers with access to Programme (WCP) team of the world markets in real time. Likewise, WTO Secretariat. producers can reach consumers for the supply of goods and services The measures of lockdown and social almost instantly and in ways that were distancing that governments around the previously unimaginable, all thanks world have adopted to mitigate the to new technologies. effects of the COVID-19 pandemic have led to increased online shopping and The world economy has changed teleworking, making this book even significantly since the World Trade more relevant and timely. The book Organization (WTO) was founded, adds significant value to the debate on amongst other due to digitalization. digital trade by combining academic We need to ensure that our trade perspectives with policy relevance system is up to date so that we can and recommendations. exploit new opportunities and address challenges of the present world. The digital trade and information There is a need to reform the rules technologies that characterize today’s that govern trade, and this should society provide countries around the be done in an inclusive manner. globe with access to markets that were Hence the relevance of the central previously considered unreachable. question addressed in the book – The barrier of geographical distance how can members ensure that the FOREWORD 7

changes brought by digital comprehension of the stakes of digital technologies benefit all and support trade through academic research. inclusive growth? We thank the WCP team for their hard work and commitment to making This book presents a sample of the the programme what it is today. We work achieved so far within the equally thank the Chairholders for their framework of the Chairs programme, continuous support and dedication to which finances Chairs in universities the programme and the Advisory Board located in developing countries. While members for having used their not necessarily endorsing all views knowledge and skills in service to the expressed1, France and the Netherlands community and in support of the WTO encourage enhanced and operational multilateral trading system.

Sigrid Kaag Franck Riester Minister for Foreign Trade and Development Minister Delegate for Foreign Trade and Cooperation of the Kingdom of Economic Attractiveness, attached to the Netherlands the Minister for Europe and Foreign Affairs of France

1 For instance regarding the status of EU Privacy Protection in the digital era. 8 NOTE ON THE WTO CHAIRS PROGRAMME

Note on the WTO Chairs Programme

The WTO Chairs Programme speaking least-developed countries (WCP) was launched in 2010 as (LDCs) in the WCP. a capacity-building project. It aims to enhance knowledge and The current chairholders are: understanding of the trading system among academics and Buenos Aires, Argentina policymakers in developing countries Latin American Faculty of Social through curriculum development, Sciences (FLACSO) research and outreach activities by universities and research institutions. Bridgetown, Barbados Information on the WCP is available at University of the West Indies, www.wto.org/wcp. Cave Hill Campus

Following the conclusion of the first Cotonou, Benin phase of the WCP (2010-2013), it University Abomey-Calavi was extended for a second period of four years in 2014. After the São Paulo, Brazil conclusion of the second phase in Getulio Vargas Foundation, São Paulo 2018, the WCP underwent an School of Economics independent external evaluation in 2019, which led to the WTO’s Santiago, Chile management decision to extend the University of Chile program and launch a third phase of the WCP in the fall of 2020 for Shanghai, China implementation in 2021. Shanghai University of International Business & Economics WCP chairholders are selected through a competitive process. Yogyakarta, Indonesia Currently, there are 19 active chairs. Universitas Gadjah Mada, Center for World Trade Studies The programme has provided financial support of up to CHF 50,000 per Amman, Jordan annum per institution for a period University of Jordan, Faculty of up to four years to each newly of Business selected chair. The WCP in its second phase was funded by the Nairobi, Kenya Netherlands with co-funding by University of Nairobi, School France, in support of the two French- of Economics NOTE ON THE WTO CHAIRS PROGRAMME 9

Réduit, Mauritius Dakar, Senegal University of Mauritius, Faculty of Law Cheikh Anta Diop University, Faculty and Management of Economics and Management

Mexico City, Mexico Singapore Autonomous Institute of Technology, National University of Singapore, Centre for International Economic Law Faculty of Law

Rabat, Morocco Potchefstroom, South Africa Mohammed V University – Souissi North-West University

Muscat, Oman Tunis, Tunisia Sultan Qaboos University University of Tunis, ESSECT

St. Petersburg, Russian Federation Istanbul, Turkey St. Petersburg State University, Istanbul Bilgi University Faculty of Economics, Department of World Economy 10 CONTRIBUTORS

Note on contributors

Editor Tunis (ESSECT), DEFI Research Unit, Maarten Smeets Tunisia; WTO Chairholder Head of Section, Knowledge and Information Management, Academic Amrita Bahri Outreach and WTO Chairs Assistant Professor of Law, Instituto Programme Division, WTO, Tecnológico Autónomo de México Geneva, Switzerland (ITAM), Mexico; WTO Co-Chairholder

Contributing authors Eddy Bekkers Toussaint Agadjihouédé Research Economist, Economic Faculty of Economics and Research and Statistics Division, Management, University of Abomey- WTO, Geneva, Switzerland Calavi, Faculté des Sciences Économiques et de Gestion, Sunil Boodoo Cotonou, Benin International Trade Division, Ministry of External Affairs, Regional Integration Alastaire Alinsato and International Trade, Mauritius Faculty of Economics and Management, University of Abomey- Houcine Boughanmi Calavi, Faculté des Sciences Associate Professor, Sultan Qaboos Économiques et de Gestion, University, Oman; WTO Chairholder Cotonou, Benin Bradly Condon Riza Noer Arfani Professor, Faculty of Law, ITAM, Director, the Institute of International Mexico; WTO Chairholder Studies (IIS) and Lecturer at the Department of International Relations Valentina Delich UGM; Director and Researcher, Academic Director, FLACSO, CWTS UGM, Indonesia; Chairholder, Argentina; WTO Chairholder WTO Chairs Programme at the Center for World Trade Studies (CWTS), Sheereen Fauzel Universitas Gadjah Mada (UGM) University of Mauritius

Taleb Awad-Warrad Emmanuelle Ganne Professor, University of Jordan Senior Analyst, Economic Research WTO Chairholder and Statistics Division, WTO, Geneva, Switzerland Leila Baghdadi Professor of Economics, University of Henry Gao Tunis, Ecole Supérieure des Sciences Associate Professor of Law at Singapore Economiques et Commerciales de Management University, Singapore CONTRIBUTORS 11

Insaf Guedidi Robert Koopman Junior Fellow, University of Tunis, Chief Economist and Director, Ecole Supérieure des Sciences Economic Research and Statistics Economiques et Commerciales de Division, WTO, Geneva, Switzerland Tunis (ESSECT), DEFI Research Unit, Tunisia Dorotea López Professor, Institute of International Maharani Hapsari Studies, University of Chile, Chile; Co-Chairholder, WCP CWTS UGM; WTO Chairholder Academic Secretary and Lecturer at the Graduate Program in International Mary Mbithi Relations at the Department of Senior Lecturer of Economics, School of International Relations UGM; Executive Economics, University of Nairobi, Kenya Secretary and Researcher, CWTS UGM, Indonesia Rohinton P. Medhora President, Centre for International Trudi Hartzenberg Governance Innovation, Waterloo, Executive Director, Trade Law Centre Canada (TRALAC), South Africa Wolf R. Meier-Ewert Youwon Hwang Counsellor, Intellectual Property, Korea Research Institute for Human Government Procurement and Settlements, M.A. International Competition Division, WTO, Business, University of Jordan Geneva, Switzerland

Charlemagne Igue Felipe Muñoz Professor of Economics, Faculty Institute of International Studies, of Economics and Management, University of Chile University of Abomey-Calavi, Cotonou, Benin; WTO Chairholder Richard Newfarmer Country Director, Rwanda and Adelia Jansen van Rensburg Uganda, International Growth Centre, TRADE Research Entity, North-West Washington, DC, United States University, South Africa Keith Nurse Yue Jiang Principal and President, Sir Arthur Lecturer, Shanghai University Lewis Community College, Saint of International Business and Lucia; former WTO Chair, University Economics, China of the West Indies, Cave Hill Campus, Barbados Yunhang Jin Shanghai University of International Marcelo Olarreaga Business and Economics, China Professor, University of Geneva, Switzerland Tabitha Kiriti Nganga Professor of Economics, School of Emmanuel Orkoh Economics, University of Nairobi, TRADE Research Entity, North-West Kenya; WTO Chairholder University, South Africa 12 CONTRIBUTORS

Nassim Oulmane Vinesh Sannassee Chief, Green Economy and Blue Professor, University of Mauritius; Economy Section Technology, Climate WTO Co-Chairholder Change and Natural Resource Management Division, UNECA, Alexandros Sarris Addis Ababa, Ethiopia Emeritus Professor of Economics, National and Kapodistrian University Kesseven Padachi of Athens, Greece University of Technology, Mauritius Pierre Sauvé Ali Parry Senior Trade Specialist within the TRADE Research Entity, North-West Macroeconomics, Trade and University, South Africa Investment Global Practice of the World Bank Group, Geneva, Putra Perdana Switzerland Research Team Member, WCP CWTS UGM; Researcher, CWTS Boopen Seetanah UGM, Indonesia Professor, University of Mauritius WTO Co-Chairholder Roberta Piermartini Chief of Section, Trade Costs Sergei Sutyrin Analysis, Economic Research Professor, World Economy Department and Statistics Division, WTO, Head, St. Petersburg State University, Geneva, Switzerland St. Petersburg, Russian Federation WTO Chairholder Alexander Pogorletskiy Professor, World Economy Robert Teh Department, St. Petersburg Extraordinary Professor in Trade and State University, St. Petersburg, Development, North-West University, Russian Federation South Africa

Giulia Sabbadini Vera Thorstensen Graduate Institute Geneva Professor, EESP/FGV and Head of (HEI), Switzerland the Center on Global Trade and Investments, São Paulo, Brazil Mustapha Sadni Jallab WTO Chairholder Head of Training and Research Division, United Nations Economic Désirée van Gorp Commission for Africa, Institute for Professor of International Business, Economic Development and Planning, Nyenrode Business Universiteit, Dakar, Senegal The Netherlands CONTRIBUTORS 13

Wilma Viviers Qing Ye TRADE Research Entity, North-West Economic Affairs Officer, Knowledge University, South Africa; and Information Management Division, WTO Chairholder WTO, Geneva, Switzerland

Mark Wu Lei Zhang Vice Dean for the Graduate Program Professor, Shanghai University and International Legal Studies, of International Business and Stimson Professor of Law, Harvard Economics, Shanghai, China; University, United States WTO Chairholder

ACKNOWLEDGEMENTS 15

Acknowledgements

This third book prepared under Smeets, Robert Teh and Qing Ye, the auspices of the WTO Chairs contributed to the book with a chapter Programme (WCP), Adapting to or commentary. Maarten Smeets, the digital trade era: challenges heading the Academic Outreach and opportunities, contains and WTO Chairs Programme section contributions from the WTO in the Knowledge and Information Chairholders of Phases I and II, Management, Academic Outreach Advisory Board (AB) members, and WCP Division (KMD), which WCP team and WTO staff members houses the WCP, was responsible who peer reviewed individual chapters for the overall coordination and and offered their perspectives on the editing of the book and prepared the Chairs’ analyses and findings. It introduction and the concluding contains a total of 16 chapters chapter. and 13 commentaries, providing various insights on digital trade. This book thus is the result of a Several chapters were presented as collective effort by WCP team working papers during the Aid for members, Chairholders and their Trade side event held at the WTO co-authors, AB members, WTO from 3 to 5 July 2019 and during an staff members, discussants of the academic WCP session held at the draft papers, participants to and Public Forum on 9 October 2019. attendees of the WTO events. The These events provided opportunities book would certainly not be what it to AB members, academics, is without the support of William Shaw, delegates, policymakers and who assisted in the preparation of representatives from civil society the book with substantive editing, to comment on the papers and and the WTO’s in-house editors, discuss the policy options emanating including Anthony Martin and from the analyses. especially Stephanie Carmel, who meticulously assured the final text Current and former members of editing of the book. The book was the WCP team, including Nassim designed by Touchline. Sandra Rossier Oulmane, Roberta Piermartini, interacted with the authors, ensuring Mustapha Sadni Jallab, Maarten their timely inputs and feedback. Introduction Digital innovations are transforming the global economy. The decline in search and information costs, rapid growth of new products and markets, and emergence of new players ushered in by digital technologies have the promise of boosting global trade flows, including exports from developing countries. At the same time, digital technologies are also threatening privacy and security worldwide, while developing countries that lack the tools to compete in the new digital environment are in danger of being left even further behind. This book from the World Trade Organization (WTO) Chairs, members of the Advisory Board and WTO Secretariat staff examines what the rapid adoption of digital technologies will mean for trade and development and the role that domestic policies and international cooperation can play in creating a more prosperous and inclusive future.

The first section identifies the challenges and opportunities posed by digital technologies to developing countries and the role of international cooperation, whether regionally or in the WTO, in addressing them. The second section discusses how countries in different developing regions view the opportunities and challenges of digital technologies and how policymakers are responding to them. The third section considers examples of how digital advances, for example the growth of e-commerce and the development of blockchain technology, may contribute to inclusive growth. The fourth and final section discusses the role of domestic policies and regional approaches to digital trade and offers some key findings. 18 INTRODUCTION

Section 1: The digital countries’ trade growth 2.5 percentage trade era – challenges points per annum higher, as a result and opportunities for of the adoption of digital technologies. developing countries Services exports would become a bigger part of global trade, making up Innovative digital technologies have more than a quarter of total trade by considerable potential for boosting 2030, while the share of services developing countries’ exports. In imports in manufacturing gross output Chapter 1, Bekkers, Koopman, would also rise. These findings run Sabbadini and Teh provide counter to concerns that increased an empirical illustration of the potential use of robots and 3D printing will result gains in trade, both globally and for in a reshoring of production to the developing countries, from the advanced countries, thus impairing adoption of robots, greater reliance on export opportunities for developing artificial intelligence and big datasets, countries. If these results are correct, more intensive use of information and the reduction in trade costs due to communications technology (ICT) digital technology has a larger impact services by other sectors of the on trade than does the increased economy, and the reduction in trade opportunities for more closely costs because of new digital matching demand owing to proximity technologies. They use the WTO to markets and improved efficiency Global Trade Model, a recursive, of custom-made production. dynamic computable general equilibrium model, to generate Section 2: Strategic simulations showing the impact of directions and policy technological change on trade. The implications for model compares a scenario showing developing countries the impact of digital technologies on 16 sectors, 14 regions and 5 factors This second section of the book of production with a baseline scenario takes a broader policy perspective where the pace of technological to analysing the challenges and change is based on past trends. While opportunities that digital technologies the accuracy of the point forecasts offer for developing countries. generated by the model is uncertain, We have no ambition to provide this exercise helps to discipline an exhaustive analysis of the topic, qualitative projections, takes into but rather the goal is to select account the indirect effects of particular countries and issues where economic changes and provides the growth of digital technologies is some insight into the likely quantitative having a marked impact. These country impacts of new technologies on and policy examples hopefully can international trade. provide insights that may be applicable to other situations. The simulations indicate that digital technologies will have a significant Our first example is the analysis by impact on trade. On average, between Baghdadi and Guedidi (Chapter 2), now and 2030 global trade growth who explore an important aspect of would be 2 percentage points per how digital technology could improve annum higher, and developing developing countries’ trade prospects INTRODUCTION 19 by examining the role of internet connectivity has a stronger influence technologies in strengthening ties on forward participation in GVCs than between African economies and global on backward participation. These value chains (GVCs). The internet is variables also have a greater impact likely to play an increasingly important on forward GVC participation for Africa role in reducing the time and costs (both in terms of firm-level and country- required to trade. Digital platforms and level data) than in other regions of the logistics technologies (among others) world. An important implication is that could reduce search costs by improvements in internet infrastructure facilitating matching between buyers could have a significant impact on and sellers, and the use of robotics, African firms’ ability to expand their artificial intelligence and Internet of participation in GVCs. Things (IoT) applications could substantially reduce shipping and In his commentary on Chapter 2, customs processing time. This Newfarmer provides an overview of the reduction in time and costs is a critical findings and conclusions that internet issue for participation in GVCs, where use and infrastructure are particularly goods are traded across borders important for “high-tech manufacturing” several times. Access to the internet and “high-tech services” exports in also can save time and money by GVCs. Newfarmer points out Dollar’s facilitating coordination and monitoring research that “the higher the across firms in a GVC. technology (knowledge) intensity of a sector, the more significant the African firms already participate to increase of complex GVC activities” some extent in GVCs, but African (2019, p. 1). Referring to de Melo and countries’ participation in GVCs is Twum’s recent work (2020) and largely through supplying inputs (often pointing out that, despite efforts of the raw materials) to foreign firms for regional communities (RECs), regional further processing (referred to as value chains remain only at the early forward participation). African firms stages of development, Newfarmer play less of a role in backward suggests further broadening the participation in GVCs, as represented research agenda on value chains in by the share of inputs of foreign origin Africa. By way of example, he notes in a firm’s total material inputs. that regional value chains in the East Country-level data from the United African Community (EAC) amount Nations Conference on Trade and to only 1.7 per cent of total gross Development (UNCTAD)-Eora GVC exports, which stands in stark contrast Database and firm-level data from the with the Association of Southeast World Bank’s Enterprise Survey are Asian Nations (ASEAN) (17.2 per cent). used to measure the relationship He concludes noting that for new between Africa’s participation in GVCs technologies to fully translate into and the spread and quality of internet increased exports and rising incomes, technology on the continent. The policies must go beyond internet authors find that access to the internet infrastructure. Trade policy needs to and internet infrastructure (represented keep pace with communication and by the availability of broadband digitization policies and, to that end, technology) increases the participation the African Continental Free Trade by Africans in GVCs, and that internet Area (AfCFTA) and its efforts to 20 INTRODUCTION

deepen regional agreements hold bias towards international websites, enormous promise. technical limitations of internet service and the small market size. Interviews The transactions with GVCs discussed with policymakers cited the strong in Chapter 2 have an increasing role in legal and regulatory framework facilitating consumer and business supporting electronic payments but purchases within Africa, and so too described a need for stronger regulatory does the internet. cooperation with other countries on e-commerce, and more work to collect In Chapter 3, Seetanah, Padachi, statistics. Technical assistance would Fauzel, Sannassee and Boodoo be useful in these efforts. discuss the importance of purchases over the internet in Mauritius, which is a In the commentary on Chapter 3, leader in e-commerce in Africa. Hartzenberg explains how government Mauritius has the second highest (after policies have been of critical Libya) share of the population making importance for Mauritius to radically online purchases in Africa. The rise in transform and diversify the economy, retail e-commerce was driven by transforming from a base product increases in internet use and economy and preferences to a high- penetration, coupled with increased tech hub. Until a few decades ago, credit card use and the development Mauritius was a single-crop (cane of secure online payment systems. sugar) exporter to the European Union Mauritius also topped the UNCTAD (under a preferential scheme). Policies B2C E-commerce Index (e-readiness) are now fully geared towards helping for Africa. Mauritius become a hub for ICT- related, financial and education Chapter 3 analyses retail customers’ services. Government policies are perceptions about e-commerce, based centred on supporting digitally enabled on a survey of 250 respondents and a growth and they work: Mauritius tops number of in-depth interviews with the the rankings for Sub-Saharan Africa, top management of 12 Mauritian firms followed by South Africa, Nigeria and engaged in online shopping across Kenya. She then looks deeper into the different business sectors. The policies, either considered or already customer survey revealed high levels of put in place, on the African continent satisfaction with online shopping, due including at the African Union, which to wider choices, the ability to save put e-commerce on Africa’s trade time, accessibility and the relative ease agenda, the Common Market for of searching for products online. Major Eastern and Southern Africa concerns included uneasiness over the (COMESA) and the Southern African potential disclosure of personal Development Community (SADC), information and the limited ability to focusing on digitalization, e-regulation, contact vendors. Respondents who e-logistics and e-trade. She also notes have not shopped online cited that the inclusion of e-commerce on concerns over navigating online, the AfCFTA’s agenda has proved to payment security and high costs. be a contentious matter, with African Online sellers expressed considerable countries holding different positions on optimism over future market growth, the treatment of e-commerce when it but also were concerned about a local comes to addressing regulatory issues. INTRODUCTION 21

The analysis by Kiriti Nganga and Referring to the international literature Mbithi of the challenges and and findings presented by international opportunities afforded by digital trade organizations, Oulmane and Sadni in Kenya (Chapter 4) confirms that Jallab, in the commentary on Chapter 4, e-commerce has grown rapidly in that support the evidence provided by Kiriti country, supported by new legislation Nganga and Mbithi, underscoring that and government policies. Laws have e-commerce is a key factor in achieving been passed to provide a framework the goal of economic development for the provision of ICT services, in Africa and specifically in Kenya. e-commerce transactions, data E-commerce can promote protection and access to information. entrepreneurship, contribute to The government also has established developing the private sector and one-stop shop centres for the delivery creating jobs. It also plays a critical of government services to citizens and role in connecting to GVCs. Data are for trade logistics. The policies outlined provided showing that Africa has a in the government’s Digital Economy huge potential in digital trade as its Blueprint provide a solid basis for the young population is growing very expansion of digital trade through the rapidly and engages heavily in this establishment of the AfCFTA. mode of producing and consuming. Africa faces considerable challenges The growth of digital trade will open up in pursuing digital trade policies and new opportunities for has a low level of internet the provision of online penetration compared to services, promote “Digital that of other countries. export diversification, innovations Also, most African boost efficiency and countries have weak growth in manufacturing, are transforming infrastructure. In order improve competition in the global to advance digital trade the financial sector, economy.” in Africa, regulatory increase access to systems need to be market-relevant developed further not information, and increase market only at the national level, but equally access for micro, small and medium- at the regional level. The AfCFTA sized enterprises (MSMEs). However, plays a critical role and so do the potential of digital trade is international institutions such as the constrained by lack of access to United Nations Economic Commission finance, low incomes, limited for Africa (UNECA). broadband and fibre coverage, inadequate transport infrastructure and In Chapter 5, Igue, Alinsato and skills gaps. The legal and regulatory Agadjihouédé analyse the potential framework is insufficient to protect for e-commerce activities in Africa. against cybercrime, ensure privacy, The share of the African population support the interoperability of mobile with internet access has increased money platforms and banks, promote rapidly in recent years, and the consumers’ trust in online transactions, continent’s share of global internet protect intellectual property and connections has risen. The rapid protect digital sites from liability for growth of internet penetration and in customers’ posts. the use of mobile telephony, the 22 INTRODUCTION

development of mobile money framework are key steps to promoting services, the increased use of credit e-commerce activities. cards and increased access to bank accounts have greatly boosted financial Noting that African nations will likely inclusion and encouraged reliance on not generate the huge number of new electronic payments, thus establishing jobs needed to match their population a strong basis for e-commerce growth, Sauvé, in his commentary on development. Online payments or Chapter 5, argues that a robust African purchases increased by 240 per cent digital economy will require deeper from 2014–2017 in Africa, compared regional cooperation, the pooling of to only doubling in Asia and smaller resources and information sharing on rises in Europe and the United States. emerging best practices across several Firms, including small and medium- key areas. These include a solid digital sized enterprises (SMEs), have infrastructure, digital literacy and skills, boosted their internet presence in digital financial services and digital terms of the number of websites and platforms, as well as digital use of e-mail. Nevertheless, Africa entrepreneurship and innovation. accounted for less than 2 per cent of These efforts need to be paired with global e-commerce transactions in 2017. building a solid set of trade rules, but they will not suffice alone. Based on Several factors constrain e-commerce how rule-making in other areas has on the continent. Cybercrime gradually evolved, he suggests taking continues to have a large impact on a closer look at various regional trade Africa: about 80 per cent of African agreements (RTAs) and preferential computers are infected by viruses or arrangements, which offer many useful malware. Moreover, the legal and relevant insights on how to framework to combat cybercrime is negotiate rules for digital trade. inadequate in many countries. More broadly, most African countries lack As Sauvé argues, digitization presents many of the basic requirements of a number of novel regulatory a legal framework for e-commerce, challenges for trade rule-makers that for example, laws providing for the stem in no small measure from the acceptance of electronic signatures increasingly blurred distinction and adequate consumer protection, between goods and services and the while in many countries the legal/ resulting uncertainty as to the regulatory framework has several applicable trade rules. In the absence defects, including high tax levels of globally agreed norms on digital and a lack of clarity on regulatory trade, he also believes that preferential policies. Despite progress, the share trade agreements (PTAs) can serve as of the population with a bank account laboratories in which to experiment remains low, which limits consumers’ with – and adopt – elements of a ability to pay for goods purchased nascent regulatory regime governing online. The cross-country electronic transactions and digital harmonization of rules required for trade. The AfCFTA features a built-in cross-border e-commerce is also negotiating agenda on e-commerce lacking. Reducing cybercrime, and digital trade, providing African increasing participation in the financial countries with a ready-made setting in sector and strengthening the legal which to design a Pan-African digital INTRODUCTION 23 strategy and action plan aimed at infrastructure, the rapid growth of accelerating the development and mobile telephony, increased financing regulatory sophistication of continent’s (particularly equity investment), the digital ecosystem and enhancing the provision of rapid logistics services, volume of digitally enhanced cross- the availability of a user-friendly internet border transactions. platform and effective market regulation based on international In Chapter 6, Jiang, Zhang and Jin agreements. China’s national discuss the recent history and the government has elaborated on policy framework for e-commerce e-commerce policies through five-year transactions in China. The dollar value plans, while regional governments of e-commerce transactions in China have also participated in planning has increased enormously over the and in adjusting the e-commerce policy past 20 years, shifting from mostly framework in light of local conditions. business-to-business transactions in the late 1990s to the rapid Building on the analysis presented development of customer-to-customer by Jiang, Zhang and Jin, Ye, in the transactions beginning in 2000 commentary on Chapter 6, provides (although the market was plagued by more evidence and data on the rapid defects in logistical support and growth of e-commerce transactions counterfeit goods) and achievement of and the transformative effects they a mature market by 2015, with rapid have had on the global economy. China growth of internet users and logistics has significantly contributed to that firms, along with increasing reliance on development in the past 20 years, mobile phones. Since 2016, the and it has become one of the largest growth in e-commerce transactions e-commerce markets in the world. appears to have levelled off, while There are many cross-border logistics and after-sales services have e-commerce market players in China, improved. Most e-commerce including e-platforms, e-payment transactions concern manufacturing, operators, e-vendors, warehousing as well as wholesale and retail trade. operators and express shippers that The market is characterized by jointly operationalize considerable increasing diversity, for example, the numbers of online transactions and growth of e-medical services, the offline deliveries on a day-to-day basis. expansion of cross-border This process has been strongly e-commerce, the rapid growth of social supported by government policies and, e-commerce and the development of in June 2015, the Chinese government online-offline transactions. However, rolled out its strategy to foster cross- the level of e-commerce development border e-commerce in a policy declines as one moves from east to document. This leads Ye to suggest west, which is closely related to the that countries should benefit from the level of economic development and lessons learned in China in terms of degree of marketization in each region. devising digital policy strategies. Also, she advocates for coordination and Both the government and the private rule-making at the international level. sector have played important roles in e-commerce development. Key In Chapter 7, Arfani, Hapsari and supports have included improved Perdana explore the structural and 24 INTRODUCTION

practical issues that confronted the interplays among key players. The adoption of Indonesia’s e-commerce second category represents practical roadmap (2017–2019). The roadmap issues that affect the digital economy. focuses on eight key issues in the The authors present two cases to development of e-commerce: funding illustrate efforts by stakeholders to (focusing on start-ups and SMEs), resolve disagreements on policy, taxation (including lowering some including Indonesia’s position on rates and easing procedures for the WTO moratorium on e-commerce small ventures), consumer protection and local initiatives (such as the one in (strengthening regulation and the city of Yogyakarta) to develop the developing a National Payment digital economy. Gateway), education and human resources (a national e-commerce In the commentary on Chapter 7, awareness campaign and education Olarreaga observes that the comparative programs for all stakeholders), logistics disadvantage Indonesia and other (strengthening courier companies and countries have on electronically developing rural to urban logistics transmitted goods and services is routes), communications (national mainly due to the lack of a strong broadband development), infrastructure that is needed to cybersecurity (establishment of a support the digital sector. Low internet national surveillance and e-commerce e-commerce and credit card monitoring system, provision of penetration and problems with postal education on e-commerce cyberthreats services are hard barriers to overcome and standardized data collection) when trying to increase the and managerial issues (establishment competitiveness of electronically of an operating management structure transmitted goods and services. for the e-commerce roadmap). He goes on to argue that problems Implementation of the roadmap has should always be solved at the root, faced difficulties, including (i) delays rather than applying secondary in executing laws and regulations; policies. The first best solution for (ii) the failure to adequately address addressing low internet penetration some key issues, including privacy is to address the source rather than protection and how technological using secondary policies such as innovations that provide for anonymity trade-distorting taxes. Not only are have facilitated illegal transactions; they costly and inefficient, they cannot and (iii) the lack of a comprehensive substitute for first best solutions. He treatment of data collection. suggests alternative ways of funding policies geared towards better internet, The authors propose two major e-commerce and credit card categories of issues in order to identify penetration, and postal services, and problems and challenges confronted which consist of issuing government by stakeholders. The structural bonds, or, if that option is not available, category concerns the larger other and less distortive border taxes, governance context of the country’s including land taxes, sales taxes, VAT digital economy and includes laws and and taxes on firms’ profits. regulations, the institutional setting and implementing phases, which Pogorletskiy and Sutyrin discuss the involve socio- and political economic taxation of e-commerce in Russia in INTRODUCTION 25

Chapter 8. The e-commerce sector is the fact that despite the growing small, but its potential for growth is significance of e-trade as a portion enormous. Thus, tax rates on of overall international trade, the fiscal e-commerce in Russia should remain effect of its taxation on national moderate, given the sector’s small size budgets is insignificant. She supports (so the rise in tax revenues from higher the proposition by the authors to focus rates would be small) and substantial on the stimulating role of taxes in growth prospects (so future tax international trade rather than on revenues from a developed sector increasing the collection of taxes could be quite large). Russian whereby the emphasis on customs authorities are establishing effective duties and excises is more important automated systems for collecting taxes for visible goods, while for e-services and customs duties on cross-border and products, import VAT becomes e-commerce, calculating VAT more important. compensation to exporters and accounting for receipts in online Improving the efficiency of trade stores. These systems will help to logistics is a key element of reducing prevent abuse of the tax system, as trade costs, promoting global and well as reduce the cost of compliance regional trade and supporting the by firms. expansion of e-commerce. In Chapter 9, Awad-Warrad, Boughanmi and The Russian taxation of e-commerce Hwang compare the quality of logistics activities presents two important services in Jordan, Oman and Hong challenges. First, consumer goods Kong, China, from the point of view purchased directly from foreign online of their ability to support increased sellers enjoy significant tax advantages e-commerce transactions. The logistics compared to imports purchased in sector plays an important role in Russian retail outlets, undermining the supporting the growth of e-commerce profitability of Russian importers and in all three economies. Each has also reducing tax revenues. Second, the established legal frameworks for VAT levied on foreign exporters of ICT-related transactions. While the electronic services creates uncertainty logistics infrastructure is stronger in because the legal definition of Jordan and Oman than in many other electronic services is unclear and countries in the Middle East and North impedes the operations of multinational Africa, the quality of logistics services companies in Russia because VAT is in these countries remains well short taxed on intra-firm imports of services. of the level in Hong Kong, China. The share of the population with internet In the commentary on Chapter 8, van access in Hong Kong, China, is Gorp notes that traditional tax systems somewhat above that of Oman and need to be reviewed because the Jordan. However, Hong Kong, China, taxation issues of e-trade are more consistently rates among the top 10 to complex and demand new frameworks 15 economies in terms of the framework for fair taxation while at the same time supporting business-to-consumer allowing enough room for innovation. e-commerce, logistics services and She considers Russia an interesting ICT development, while Oman is case because the country’s budget ranked around the top third and Jordan suffers from tax losses reflected in around the middle or lower in most 26 INTRODUCTION

indicators surveyed in the chapter. And economies. The Comprehensive and export costs, and to a smaller extent Progressive Agreement for Trans- import costs, are much lower in Hong Pacific Partnership (CPTPP) and the Kong, China, than in Jordan or Oman. United States-Mexico-Canada Free Trade Agreement (USMCA) are In the commentary on Chapter 9 and among the most advanced regional based on a review of the literature, agreements that cover the regulation Sarris supports the findings by of digital trade, particularly in the key Awad-Warrad, Boughanmi and Hwang areas of privacy, access to information on the role of improvements in trade and data flows. The CPTPP includes logistics performance in the form of a comprehensive set of new digital cost and time to export. One aspect trade rules that involves a binding of the new international economy is commitment to allow the free flow of the proliferation of value chains, data, prohibits data localization with products and services that are requirements that could impede market intermediate inputs to a final product entry, permits the use of all devices on going through many countries or many the internet and requires all groups to times through the borders of one adopt privacy protection regulations. country before reaching final assembly. This suggests that the longer the While the USMCA incorporates many product value chain the higher the provisions of the CPTPP, there are proportion of final product value that important differences between the two. can be affected by border measures. For example, both agreements provide It follows that the reduction in trade for the free transmission of information. costs, via increases in efficiency of However, the two agreements have a trade procedures, could expand the slightly different balance between the length of a given value chain, by rights of governments to regulate reducing the costs of extra steps in cross-border data flows in the public the chain. This in turn could reduce interest and the rights of big data to obstacles for many SMEs to enter engage in cross-border data mining some segments of the value chain, that facilitates the development of new and hence increase the production technologies, particularly those based and trade opportunities for such firms. on artificial intelligence. Thus, the lack Countries with large improvements in of multilateral rules on the free flow of trade facilitation will thus have more data has resulted in divergent chances of entering long GVCs. approaches in RTAs.

The lack of a WTO agreement has According to Medhora’s commentary shifted responsibility for ensuring the on Chapter 10, there are two areas free flow of digital trade to regional and where the seeming technocratic bilateral trade agreements, while the e-commerce-related provisions of the growth of e-commerce has increased USMCA mask deeper and more the importance of clear rules in this sensitive issues of power and national area for Latin American governments. sovereignty. One is data localization, In Chapter 10, López, Condon and and the other is the capacity of national Muñoz consider the new rules on authorities to hold multinational digital digital trade in RTAs recently platforms accountable for the content negotiated by Latin American they carry. He points to the current INTRODUCTION 27 discussions on how best to manage regulatory approaches that will content on digital platforms and where increase legal uncertainty and thus the challenges consist of balancing constrain investments and market safety with freedom of speech. This expansion in the sector. An exception tension is reflected in the regional is the regulation of data protection, approaches as opposed to where both Argentina and Brazil are multilateralism. As he points out, following principles laid out in the RTAs were traditionally used as “hot European Union’s General Data houses” in which policy approaches Protection Regulation (GDPR). Further were tried before moving to the negotiations between the two countries multilateral sphere. However, he notes over regulatory convergence for that it is equally possible that RTAs act e-commerce could best be undertaken as a ratcheting mechanism, locking through MERCOSUR. norms and practices negotiated by powerful players that stand to become In his commentary on Chapter 11, Wu a multilateral standard. notes that both countries have sought to engage digital trade on their own In Chapter 11, Thorstensen and terms. He highlights the three Delich consider the challenges facing important contributions made by the regulation of e-commerce by authors that help us better understand comparing the domestic regulatory the development of e-commerce in provisions of Argentina and Brazil, Argentina and Brazil: (i) the importance along with their participation in of robust regulatory reform; (ii) the role negotiations of agreements on of participation in external processes in e-commerce regulation through the influencing internal developments; and Southern Common Market (iii) the fact that both countries pushed (MERCOSUR) and the WTO. The domestic regulatory reforms on their value of e-commerce transactions is own terms, without necessarily seeking growing rapidly in Argentina and Brazil, regional harmonization. On this last and in both countries the share of the point, there is a real concern that the population participating in e-commerce lack of a single digital market in transactions exceeds the Latin MERCOSUR will prevent regional American average. Both countries have firms from acquiring the scale established a legal framework for data economies necessary to become protection, regulation of the internet, competitive globally. This raises the consumer protection, taxation of question of whether Argentina and e-commerce, and contracts and Brazil are bound to continue as e-signatures. Argentina and Brazil also success stories. Both countries have submitted proposals for dropped in the UNCTAD B2C negotiations over the treatment of E-commerce Index rankings. e-commerce transactions in WTO Concluding on a more optimistic agreements, and included e-commerce note and as digital competition is just provisions in free trade agreements. beginning, the vital lesson to be drawn is that investing in legal reform and However, different approaches to active participation in multilateral internal regulation of e-commerce and institutions can only get a developing differences in positions in international country so far. In order to compete negotiations indicate diverging against advanced economies and 28 INTRODUCTION

emerging Asian giants, developing integration of developing countries’ countries need to invest heavily creative industries in GVCs requires a in human capital, stabilize shift in the industrial paradigm and macroeconomic conditions and business practice from the typical low achieve regional scale economies. value-added, standalone creative firm, cultural practitioner or artist operating Nurse considers the policy issues in isolation to higher levels of raised by the use of digital technology collaboration, coordination and in developing countries’ “creative organization, along with a sectors”, including, for example, comprehensive approach to sectoral entertainment (TV, movies, videos, support. Key policy measures should games), visual arts, books, include a stronger legal framework for newspapers and magazines, creative industries (in particular advertising and architecture (Chapter improved copyright protection), 12). The creative sector is an important reductions in tariff rates on the import source of growth in the global of machinery that supports creative economy, as personal, recreational and industries, financial support for the audio-visual services have expanded commercialization of creative activities, as a share of the expenses of the government involvement in business average household. Firms operating in support services (e.g. training, the creative sector have been the incubators, innovation labs, market fastest adopters of online and digital incubators, cluster development and technologies. Digital creative trade has market development programmes), increased sharply in recent years and the creation of enabling institutions developing countries’ share of the to represent the interests of creative sector has risen. Digital content is workers and firms, the generation of replacing physical goods in the sector, data on creative markets, and the for example, in music, books and harmonization of government policies gaming; copyright collections from towards the sector. digital sources are rising as a share of global collections (although digital Meier-Ewert, in his commentary on collections remain small); and creative Chapter 12, takes the point further, content accounts for a significant considering that the development of share of e-commerce, as well as effective collective copyright content on mobile networks, the management organizations (CMOs) internet and blockchains. is an important contribution to a functioning intellectual property (IP) Participation in the creative sector by system and is needed particularly in developing countries appears to be developing countries to ensure viability increasing, although data availability is and financing of the creative sector. poor. The copyright sector contributes He argues that development and a substantial share of gross domestic adaptation of the copyright system to product (GDP) and employment in the challenges of the modern digital several developing countries. To reap world are required. Digital the potential benefits of creative communication technologies have industries, developing countries need enabled global markets for digital to improve the quality and marketability products, whereas licences to use of their content. The enhanced IP-protected content are granted on INTRODUCTION 29 a territorial basis and related IP rights unemployed, women, people with are covered by domestic law. The disabilities, minority ethnic groups, paradigm shift in the significance and the small businesses operated by of IP systems for the global digital these groups. Nevertheless, marketplace creates a particular digital technologies – particularly urgency in the area of copyright. A e-commerce – may hold promise for concentration of efforts in the marginalized groups by increasing development of an internationally access to marketing and financial compatible modern and responsive transactions; boosting services system of law and institutions in the sectors, where many women are area of IP is likely to be an excellent employed; providing youth with investment in the future opportunities information about entrepreneurial of creative industries in developed and possibilities, knowledge and skills; developing countries alike. and helping small businesses compete with larger establishments by linking Section 3: Making the to suppliers or partners, and finding most of the digital trade and communicating with the market. era – inclusiveness, gender A cross-country study finds a positive and development correlation between internet usage and digital trade in goods and Parry, Jansen van Rensburg, Viviers services, on the one hand, and a and Orkoh consider whether the reduction in vulnerable employment, growth of the digital economy is on the other. In addition, there is a consistent with further progress in positive correlation between greater inclusive growth (Chapter 13). internet usage and life expectancy. Concern is growing over the rise of Perhaps the use of digital technologies inequality in many countries, driven by in recent years has improved differences in opportunities to develop healthcare services. human capital, international trade and technological progress. Digital Policies to use digital technologies technology can provide new to improve inclusive growth include opportunities to disadvantaged groups improving the availability of data, but can also exacerbate inequality and solving the issue of uneven digital limit inclusiveness. Developed-country connectivity, establishing an effective policymakers tend to stress the regulatory framework for digital importance of the free transmission of developments and data flows, data across borders, while some upgrading education and skills developing-country policymakers have training, and designing a digital advocated for a digital industrialization trade policy that is appropriate for strategy to limit competition from large the level of income and inclusivity. technology firms to encourage the growth of local digital capabilities. Building on the analysis by Parry, Jansen van Rensburg, Viviers and The spread of the internet and other Orkoh, Piermartini, in her commentary new technologies (artificial intelligence, on Chapter 13, stresses the role that robotics, the IoT and 3D printing) has trade policy can play in creating the generated challenges for employment, right environment for a country to seize particularly for the poor, the the opportunities that digital 30 INTRODUCTION

technologies provide and to attract bookkeeping that enables a list of investment. This not only includes encrypted transactions (known as a goods-related trade policy measures ledger) to be stored in a decentralized such as lower tariffs on manner, can help women IT products, but it also in overcoming barriers includes digital trade “International to trade. Blockchain policy that fosters data technology could exchanges and allows cooperation significantly lower the for the harmonization of is essential cost of cross-border e-certificates. Trade for realizing the payments, security policies related to full potential trading and compliance, services sectors, such of digital while its anonymity and as finance, distribution, efficiency could enable logistics and transport, technologies.” many women, who are also key otherwise would be determinants for a constrained by law, country to reap the benefits of digital custom or high costs, to engage in technologies. She offers three main financial and business transactions. arguments in support of strengthening For example, blockchain could be international cooperation to make used to enable women who lack digital technologies more inclusive, identification documents to undertake specifically that international transactions that otherwise would cooperation: (i) may help to tackle require official identification (as, for the potential negative impact of example, through IDbox), which digitalization on competition, resulting would facilitate women’s access to from market dominance (monopoly) finance and their ability to effect by leading operators; (ii) may address financial transactions (as, for example, the issue of data availability; and finally, under a joint programme with UN (iii) may help to resolve some of the Women and the World Food Programme tensions generated by uncoordinated assisting women in Jordan), and unilateral approaches to digitalization to prove their ownership of assets (“digital protectionism” or simply without interventions from male unnecessarily divergence). She feels family members (as in a World that at the multilateral level, the WTO Bank pilot project in Viet Nam). negotiations and joint initiatives related Blockchain can help MSMEs, to services, electronic commerce and more than 30 per cent of which MSMEs can help deliver a more are owned by women, to overcome inclusive digital development. One costs associated with exporting and policy that can contribute to bridging importing, and interact easily with the digital divide is by making further consumers, other businesses commitments under the General engaged in the supply chain, customs Agreement on Trade in Services officers and regulatory bodies. (GATS). This could be a way to Blockchain also can increase women enhance policy credibility and thereby farmers’ access to information on help attract foreign direct investment. crops and market conditions (as in the UN “Buy from Women” In Chapter 14, Bahri focuses on how initiative), thus improving their blockchain, a kind of electronic bargaining position. INTRODUCTION 31

However, if not regulated properly, devices remain significantly lower the expanded use of blockchain also than men’s and tech-related jobs could increase the relative return to remain male-dominated. This is also sophisticated technology skills (for true for blockchain. Multilateral example, understanding of how to organizations have a key role to play operate a blockchain-based mobile in helping address these issues and application, how to initiate a smart turn blockchain’s potential for women contract, or how to create, save or into reality. Women’s blockchain access documents) that men are more networks, such as Global Women likely to have, and thus might erect in Blockchain and African Women even higher barriers to trade for in Blockchain, which assist women women. Many regulatory agencies and help them seize the opportunities are either trying to catch up with this that this new technology opens are rapidly evolving technology or are in welcome developments that will, a major state of disagreement about no doubt, contribute to making the value blockchain adds to the blockchain work for women’s ecosystem of international trade. economic empowerment. This lack of regulation and the differences in country regulations Section 4: the ways forward create uncertainty that could impede the use of blockchain for the economic Building on the analysis offered in the empowerment of women. The WTO earlier sections of the book, Section 4 could play a key role in developing provides forward-looking perspectives. guidelines for the use of blockchain Gao (Chapter 15) provides a succinct in international trade to support the yet thought-provoking analysis on data efficient and inclusive adoption of regulation in trade agreements. He blockchain technology. starts by highlighting the important role played by data in national economy and Analysing the channels discussed by international trade, which also explains Bahri and through which blockchain the rush to regulate data both can empower women, Ganne writes domestically and internationally. This in her commentary on Chapter 14 that is not an easy exercise as it involves blockchain can be a powerful tool to balancing the conflicting interests of remove frictions from international three main groups of stakeholders, trade and promote women’s access to i.e. the individual, the firm and the international markets but realizing the state. With the growing popularity full potential of blockchain will require of provisions on data regulation in more than merely the technology. It will trade agreements, we start to see require political will and action to allow the emergence of three different interoperability of blockchain platforms approaches, with each of the three and to create a regulatory framework main traders in the world – China, that is conducive to the large-scale the European Union and the United States deployment of the technology. It will – each championing a different model. also require addressing the digital After summarizing the differences divide through investment in physical between the three, this chapter ICT infrastructure and IT education explores the reasons for them, and for women. Women’s access to the Gao argues that they are mainly internet and ownership of digital driven by different commercial interests 32 INTRODUCTION

and regulatory philosophies. It domestically. Of critical importance is concludes by providing some practical the need to put the right infrastructure suggestions on how to move the in place and to facilitate IT and digital discussions on data regulation forward trade, thus allowing a better as part of ongoing negotiations on connection to markets and linking digital trade among WTO members. to the GVC. This requires adequate domestic regulatory systems as well In Chapter 16, Smeets explains that as harmonization and coordination of while perspectives differ as to how such policies at the international level. governments can create an enabling environment and establish the right The analysis presented in the book conditions at the national, regional leads to some main conclusions. and global levels in support of While the various chapters in this digitalization and with a view of their volume discuss a wide variety of fuller integration in world trade, the issues and focus on different country views tend to converge on several and regional examples, some common specific requirements that need to be themes emerged. First, many of the fulfilled in order to take full advantage authors share considerable optimism of the opportunities offered in the new about the impact of digital technologies, digital trade era. This includes focusing such as the internet, blockchain, more strongly on specific services artificial intelligence and other uses sectors, strengthening infrastructure of ICT services. The further adoption to facilitate digital trade and further of digital technologies is expected reducing transaction costs, all of which to increase developing countries’ are elements conducive to a better trade, in part by facilitating connections linking to GVCs. These findings and to GVCs. E-commerce transactions the examples presented by the Chairs have grown rapidly (examples are are supported by analysis conducted provided of China, Kenya and by the leading institutions, including Mauritius, as well as regional data the WTO: digital trade can play a on Africa), and the reliability and significant role in supporting inclusive variety of goods and services have economic growth and enhancing increased markedly. the development perspectives of developing countries. The findings Absent any government intervention, not only contribute to a fuller the impact of digital technology on understanding of the complex digital vulnerable and marginalized groups trade issues affecting competition, is less clear. On the one hand, they facilitate a better appreciation improved access to information and of the challenges that remain in lower-cost communications through designing policies for the future. the internet can help level the playing In order to facilitate digital trade, field for small producers and assist governments have a significant role new entrants to the labour force in to play domestically, regardless of finding jobs. And blockchain what will or can be agreed multilaterally technology holds considerable on regulating digital trade. International promise for enabling women to trade is increasingly determined by increase their participation in financial an enabling environment created and business transactions. On the by countries at the national level, i.e. other hand, the increasing importance INTRODUCTION 33 of digital technologies is raising the with digital technologies, for example, returns to sophisticated skills that the regulation of data flows, protection individuals from higher-income of privacy on the web, the control backgrounds (and men) are more of cybercrime and legal recognition likely to possess. of digital signatures. Others concern both the internet and the analogue The chapters show a broad consensus economies, including IP rights, on the critical role that policy plays in consumer protection, the financial supporting the adoption of digital system and business support services. technologies and ensuring that vulnerable groups are not left behind. Finally, international cooperation is High levels of access, high-quality essential for realizing the full potential infrastructure that supports the internet of digital technologies. Differences in and mobile telephony, and solid legal and regulatory provisions across transport and postal services are countries create uncertainty over essential for e-commerce. Realizing the validity of transactions, which the full potential of digital technologies constrains investment and business will also require governments to operations in the sector. The need address the digital divide (in for international rules to regulate infrastructure and skills) within their data flows has led governments to own country, between men and introduce specific provisions in RTAs, women, urban and rural areas, rich with the consequent risk of a and poor. A strong legal and regulatory fragmented regulatory environment. framework is critical for the efficient The internet has brought us closer adoption of digital technologies and together, for both good and ill. to improve their contribution to International cooperation is essential inclusive growth. Some essential to reap the maximum benefits while provisions are directly concerned limiting the costs. 1SECTION The digital trade era – challenges and opportunities for developing countries Chapter 1 The impact of digital technologies on developing countries’ trade

Eddy Bekkers, Robert Koopman, Giulia Sabbadini and Robert Teh* Abstract

Using the World Trade Organization (WTO) Global Trade Model (GTM), a recursive, dynamic computable general equilibrium model, we examine the potential future impact of technological innovations, in the form of robotization and use of artificial intelligence (AI), servicification of the production process, and falling trade costs due to the rise of online markets and platforms on the trade of developing countries. The simulations show that technological change will boost trade growth, as a result of both falling trade costs and the more intensive use of information and communications technology (ICT) services. On average, between now and 2030 global trade growth would be 2 percentage points per annum higher as a result of digital technologies. Further, developing countries’ trade growth would be 2.5 percentage points per annum higher and the increase in their share of global trade will be more pronounced the faster they are able to catch up technologically. Another finding from the simulations is that services exports will become a bigger part of global trade, making up more than a quarter of total trade by 2030, and technological changes tend to increase the share of services imports in manufacturing gross output. Finally, these technological developments do not appear to portend a reshoring or localization of production, suggesting that future technological change can go in hand in hand with continuing globalization.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 38 CHAPTER 1

Introduction the fact that the model is computable makes it possible to go beyond In the last 30 years, technological qualitative predictions and provide advancements in information and quantitative projections on the communications technology (ICT), magnitude of the effects of the new by supporting the development of technologies on international trade. digital markets and platforms, have significantly impacted the way in which The GTM is used to explore the goods, services and information are impact of three technological trends bought, sold and exchanged. More on the magnitude and patterns of cross-border trade is now digital international trade. The first trend in nature – a trend that is likely is robotization and greater use of to continue in the future. artificial intelligence (AI). AI can be defined as the ability of a digital Qualitative analysis can be useful to computer or computer-controlled identify the ways in which these new robot to perform tasks commonly technologies and digitalization can associated with humans, such as the affect international trade. In this ability to reason, generalize or learn chapter, we complement this qualitative from past experience. Important analysis with quantitative projections branches of AI, such as machine about changes in the size and patterns learning, rely on computing power to of international trade using the WTO sift through big data to recognize Global Trade Model (GTM), patterns and make predictions without a recursive dynamic computable being explicitly programmed to do so. general equilibrium (CGE) model with The second trend is the more intensive multiple sectors and production use of ICT services by other sectors factors, intermediate linkages, non- in the economy, which we term as homothetic preferences (consumer “servicification”.1 The third trend preferences in which we examine is the expenditures shares for reduction in trade goods and services are “More cross- costs because of new not constant but vary border trade is digital technologies. with income), and now digital in Digital technologies investment linkages are expected to between countries nature – a trend reduce trade costs (see Aguiar et al., 2019). that is likely by improving customs This quantitative to continue in procedures, increasing exercise serves three the future.” the efficiency of important goals. First, logistics and reducing it disciplines the the costs of qualitative predictions, as it forces communication and contract analysts to translate their storylines enforcement (for example, through into quantitative “shocks” or changes the use of blockchain). Further, in a micro-founded economic various studies have shown that model. Second, the use of a general trade costs for online trade, equilibrium model implies that the i.e. e-commerce, are lower than indirect effects of economic changes for offline trade (see, for example, are all taken into account. And third, Lendle et al., 2016). CHAPTER 1 39

In order to quantify the impact of new 1. WTO Global Trade Model technologies and digitalization, we first The WTO GTM is calibrated to the construct a baseline scenario for the Global Trade Analysis Project (GTAP) world economy up to the year 2030 database, Version 9.2, which has 141 in which the digital trends mentioned regions and 57 sectors, implying that above are assumed not to gather baseline shares are equal to actual speed over time. Instead, the baseline shares. We use an aggregation with assumes business-as-usual with 16 sectors, 14 regions and 5 factors previous trends simply continuing of production, as displayed in Table 1. to 2030. These business-as-usual The sectoral aggregation includes developments include differential the sectors of interest related to productivity growth across sectors digitalization of the economy, such as based on past rates to capture the telecommunications, business services phenomenon of structural change, and electronic equipment. The 14 changing income elasticities as regions, a mix of developing and countries grow richer, changes developed countries from across in the trade to income ratio, and the world, include the Association variation in the savings rate that of Southeast Asian Nations (ASEAN), depends on changing demographic Brazil, China, European Union (28),2 or life cycle factors (Fouré et al., 2013). India, Japan, Rest of Latin America, Middle East and North Africa (MENA), The structure of the chapter is as Nigeria, Other Asia, Other Developed follows. The next section describes Countries, Rest of the World, Sub- the WTO GTM that is used to project Saharan Africa (SSA) and the the future impacts of these United States. Of the 14 regions included technologies on global trade, and then in the simulation, 10 can be classified as it presents the baseline scenario for developing,3 which enables us to shed the world economy when using gross light on how the newly emerging domestic product (GDP), population countries are affected by digitalization. and labour force projections from various international organizations. Each region features a representative The following section discusses the agent collecting factor income and tax emerging technological trends that are revenues and spending this (under the focus of this chapter and describe the assumption of utility maximization) how they are quantified and introduced on private consumption, government into the GTM. The next section consumption and savings. Savings discusses the simulation results and are collected by a hypothetical global compares the core and convergence trust, which allocates investment scenarios with the baseline. Finally, across different regions. In the the last section concludes. simulations on the digitalization of the economy, one wants to take Methodology into account changes in foreign investment. This requires specifying In this section, we first describe the how foreign investment flows across model used and then the construction borders. In the simulations, we assume of the baseline, which could be that investment flows across regions characterized as a middle-of-the-road so that the rate-of-return on investment scenario for the global economy. is equalized. 40 CHAPTER 1

Table 1: List of regions, sectors and factors of production

Regions Sectors Factors of production ASEAN Agriculture Capital Brazil Chemical and petrochemicals Land China Communication Natural resources European Union (28) Electronic equipment Skilled labour India Financial services and insurance Unskilled labour Japan ICT services and consultancy Rest of Latin America Other machinery and motor vehicles MENA Metals Nigeria Mining and extraction Other Asia Other business services Other Developed Countries Other goods Rest of the World Other services SSA Processed food United States Trade Transport Utilities and construction

On the production side, firms display we need to compare that scenario profit maximizing behaviour, choosing with a baseline projection of the world the optimal mix of factor inputs and economy until 2030. As noted in the intermediate inputs. There are five previous section, this baseline production factors: high-skilled labour, assumes business-as-usual with the low-skilled labour, capital, sector- pace of technological change based specific natural resources and land. on past trends. The baseline is Capital accumulation is recursive constructed using projections about dynamic. Hence, the current period the future evolution of GDP per capital stock is equal to the capital capita, population, labour force and stock in the previous period minus skills up to 2030 that are available depreciation plus investment. from various international sources and Investment flows to regions with higher organizations. More specifically, GDP rates of return. Capturing many per capita growth is based on actual features of the global economy International Monetary Fund (IMF) in a detailed way requires us to data until 2014. From 2015 we use abstract from one important feature: the Organisation for Economic agents are not forward-looking and Co-operation and Development different periods are only connected (OECD) Shared Socioeconomic through the adjusting stock of capital. Pathways projections, SSP2 (Dellink et al., 2017). Data on population and 2. The baseline projection labour force growth come from To explore the impact of new United Nations population projections, technologies and digitalization, medium variant for 2015 (UN, 2015). CHAPTER 1 41

Changes in the number of skilled and supply. We depart from the standard unskilled workers are inferred from GTAP specification in modelling projections on education levels by savings5 and instead follow the the International Institute for Applied approach in Fouré et al. (2013) to Systems Analysis (IIASA) (Samir and model the gross savings rate as a Lutz, 2017).4 We use changes in the function of GDP and demographic share of the tertiary educated as a variables. Targeting the savings proxy for changes in the share of rates to the projections from a skilled workers. macroeconomic model makes the evolution of savings more realistic. All the other parameters of the GTM We allow for differential productivity are set at standard values provided by growth across sectors based on the GTAP 9.2 database. However, to historical data; a detailed description allow for changes in the amount of land of the estimation used to generate and natural resources employed, we the trends is provided in Bekkers et al. assume supply elasticities equal to (2018). The results of the baseline one for these factors. This means that projection of the global economy up prices for these resources need to to 2030 are shown in Table 2. Global rise by 1 per cent to coax out an GDP growth per capita is projected additional 1 per cent increase in their to average 2.61 per cent per annum

Table 2: Baseline projection of global economy to 2030, per cent

Average yearly growth from 2015 to 2030 of Low-skilled High-skilled GDP per capita Population labour labour ASEAN 4.33 0.90 0.44 3.43 Brazil 2.69 0.64 0.30 2.26 China 5.98 0.19 -0.70 2.91 European Union (28) 1.51 0.06 -1.04 1.11 India 5.01 1.02 0.92 3.78 Japan 1.28 -0.35 -2.01 0.58 Rest of Latin America 2.60 0.96 0.63 3.01 MENA 2.81 1.39 1.02 3.92 Nigeria 4.04 2.47 2.42 5.59 Other Asia 2.58 1.18 1.09 2.94 Other Developed 1.25 0.90 -0.47 1.26 Countries Rest of the World 3.59 0.05 -0.59 0.42 SSA 3.36 2.52 2.85 5.51 United States 1.61 0.67 -0.34 0.94 Global 2.61 0.93 -0.28 1.66 Developing countries 4.06 1.08 -0.56 5.13

Source: GDP projections from OECD Shared Socioeconomic Pathways; Population from UN World Population Projections; high-skilled and low-skilled labour supply from IIASA, assuming that high-skilled are tertiary educated and low-skilled are primary and secondary educated. 42 CHAPTER 1

Table 3: Overview of trends modelled in the core and convergence scenarios

Trends Core scenario Convergence scenario Robotization Differential productivity growth by Differential productivity growth across and digitalization sector and region as a function of sectors as in core scenario but scope for technological change and with lagging regions catching up to digital readiness. 25 per cent best performing regions. Servicification Doubling of the share of ICT Doubling of the share of ICT services services and consultancy used by and consultancy used by other other sectors. Constant growth in sectors. Faster growth in the share the share across regions. in lagging regions. Falling trade costs Reductions in iceberg trade costs Reductions in iceberg trade costs as a result of new technologies and as a result of new technologies and e-commerce. Identical reductions e-commerce. Trade costs in lagging across different regions. pairs of countries converge to 25 per cent best performing pairs of countries.

until 2030, with developing countries’ 1. Robotization and automation per capita GDP growing significantly The robotization or automation of faster at 4.06 per cent per annum. production is increasing around the world. According to the International Trends in digital technology Federation of Robotics, there are more than 2.4 million industrial To study the impact of digitalization robots operating in factories around on global trade, we explore several the world.6 In the manufacturing sector trends associated with it quantitatively. alone, there are now 99 robot units They include the: (i) reallocation of per 10,000 employees, compared to tasks in production because of the average global density of 66 units robotization and the use of AI; just a few years ago. The automotive (ii) servicification of the production industry is the largest customer process from the increasing use of industry with 30 per cent of total ICT services in the rest of the robots, ahead of electrical/electronics economy; and (iii) falling trade costs (25 per cent), metal and machinery as a result of digitalization in logistics (10 per cent), plastics and chemical and the rise of e-commerce. For each products (5 per cent) and food and of these, we develop a core scenario beverages (3 per cent). Asia is the and a convergence scenario, where world’s largest industrial robot market, we assume there is a faster adoption followed by Europe and the Americas. of digital technologies by developing At the same time, AI is going countries than in the core scenario mainstream as its deployment now (see Table 3). For each of the trends, extends beyond the technology sector. we discuss the economic rationale It can be seen as a form of automation behind its inclusion, the way we obtain in which the computing ability of the size of the future changes and machines is substituted for human how it is introduced and analysed intelligence and expertise (Aghion in the GTM. A more detailed technical et al., 2019). Robotization and AI lift description with estimation results productivity but also make production of these trends and relationships is more capital intensive (Acemoglu and provided in Bekkers et al. (2018). Restrepo, 2018). One possible CHAPTER 1 43 implication of robotization and AI for that the share of ICT services used by trade is that even some labour-intensive other sectors will grow at a constant goods currently produced in poor rate of 3.8 per cent in all regions, countries will eventually be reshored which means that the share doubles in to capital-abundant counties as robots 15 years. In the convergence scenario, and AI make production there more the share grows more rapidly in cost-efficient. countries that start out with a lower share of ICT services. Taking into account these ideas, robotization is introduced into the 3. Reduction in trade costs from GTM in two ways. First, we digitalization and e-commerce exogenously increase the share of New technologies are expected to capital income until 2030 based on the lead to a reduction of trade costs by historical trend. Second, we increase improving efficiency in such areas as productivity growth in certain sectors trade finance, logistics, and custom and countries that current research procedures and risk management suggests are likely to gain from (McDaniel and Norberg, 2019). For automation (Bitkom instance, blockchain and Fraunhofer, 2014; could reduce the expense Boston Consultancy “Technological and time required to Group, 2015; Friedrich change will facilitate trade finance et al., 2011; McKinsey transactions that depend Global Institute, 2015). boost trade on third-party lending or The leading sectors growth.” insurance, as well as include financial improve management of services and insurance supply chains by and the automotive sector, while the providing real-time information on countries in the technology frontier the origin and movement of goods. include the European Union (28), Blockchain may also be used to Japan and the United States. improve detection of illicit trade flows and deter illegitimate efforts 2. Servicification to circumvent trade rules. One way in which digitalization is likely to affect the sectoral structure of To calculate how much these new production is through servicification, technologies are going to reduce trade with the use of ICT services by other costs, we employ a structural gravity sectors of the economy growing over structure (Head and Ries, 2001) and time. To project this trend into the estimate how much logistics and other GTM, we calculated the change in customs-related variables (taken from the share of ICT services – more the World Bank’s Doing Business specifically the share of “computer database) affect trade. In the programming, consultancy and related convergence scenario, we assume activities” and “information service that countries with poor performance activities” – in the World Input-Output in terms of the different measures of Database (WIOD) from 2000 to 2016 logistics and customs converge to (Timmer et al., 2015). This share turns the level of the country that performs out to have doubled during the period. at a level equal to 75 per cent of the Thus, in the core scenario, we assume level achieved by the top performer. 44 CHAPTER 1

In particular, we assume that laggard between buyer and seller – by nearly a countries close half of the gap with the third according to Lendle et al. (2016) – 75 per cent best performing country. In facilitating more exchange. the core scenario, we assume identical trade cost reductions across regions To determine the reduction in trade and sectors, subject to the constraint costs from e-commerce, we first that the trade-weighted average project the growth of e-commerce reduction in trade costs is identical to up to 2030. This is derived from that in the convergence scenario. regressing online sales in the European Union and in the The other important source of trade United States on macroeconomic cost reduction from digital variables (GDP growth) and using the technologies is the creation and resulting coefficient estimates and our growth of online markets as more and GDP projections from the OECD more consumers and firms turn to SSP2 to calculate their future growth. these sites and platforms to make their It is assumed that domestic and purchases. The United Nations cross-border e-commerce grow Conference on Trade and Development at the same rate. Second, using (UNCTAD) estimates that global the estimates of Lendle et al. (2016) e-commerce transactions in 2017 that e-commerce reduces distance amounted to US$ 29 trillion, with the by a third, we back out the equivalent number of online shoppers growing to reduction in trade costs implied by the 1.3 billion people.7 E-commerce growth of e-commerce. transactions between businesses (B2B) accounted for 88 per cent of Simulation results online transactions with business-to- consumer (B2C) sales accounting for In this section, we combine the the remainder. Slightly more than a technological trends to generate a core tenth of all B2C sales in 2017 were scenario and a convergence scenario. cross-border e-commerce transactions, The core scenario projects forward which reached a value of US$ 420 trends in the new technologies billion. The magnitude of these discussed earlier – robotization, flows suggests that digital markets servicification and digitalization that are creating trade opportunities for reduce trade costs. The convergence many countries. scenario differs from the core scenario in one significant way: it assumes more By reducing search costs, the rapid catch-up of developing internet and e-commerce platforms economies to the technological can facilitate market transactions, leaders. For example, in the case of including cross-border trade (see robotization, we assume that lagging e.g. Borenstein and Saloner, 2001; regions catch up to the top quartile Cairncross, 2001). This is borne out by (or 25th percentile). While we do not the empirical literature, which finds that delve into what actions lagging regions e-commerce reduces distance-related need to take to catch up with the trade costs (Ahn et al., 2011; Clarke, technological leaders, there is no 2008; Freund and Weinhold, 2004; shortage of proposals or ideas.8 Hortaçsu, 2009; Lendle et al., 2016). The core and convergence scenarios E-commerce shrinks the distance are summarized in Table 3. CHAPTER 1 45

Figure 1: Trade growth in the baseline and in the core and convergence scenarios to 2030

Source: GTM simulations.

We then examine the effect of scenario and 5.19 per cent in the digitalization, across the baseline, convergence scenario. As expected, core and convergence scenarios, developing regions exhibit stronger by comparing the trajectory of the trade growth in the convergence following variables of interest: scenario, where we assume digital (i) annual trade growth; (ii) the share catch-up by developing countries up of developing countries in global to the 25th percentile. Their trade trade; (iii) changes in the sectoral grows 7.23 per cent per annum in and geographical distribution of trade the convergence scenario compared and production; (iv) the share of to 6.91 per cent in the core scenario imported services in manufacturing and 4.70 per cent in the baseline output; and (v) the contribution of scenario. This last result implies that services and goods to total trade. countries that are currently not on the technological frontier are not trapped Figure 1 displays the impact of the there and could make rapid advances technological trends on annual in their trade. trade growth in the baseline, core and convergence scenarios. Trade In Figure 2, we show the change in the growth is higher in all regions in the regional shares in global exports. China core and convergence scenarios, continues to increase its share of trade reminding us how international trade and becomes the biggest exporter in and technological change often go the world. Developed economies like hand in hand. On average, annual the European Union, Japan and the trade growth is 3.14 per cent in the United States experience an erosion baseline, 5.07 per cent in the core in their market share. Further, the figure 46 CHAPTER 1

Figure 2: Country and regional share of global exports in 2016 and 2030 in the baseline and in the core and convergence scenarios

Source: GTM simulations.

Figure 3: Sectoral composition of global trade in 2016 and 2030 in the baseline and in the core and convergence scenarios

Source: GTM simulations. CHAPTER 1 47 shows that the export share of economy and thus also in trade. developing countries rises more in the Globally, the share of services trade convergence scenario than in the core in total trade rises to 24.9 per cent in scenario, suggesting some positive the core scenario and to 25.2 per cent impact from technological catch-up. in the convergence scenario, compared Their share of global exports rises to 22.4 per cent in the baseline scenario. to 62.4 per cent by 2030 in the convergence scenario, whereas Figure 4 exhibits the impact of it rises only to 61.3 per cent in the these technological trends on the core scenario without catch-up. More organization of value chains. For notably, this pattern holds as well most regions, the share of imported for SSA, whose share is projected intermediates in gross output rises to increase to 2.9 per cent in the in both the core and convergence convergence scenario compared scenarios. This is because trade to 2.6 per cent in the core scenario. costs are falling, thus making it more attractive to employ imported Figure 3 presents the change in the intermediates in production. Further, sectoral composition of global trade. Figure 5 displays the share of The share of services in global trade imported services in manufacturing rises for most regions in the baseline (gross) output. The figure shows that scenario, and more so in both the core technological developments have and convergence scenarios. This is even stronger effects on the use because trade costs fall more for the of services imports in manufacturing, services sectors and servicification which results from the combination increases the use of services in the of falling trade costs and servicification

Figure 4: Impact of technological trends on the organization of value chains in 2016 and 2030 in the baseline and in the core and convergence scenarios: the share of intermediate imports in gross output

Source: GTM simulations. 48 CHAPTER 1

Figure 5: Impact of technological trends on the organization of value chains in 2016 and 2030 in the baseline and in the core and convergence scenarios: the share of services intermediate imports in manufacturing gross output

Source: GTM simulations.

leading to more imports of ICT in the baseline scenario (6.91 per cent services. Some have argued that the annually compared to 4.70 per cent growth of automation and other annually), but only 0.3 percentage labour-saving technologies such points more in the convergence as 3D printing may encourage scenario compared to the core multinationals to move towards scenario (7.23 per cent annually localized supply chains and reduce compared to 6.91 per cent annually). production abroad (Gebler et al., One possible interpretation that can 2014). However, this conjecture is not be put on this conclusion is that the supported by our simulation results, global spread of digital technologies, as it does not appear that robotization even in the absence of significant or the rising share of capital in income technological catch-up by poor in developed economies would lead countries, is sufficient to cause a to the reshoring of manufacturing sizeable uptick in developing activity and thus reduced imports countries’ participation in international of foreign intermediates. trade. But even if this is the answer one draws, this does not mean that In these figures, we find a substantial greater investments in ICT gap between the baseline and core infrastructure and creating a policy scenario outcomes but not as big environment more conducive to the a difference between the core and digital economy are not priorities for convergence results. For instance, developing countries. There are other developing countries’ trade grows valuable policy goals beyond trade – at least two percentage points more such as improving access to per annum in the core scenario than education and increasing innovation CHAPTER 1 49 and economic growth – that these grow by 2.5 percentage points per policies will advance. The difference annum more as a result of technology – between the convergence and core 7.33 per cent per year in the outcomes – which is positive – is convergence scenario compared only one measure of the value to 4.7 per cent yearly in the baseline of getting policies right on the scenario. Developing countries’ share digital economy. of global trade increases in both the core and convergence scenarios Conclusion but rises more in the latter scenario, with technological catch-up providing In this chapter we examined the a significant tailwind. expected impact of new digital technologies on the international trade Second, the share of services in of developing countries until 2030. global trade rises in both the core We employed a recursive dynamic and convergence scenarios because CGE model to generate a baseline trade costs fall more for the services trajectory of the world economy based sectors and servicification increases on GDP, population, labour force the use of services in the economy. and skill projections from different By 2030, services would make up international agencies. We then 25.2 per cent of total trade in the introduced the three trends associated convergence scenario compared with the development of digital to 22.4 per cent in the baseline. technologies and that are likely to shape the future – robotization and Finally, contrary to some conjectures, adoption of AI, the servicification of the rise of robotization and AI, the production process and the fall which makes production more in trade costs due to the rise of capital intensive, does not appear to e-commerce – into a core scenario. portend a reshoring or localization of We also considered a variant, the production from developing countries. convergence scenario, in which technologically lagging countries Endnotes and regions are able to catch up to the technological level of the 1 We distinguish this process, which focuses top quartile. on the greater use of services as inputs to manufacturing, from “servitization”, which The simulation results we obtain lead refers to manufacturers offering services us to the following observations. as complements to or substitutes for the goods that they produce. See, for First, technological change will boost example, Lanz and Maurer (2015) and trade growth. On average, between Crozet and Milet (2017). now and 2030 annual trade growth would be 2 percentage points per 2 While this chapter was being finalized, the annum higher – 5.19 per cent per United Kingdom withdrew from the annum in the convergence scenario European Union on 31 January 2020. instead of 3.14 per cent per annum However, negotiations on the post-Brexit in the baseline – as a result of digital trade arrangement between the United technologies. Over the same period, Kingdom and the European Union (27) had developing countries’ trade would not yet started, and thus it was not possible 50 CHAPTER 1

to include a post-Brexit scenario in the growth”, in Agrawal, A., Gans, J. and baseline and counterfactual projections. Goldfarb, A. (eds.), The Economics of Artificial Intelligence: An Agenda, Chicago: 3 The 10 regions are ASEAN, Brazil, China, Chicago University Press, 237-282. India, Rest of Latin America, MENA, Nigeria, Other Asia, Rest of the World Aguiar, A., Bekkers, E., Corong, E., and SSA. Koopman, R., Teh, R. and van der Mensbrugghe, D. (2019), “The WTO Global 4 IIASA is an international institute that Trade Model: Technical Documentation”, conducts policy-oriented research into WTO Staff Working Paper ERSD-2019-10. problems that are too complex to be solved by a single country or discipline – Ahn, J., Khandelwal, A. K. and Wei, S.-J. such as climate change, energy security (2011), “The role of intermediaries in and sustainable development. See facilitating trade”, Journal of International https://www.iiasa.ac.at/. Economics 84(1): 73-85.

5 In the GTAP model, the utility of consumers Bekkers, E., Koopman, R., Sabbadini, G. is assumed to be a Cobb Douglas function and Teh, R. (2018), “Long Run Trends in of expenditures and savings so that savings International Trade: The Impact of New is always a constant share of GDP. Technologies”, Mimeo.

6 See https://ifr.org/downloads/press2018/ Bitkom and Fraunhofer (2014), Industrie Executive%20Summary%20WR%20 4.0 – Volkswirtschaftliches Potenzial fur 2019%20Industrial%20Robots.pdf. Deutschland. https://www.bitkom.org/sites/ default/files/file/import/Studie-Industrie-40. 7 See https://unctad.org/en/pages/ pdf PressRelease.aspx?OriginalVersionID=505. Borenstein, S. and Saloner, G. (2001), 8 They include expanding digital capabilities “Economics and electronic commerce”, (e.g. broadband), investing in research and The Journal of Economic Perspectives development (R&D), improving the legal 15(1): 3-12. and regulatory environment, upgrading the education and skills of the population, Boston Consulting Group (2015), The strengthening intellectual property Robotics Revolution: The Next Great Leap protection, bolstering privacy and better in Manufacturing, 23 September 2015. protecting personal data, facilitating online payments, etc. Cairncross, F. (2001), The Death of Distance: How the Communications References Revolution Is Changing Our Lives, Boston, Massachusetts: Harvard Business School. Acemoglu, D. and Restrepo, P. (2018), “The race between man and machine: Clarke, G. R. G. (2008), “Has the internet Implications of technology for growth, factor increased exports for firms from low and shares, and employment”, American middle-income countries?”, Information Economic Review 108(6): 1488-1515. Economics and Policy 20(1): 16-37.

Aghion, P., Jones, B. F. and Jones, C. I. Crozet, M. and Milet, E. (2017), “Should (2019), “Artificial intelligence and economic everybody be in services? The effect of CHAPTER 1 51

servitization on manufacturing firm Lanz, R. and Maurer, A. (2015), “Services performance”, Journal of Economics and and global value chains: Servicification of Management Strategy 26(4): 820-841. manufacturing and services networks”, Journal of International Commerce, Dellink, R., Chateau, J., Lanzi, E. Economics and Policy 6(3). and Magne, B. (2017), “Long-term economic growth projections in the shared Lendle, A., Olarreaga, M., Schropp, S. and socioeconomic pathways”, Global Vézina, P.-L. (2016), “There goes gravity: Environmental Change 42: 200-214. eBay and the death of distance”, The Economic Journal 126(591): 406-441. Fouré, J., Bénassy-Quéré, A. and Fontagné, L. (2013), “Modelling the world McDaniel, C. and Norberg, H. C. (2019), economy at the 2050 horizon”, Economics “Can blockchain technology facilitate of Transition 21(4): 617-654. international trade?”, Mercatus Research, Arlington, VA: Mercatus Center at George Freund, C. and Weinhold, D. (2004), “The Mason University. effect of the internet on international trade”, Journal of International Economics 62(1): McKinsey Global Institute (2015), Digital 171-189. America: A Tale of the Haves and Have- Mores, 1 December 2015. Friedrich, R., Le Merle, M., Gröne, F. and Koster, A. (2011), Measuring Industry Samir, K. C. and Lutz, W. (2017), “The Digitization: Leaders and Laggards in the human core of the shared socioeconomic Digital Economy, London: Booz & Co. pathways: Population scenarios by age, sex and level of education for all countries Gebler, M., Schoot Uiterkamp, A. J. M. and to 2100”, Global Environmental Change Visser, C. (2014), “A global sustainability 42: 181-192. perspective on 3D printing technologies”, Energy Policy 74: 158-167. Timmer, M. P., Dietzenbacher, E., Los, B., Stehrer, R. and de Vries, G. J. (2015), “An Head, K. and Ries, J. (2001), “Increasing illustrated user guide to the World Input– returns versus national product Output Database: The case of global differentiation as an explanation for the automotive production”, Review of pattern of U.S.-Canada trade”, American International Economics 23: 575-605. Economic Review 91(4): 858-887. United Nations (UN) Department of Economic Hortaçsu, A., Asís Martínez-Jerez, F. and and Social Affairs, Population Division (2015), Douglas, J. (2009), “The geography of trade World Population Prospects, The 2015 in online transactions: Evidence from eBay Revision. and Mercado Libre”, American Economic Journal: Microeconomics 1(1): 53-74. SECTION 2 Strategic directions and policy implications for developing countries Chapter 2 Global value chains in the age of internet: what opportunities for Africa?

Leila Baghdadi and Insaf Guedidi* Abstract

This chapter analyses the impact of the internet on global value chains (GVCs) in Africa. We investigate the effect of internet adoption on forward participation and backward participation of African countries in GVCs. We conduct the estimations using country-level data from the United Nations Conference on Trade and Development (UNCTAD) Eora GVC database and firm-level data from the World Bank’s Enterprise Survey. We test whether internet adoption facilitates the participation of Africa in GVCs at the country level and the firm level. We find that internet use and internet infrastructure are more important for African firms and African countries in terms of forward GVC participation. To conclude, empirical results show that the internet increases GVC participation in Africa. African countries and firms need to improve internet infrastructure in order to make the best of integration into GVCs.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 56 CHAPTER 2

Introduction Empirical evidence supports this positive impact of digitalization and the The amount of cross-border bandwidth internet on trade flows. For instance, used increased by 148 times between Sousa (2018) presents evidence that 2005 and 2017 (McKinsey Global the IoT is changing the way industries Institute, 2019). These flows of perform through creating new information helped firms to be closer opportunities and transforming to consumers and suppliers. Firms with production processes. Osnago and a high rate of digital adoption tend to Tan (2016) indicate that countries are reduce their physical presence in more likely to exchange goods and partner countries. This is due to the services among themselves when both newly acquired ability to create virtual exporters and importers have high global teams through digital platforms internet adoption rates. Moreover, (McKinsey Global Institute, 2016). Vemuri and Siddiqi (2009) show that Currently, digitalization and technology the availability of the internet for evolution notably reduce trade costs as business transactions significantly they simplify transactions across enhances trade flows. Lin (2015) borders, thus generating more trade. demonstrates that a 10 per cent The internet and electronic systems increase in internet users increases help eliminate unnecessary processes exports by 0.2 to 0.4 per cent. Freund in customs declaration and customs and Weinhold (2004) conclude that clearance. For instance, recent bilateral trade flows are enhanced estimations show that online by a high level of internet connectivity. submissions of customs documentation The authors find that a 10 per cent decreased time spent at the border by increase in the number of web hosts more than 70 per cent for both imports increases exports by 0.2 percentage and exports (WTO, 2018). points. Likewise, Rodríguez-Crespo and Martínez-Zarzoso (2019) investigate The next wave of digital technologies, the impact of the internet on bilateral such as digital platforms and logistics exports of 120 countries for the period technologies (among others), could 2000–2014. They use the percentage further decrease trade costs. Digital of internet users as an indicator of platforms help buyers and sellers from information and communications around the world to meet and exchange technology (ICT) and product goods and services, thus lowering their complexity to segment countries based search costs. Logistics technologies on their degree of knowledge. They through the use of robotics, artificial show that ICT has a positive and intelligence and Internet of Things (IoT) significant impact on exports when applications could decrease shipping trade flows are within countries with and customs processing time by 16 to low product complexity. Liu and Nath 28 per cent. They could potentially (2012) also find that the use of the boost overall trade by 6 to 11 per cent internet positively and significantly by 2030 (McKinsey Global Institute, affects trade in emerging markets. 2019). Thus, a greater use of digital technologies is likely to reduce trade Digitalization could particularly empower costs, empower trade and increase trade flows of developing countries GVC participation in both developed through reducing trade costs. The World and developing countries. Trade Organization (WTO) estimates CHAPTER 2 57 that the reduction in trade costs resulting GVCs in developing countries is from technology diffusion and regulatory enhanced by improving internet policies could increase developing connectivity (measured by whether countries’ share in global trade up to a firm has a website). The authors 57 per cent by 2030 (WTO, 2018). also find that the quality of ICT Clarke and Wallsten (2004) find that infrastructure, measured by fixed higher exports to developed countries broadband subscriptions, is associated are associated with higher internet with SMEs’ participation in GVCs. penetration rates in developing Marcolin and Squicciarini (2018) countries. In addition, Abeliansky highlight how a highly skilled workforce and Hilbert (2017) find that the quality and ICT adoption shape the way of ICT services (measured by bandwidth countries integrate and position speed) has a larger impact on exports themselves in GVCs. The availability of developing countries than does the of skilled workers is critical to the extent of ICT services (measured by expansion of non-routine jobs that the number of telephone and internet has gone hand in hand with recent subscriptions), while the reverse is true technological change. Authors define for developed countries.1 non-routine jobs as occupations that give The advent of workers a degree of digitalization is “Digital platforms independence. They particularly important for help buyers decide what activity to GVCs in both developed and sellers from do and plan their time and developing around the and tasks. Such workers countries. Trade costs world to meet are able to adopt and tend to cumulate in use technologies in GVCs. Parts and and exchange tasks related to GVCs components are goods and where time is important combined in different services.” (ESCWA, 2017) and countries before being costs are high turned into final goods. (Muradov, 2017). The time and cost involved in border crossings have a large impact on The adoption of digital technologies production costs, since products plays an important role in shaping cross borders several times. Hinson cross-border activities of multinational and Adjasi (2009) indicate that the enterprises (MNEs) (Gestrin and internet plays a major role in reducing Staudt, 2018). Cadestin et al. (2018) the cost to export in Africa. In addition, indicate that cross-border activities of technology emerges as a key factor in MNEs lead to more fragmentation of lowering trade costs in international production. A great part of global production networks (Amador and production networks within GVCs Cabral, 2016; WTO, 2018). Recent belongs to MNEs. As the world is studies link integrating global digitalizing, the costs of coordination production networks with adopting and production are falling. Therefore, more digital technologies. In this MNEs tend to execute more business respect, Lanz et al. (2018) argue that and production activities in different manufacturing small and medium countries. For instance, Lanz et al. enterprises’ (SMEs) participation in (2018) find that small firms participate 58 CHAPTER 2

more in GVCs in countries with good We explore both country- and firm-level ICT infrastructure. They indicate dimensions. In the remainder of the that affordable and high-quality chapter, we look at both country-level access to the internet improves firms’ and firm-level results, and then present production activities by connecting our conclusion. those firms to GVCs. Internet and participation Connection to GVCs can take of countries in GVCs place through forward linkages or backward linkages. Forward GVC 1. Model specification and data participation refers to domestically We study the impact of internet produced inputs used in connectivity on the GVC third countries’ exports, participation of African while backward “Digitalization countries in terms of participation refers to could backward and forward the use of foreign inputs particularly linkages. The model in domestic production used includes internet (De Backer and empower infrastructure, proxied Miroudot, 2013). trade flows by Broadband in the Siedschlag and Murphy of developing model, and internet (2015) indicate that the countries connectivity, proxied by form of engagement in through reducing Internet Use, as international activities explanatory variables. (forward versus trade costs.” Following the empirical backward) has model used by implications for the level Shepherd (2016) and of profitability. They argue that Cheng et al. (2015) in their country- European firms’ engagement in GVCs level analyses, we use a measure of is linked to their productivity and GVC participation as the dependent innovation performance. Therefore, it variable in the regression. is important to study the impact of the internet on forward GVC participation At the country level, the estimation and backward GVC participation. is based on the following specification, including country and year Several studies on the relationship fixed effects: between gross trade and the internet

have been carried out (Hinson and GVCit = α + β1 Broadbandit + β2 Internet

Adjasi, 2009; Lin, 2015; Osnago and Useit + β3 Broadbandit x Africai Tan, 2016; etc.), but research on the impact of the internet on trade in the

era of GVCs is limited. Moreover, few + β4 Internet Useit x Africai + β5 Ζit + ν1

studies have empirically addressed + μt + εit the question of the impact of digital

connectivity on GVCs in African GVCit denotes backward participation countries. This study aims to fill this (expressed by foreign value added gap by examining the effect of the (FVA)) and forward participation internet on forward and backward (expressed by indirect value added linkages, with a focus on Africa. (DVX)), all in logs. CHAPTER 2 59

Ζit is a control variable that captures Another ICT indicator is the gross domestic product (GDP) per percentage of the population using capita. Broadband indicates fixed the internet via computer, mobile broadband subscriptions. Internet phone, personal digital assistant, Use is a measure of the percentage gaming machines, digital TV, etc., of individuals using the internet. also from the ITU.

Africai is a dummy variable representing whether or not country The control variable used at the i is in Africa; Broadbandit x Africai and country level is GDP per capita.

Internet Useit denote the interaction Data on GDP per capita are taken terms between internet connectivity from the World Development variables and the Africa dummy. ν1 Indicators database. and μt denote country and year fixed effects, respectively.ε it is 2. Results the error term. This section presents our main results at the country level. We The analysis of global production estimate the empirical model with networks at the country level is Ordinary Least Squares (OLS). based on data from the UNCTAD-Eora Table 1 presents the results of the GVC database. Data from 1990 to estimated equation where the 2017 are generated from Eora dependent variable is in log. GDP Multi-Region Input-Output tables per capita, a proxy for a country’s (MRIOs), data for 2016–2017 are level of economic development, provisional results, and data for has a positive sign. Thus, the more 2018–2019 are estimated based developed an economy is, the more on the International Monetary Fund likely it is to participate in GVCs. (IMF) World Economic Outlook.2 The Broadband and Internet Use GVC indicators by country are variables have a positive and significant from the UNCTAD-Eora GVC impact on participation in GVCs, database. The data covers 175 with slightly higher coefficients countries and the years 1990 to related to backward participation 2018. DVX and FVA are measured (proxied by FVA exports) than for in US dollars. forward participation. This shows that internet connectivity enhances Regarding ICT variables, fixed countries’ participation in GVCs. broadband subscriptions (per 100 These results are in line with results people) come from the International in Lin (2015), Liu and Nath (2012) Telecommunication Union (ITU), and Osnago and Tan (2016). including public internet subscriptions For African countries, however, (TCP/IP connections) at speeds broadband appears to be important equal to, or greater than, 256 kbit/s. for backward linkages, but not for This includes cable modem, DSL, forward linkages (coefficient is fibre-to-the-home/building, other fixed insignificant). A 10 per cent increase (wired)-broadband subscriptions, in internet use in Africa increases satellite broadband and terrestrial backward GVC participation by fixed wireless broadband for both 3.74 per cent and forward GVC residences and organizations. participation by 10.7 per cent. 60 CHAPTER 2

Table 1: GVC participation and internet, country-level analysis with OLS

(1) (2) (3) (4) Backward Backward Forward Forward Variables Participation Participation Participation Participation (log FVA) (log FVA) (log DVX) (log DVX) Broadband 0.0221*** 0.0149*** (0.000737) (0.00135) Africa × Broadband 0.0129** 0.0115 (0.00545) (0.00996) Internet Use 0.00966*** 0.00749*** (0.000317) (0.000413) Africa × Internet Use 0.00374*** 0.0107*** (0.000943) (0.00123) Log GDP per capita 0.811*** 0.899*** 1.025*** 1.109*** (0.0155) (0.0148) (0.0284) (0.0193) Constant 7.153*** 6.107*** 5.579*** 4.606*** (0.133) (0.119) (0.243) (0.155)

Observations 2,523 3,934 2,523 3,934 R-squared 0.768 0.796 0.535 0.741

Country Fixed Yes Yes Yes Yes Effects (FE) Year FE Yes Yes Yes Yes

Note: Robust standard errors are in parentheses. * p < 0.1 ** p < 0.05 *** p < 0.01

A firm-level dimension At the firm level, the model is specified to GVCs in the age as follows: of internet

GVCijkt = α + β1 Broadbandijt + β2 Internet

1. Model specification Useijt + β3 Broadbandijt x Africaij and data We apply a regression with Broadband

(as a proxy for internet infrastructure) + β4 Internet Useijt x Africaij + β5

and Internet Use (as a proxy for Website ijt + β6 Χijt + vi + μk + θt + εijt internet connectivity) variables to

assess the impact of internet The dependent variable GVCijkt proxies connectivity on GVC participation in GVC participation in terms of terms of backward and forward backward linkages (measured by the linkages. We specify the empirical share of imports in total material inputs) model and use data following Lanz and forward linkages (measured by the et al. (2018) for the firm-level analysis. share of sales that were known to be CHAPTER 2 61 exported by a third party), for firmi in infrastructure on forward GVC country j at year t of industry k. participation and backward GVC participation at the firm level. We

Africaij is a dummy variable estimate the empirical model with representing whether or not firmi is OLS. Table 2 and Table 3 display in Africa. Broadbandijt x Africaij and the firm-level results.

Internet Useijt x Africaij denotes the interaction terms between Africa and Table 2 shows the results of the internet variables. Website ijt is a dummy estimated equation. The dependent variable indicating whether the firm has variable is backward participation a website or not. Χijt represents a set of proxied by the share of inputs of control variables including the foreign origin in a firm’s total material manager’s experience (in years) and inputs. Columns 1–3 are estimation foreign ownership. vi, μk and θt are results for the whole data sample (all country, industry and year fixed effects, surveys). Columns 4–6 are separate respectively. Finally, εijt denotes the regressions using the last sample error term. At the firm level, data on for each country and firm (last survey) GVC participation are from the World to do a robustness check. Bank Enterprise Surveys (WBES), which cover the years 2006 to 2018 Our control variables, foreign for 133 countries. While the data ownership and manager’s experience, cover a wide span of years, countries have a positive and significant impact appear only between one to three on the share of imported inputs. times in the data during the period covered, and we do not know how The Internet Use variable is many times a surveyed firm appears insignificant. However, Broadband in the dataset. Therefore, we run has a positive and significant regressions using first the full sample coefficient. Thus, internet infrastructure and second including only the latest proxied by Broadband increases survey of each country for robustness a firm’s share of imported inputs. check purposes. Only manufacturing Also, having a website helps firms industries are considered. integrate into GVCs through backward linkages. ICT variables are the same as explained in the previous section. In addition, we Our main variables of interest are the use a dummy variable that indicates interaction terms between internet whether the establishment has its own connectivity variables and the Africa website or not. At the firm level, the dummy variable. The interaction term control variables include the number of between the Africa dummy and years of experience of the company’s Broadband is insignificant. However, top manager and the percentage of the interaction term between the the firm owned by private foreign Africa dummy and Internet Use individuals, companies or organizations. is positive and significant. This These data are taken from the WBES. indicates that a higher rate of internet penetration is associated 2. Results with a higher share of foreign We are interested in comparing the imported inputs in firms’ total inputs impact of internet use and internet (backward GVC participation). 62 CHAPTER 2

Table 3 contains the estimation results The positive coefficients for the of firms’ forward linkages. We use the interaction terms between internet share of indirect exports as the variables and the Africa dummy show dependent variable to proxy forward that the effect of Internet Use and linkages. Columns 1–3 are estimations internet infrastructure (Broadband) on for the whole data sample (all surveys). forward linkages is stronger if the For robustness check purposes, country is an African country. This columns 4–6 are regressions using suggests that actions to improve ICT the last sample for each country and infrastructure and to adopt more firm (last survey). technologies would help improve the region’s position in GVCs. The relationship between Internet Use and forward participation in GVCs is Forward integration and foreign insignificant, and Broadband has a ownership are positively related, negative sign. Firms with websites are as displayed in Table 3. However, associated with a significantly higher the coefficient for Manager Experience share of indirect exports. is statistically insignificant.

Table 2: Backward GVC participation and internet, firm-level analysis with OLS

(1) (2) (3) (4) (5) (6)

Variables All surveys All surveys All surveys Last Last Last survey survey survey Broadband 0.287*** 0.414*** (0.0927) (0.0277) Africa × -1.024 2.918*** Broadband (1.125) (0.203) Internet Use 0.0160 0.154*** (0.0374) (0.0107) Africa × 0.351*** 0.274*** Internet Use (0.0969) (0.0203) Website 9.223*** 7.423*** (0.302) (0.420) Foreign 0.206*** 0.212*** 0.193*** 0.299*** 0.298*** 0.287*** Ownership (0.00597) (0.00597) (0.00595) (0.00890) (0.00905) (0.00897) Manager 0.144*** 0.140*** 0.129*** 0.263*** 0.251*** 0.280*** Experience (0.0126) (0.0126) (0.0124) (0.0184) (0.0186) (0.0182) Constant 10.29*** 8.166* 108.8*** -5.817*** -6.307*** -0.876** (2.854) (4.839) (9.474) (0.365) (0.371) (0.383)

Observations 54,519 54,965 55,690 26,583 26,202 26,950 R-squared 0.258 0.257 0.269 0.114 0.112 0.109 Country FE Yes Yes Yes No No No Year FE Yes Yes Yes No No No Industry FE Yes Yes Yes Yes Yes Yes

Note: Robust standard errors are in parentheses. * p < 0.1 ** p < 0.05 *** p < 0.01 CHAPTER 2 63

Table 3: Forward GVC participation and internet, firm-level analysis with OLS

(1) (2) (3) (4) (5) (6) Variables All surveys All surveys All surveys Last Last Last survey survey survey Broadband -0.0832* 0.0553*** (0.0428) (0.0130) Africa × 1.629*** -0.0709 Broadband (0.466) (0.0825) Africa × 0.368*** 0.0142* Internet Use (0.0480) (0.00833) Website 0.842*** 1.006*** (0.142) (0.174) Foreign 0.0312*** 0.0323*** 0.0293*** 0.0482*** 0.0499*** 0.0466*** Ownership (0.00336) (0.00337) (0.00335) (0.00521) (0.00535) (0.00522) Manager -0.00509 -0.00534 -0.00616 -0.00609 -0.00731 -0.00423 Experience (0.00557) (0.00551) (0.00551) (0.00742) (0.00738) (0.00724) Internet Use 0.00128 0.0203*** (0.0182) (0.00487) Constant 40.82*** 30.82*** -0.186 0.124 0.0426 -0.879*** (1.263) (2.152) (21,713) (0.148) (0.146) (0.262)

Observations 61,420 61,867 62,565 31,997 31,615 32,348 R-squared 0.050 0.052 0.050 0.017 0.019 0.017 Country Fixed Yes Yes Yes No No No Effects (FE) Year FE Yes Yes Yes No No No Industry FE Yes Yes Yes Yes Yes Yes

Note: Robust standard errors are in parentheses. * p < 0.1 ** p < 0.05 *** p < 0.01

Africa appears to have better import and reduces trade costs, a performance in connecting to GVCs critical issue for participation in GVCs through forward linkages than through where goods cross borders several backward linkages (see Table 2). This times. Access to the internet also can is in line with the fact that African firms save time and money by facilitating are connected to GVCs largely through coordination and monitoring across providing inputs to firms in other firms. Therefore, African countries regions for further processing (Foster- are able to seize more opportunities McGregor et al., 2015). For example, from digitalization. North Africa integration in global production networks is due to forward This study shows that internet use participation (Del Prete et al., 2017). and internet infrastructure are important for countries engaging in Conclusion international production networks. From a trade perspective, ICT plays Technology diffusion among African a key role in countries as well as countries reduces the time required to in firms. We analyse the effect of 64 CHAPTER 2

internet adoption on forward measures”, Journal of Economic Surveys participation and backward 30: 278-301. participation in GVCs. Globally, internet variables tend to have a larger Aslam, A., Novta, N. and Rodrigues- impact on increasing backward Bastos, F. (2017), “Calculating Trade participation than they do for forward in Value Added”, IMF Working Papers, participation. However, this is not the 31 July 2017. case for African countries, for whom internet connectivity has a stronger Cadestin, C., De Backer, K., Desnoyers- influence on forward participation in James, I., Miroudot, S., Rigo, D. and Ye, M. GVCs than on backward participation. (2018), “Multinational Enterprises and Global Value Chains: The OECD Analytical We conclude that African countries AMNE Database”, OECD Trade Policy and firms in Africa need to improve ICT Papers 28. infrastructure and increase internet penetration to reap more benefits from Casella, B., Bolwijn, R., Moran, D. and participating in GVCs at different Kanemoto, K. (2019), “Improving the production levels. Internet use seems analysis of global value chains : The to fuel both forward and backward UNCTAD-Eora database”, Transnational linkages. Increasing internet adoption Corporations Journal 26(3): 115-142. and improvement of internet infrastructure offer several opportunities to African Cheng, K., Rehman, S., Seneviratne, D. and countries and firms to better participate Zhang, S. (2015), “Reaping the Benefits from in GVCs. Global Value Chains”, IMF Working Paper.

Endnotes Clarke, G. R. G. and Wallsten, S. J. (2004), “Has the Internet Increased Trade? Evidence 1 The dataset covers 122 countries over the from Industrial and Developing Countries”, period 1995–2008. Policy Research Working Paper Series.

2 More details about the UNCTAD-Eora De Backer, K. and Miroudot, S. (2013), GVC database and its methodological “Mapping Global Value Chains”, OECD background are described in Casella et al. Trade Policy Paper. (2019). Aslam et al. (2017) and De Backer and Miroudot (2013) provide more details Del Prete, D., Giovannetti, G. and Marvasi, on the calculations of value-added E. (2017), “Global value chains participation indicators for GVCs. and productivity gains for North African firms”, Review of World Economics References 153: 675-701.

Abeliansky, A. L. and Hilbert, M. (2017), ESCWA (2017), Transport and Connectivity “Digital technology and international trade: to GVCs: Illustrations from the Arab Region. Is it the quantity of subscriptions or the quality of data speed that matters?”, Foster-McGregor, N., Kaulich, F. and Telecommunications Policy 41: 35-48. Stehrer, R. (2015), “Global Value Chains in Africa”, Inclusive and Sustainable Amador, J. and Cabral, S. (2016), “Global Industrial Development Working Paper value chains: A survey of drivers and Series, WP 04 / 2015. CHAPTER 2 65

Freund, C. and Weinhold, D. (2004), “The Muradov, K. (2017), “Trade costs and effect of the Internet on international trade”, borders in global value chains”, Review of Journal of International Economics 62(1): World Economics 153: 487-509. 171-189. Osnago, A. and Tan, S. W. (2016), Gestrin, M. V. and Staudt, J. (2018), “Disaggregating the Impact of the Internet The Digital Economy, Multinational on International Trade”, Policy Research Enterprises and International Investment Working Paper 7785, World Bank Group. Policy, Paris: OECD. Rodríguez-Crespo, E. and Martínez-Zarzoso, Hinson, R. E. and Adjasi, C. K. D. (2009), I. (2019), “The effect of ICT on trade: Does “The internet and export: Some cross- product complexity matter?” Telematics and country evidence from selected African Informatics 41: 182-196. countries”, Journal of Internet Commerce 8: 309-324. Shepherd, B. (2016), “Infrastructure, trade facilitation, and network connectivity in Lanz, R., Lundquist, K., Mansio, G., Maurer, Sub-Saharan Africa”, Journal of African A. and Teh, R. (2018), “E-commerce and Trade 3: 1-22. Developing Country-SME Participation in Global Value Chains”, Staff Working Paper Siedschlag, I. and Murphy, G. (2015), ERSD-2018-13. “Firms’ engagement in global value chains”, in Amador, J. and di Mauro, F. (eds.), The Lin, F. (2015), “Estimating the effect of the Age of Global Value Chains: Maps and internet on international trade”, Journal of Policy Issues, 175-186. International Trade and Economic Development 24: 409-428. Sousa, M. J. (2018), “The impact of the Internet of Things on global trade: Liu, L. and Nath, H. K. (2012), Information and A multiple-case study on multinationals”, Communications Technology (ICT) and Trade Transnational Corporations Review 10(2): in Emerging Market Economies, SSRN. 108 -114.

Marcolin, L. and Squicciarini, M. (2018), Vemuri, V. K. and Siddiqi, S. (2009), “Impact “Investing in innovation and skills: Thriving of commercialization of the Internet on through global value chains”, Review of international trade: A panel study using the Economics and Institutions 9: 33. extended gravity model”, International Trade Journal 23: 458-484. McKinsey Global Institute (2016), “Digital Globalization: The New Era of Global WTO (2018), World Trade Report 2018: Flows”, 24 February 2016. The Future of World Trade: How Digital Technologies Are Transforming Global McKinsey Global Institute (2019), Commerce, Geneva: WTO. “Globalization in Transition: The Future of Trade and Value Chains”, January 2019, 1‑18. 66 CHAPTER 2: COMMENTS

Comments

RICHARD NEWFARMER*

The emergence of global value chains sophisticated the product is (or (GVCs) has major policy implications production process), the greater the for economic growth in Africa. As role of the brand name, and the greater Baldwin (2011) pointed out, two is the market share for the lead firm, consequences are particularly the more difficult it is for new entrants germane for developing countries. On to gain entry into the final market the one hand, GVCs have created an or supply networks without direct avenue through which countries can association with the value chain. industrialize at a much earlier stage of development as producing firms A third consequence is the rising choose to off-shore fragments of the importance of connectivity to GVCs, production value chain to countries the subject of this chapter. “Global where labour is cheaper or where value chains in the age of internet” other locational advantages confer a examines the role of internet competitive cost advantage on the connectivity – proxied through the whole value chain. number of internet connections as backbone infrastructure and the However, a second consequence is percentage of population using the that, in a world of GVC-dominated internet – in spurring African trade trade in which production is allocated and in particular trade in value chains. to the location with the lowest cost, It provides compelling aggregate countries that try to industrialize evidence that the connectivity via the through the high tariffs and restrictive internet is playing an important role import-substitution policies prevalent in in export development of African the pre-1990 period are unlikely to countries, particularly the participation reduce their costs to the point where in GVCs. In analysing broad sectors, they can be competitive in global the chapter also presents evidence markets. Said differently, GVCs raise that internet use and infrastructure the penalties to countries that seek to are particularly important for expand exports by raising tariffs and “high-tech manufacturing” as well as import-substitution policies that would “high-tech services” exports. This aspire to build competing production comports with Dollar’s findings for networks; high border barriers will world trade that “the higher the likely result only in high-cost local technology (knowledge) intensity production and slow growth. In of a sector, the more significant general, a good working presumption the increase of complex GVC is that the more technologically activities” (2019, p. 1).

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 2: COMMENTS 67

As the chapter notes, internet-based The chapter implicitly prompts digitization presents African firms with questions that could form a larger new opportunities to lower trade costs research agenda about value chains across a range of activities, particularly in Africa. De Melo and Twum (2020) in speeding delivery times; technology have shown that, despite efforts of can thus reduce the cumulative costs the regional economic communities of delays and administrative (RECs), regional value chains remain procedures as products cross borders. only incipient. Regional value chains In East Africa, for example, transport in the East African Community costs typically add 30 to 50 per cent (EAC), for example, amount to only to the transit times from Mombasa 1.7 per cent of total gross exports, a (Kenya) to Kampala (Uganda) and sharp contrast with the Association of Kigali (Rwanda). These transport South East Asian Nations (ASEAN) times and transit costs have fallen (17.2 per cent) and the Southern substantially over the last decade, Common Market (MERCOSUR) through a combination of digital (4.6 per cent). The Southern African technologies in logistics and policy Development Community (SADC) reforms (Kunaka et al, 2018). performs only marginally better with 3 per cent included in regional value The findings that enhanced ICT chains. The authors’ definition of stimulates the emergence of value GVCs requires that a product crosses chains to a greater extent than trade two borders. Were they to use a outside of value chains are persuasive one-border criterion, the numbers in as much from a theoretical perspective Africa’s regions would no doubt be as from the chapter’s empirics. It higher. Even with their stringent stands to reason that firms operating definition, Sub-Saharan Africa in regional value chains and GVCs increased its participation in GVCs would benefit from common comparing 2015 with 1990 from technologies controlling standards, some 34 per cent of trade to parts and software platforms less nearly 40 per cent. readily available among exporters and importers in arms-length market In contrast to East Asia, African trade transactions. In value chains with more in GVCs was discernibly more centred integrated governance structures on forward GVC integration, that is, its among the five Gereffi et al. (2005) exports were disproportionately used types1 – say intra-firm trade and captive by importing countries to produce for hierarchical trade – these benefits are export. For example, Ugandan maize likely to be even larger. would be used by Kenyan food processors to export to third markets. Two readily undertaken extensions This pattern differs from East Asia, of the Baghdadi chapter would be where much of the GVC integration worth pursuing if data are available: was backward (that is, the countries’ (i) extending the analysis back to exports included a large share of 2000 would extend the time horizon imported value added). Moreover, in underpinning the chapter; and contrast to Asia, extra-regional value (ii) undertaking the analysis worldwide chains were much more important to would illuminate the particularities of Africa than intra-regional value chains. African trade. These patterns merit further research. 68 CHAPTER 2: COMMENTS

This discussion underscores the • Market-driven chains in which both need to improve internet usage and buyers and suppliers have multiple infrastructure throughout the region as sources of transactions, the price is a building block to effective use of fully market determined and the cost GVCs for growth. In the last decade of switching to new partners is low; alone, the installation of a vast network an example is commodity markets. of fibre optic cable has ushered in new levels and speeds of connectivity. • Modular chains in which suppliers produce Simultaneously, smartphone usage is to the specification of the buyers using spreading across the continent, and generic technology; an example is many the green shoots of 5G technology are apparel chains. slowly sprouting up in different parts of Africa. Digitization is revolutionizing • Relational value chains in which logistics and unleashing productivity interactions between buyers and sellers gains in transport of goods. Services are mutually dependent, usually have exports – whether tourism, call centres sustained involvement over time, and or business services – are inextricably are based on family or ethnic ties that bound up with an increasing reliance tend to cement business relationships; on internet-based technologies. these forms of collaboration are particularly common among companies But to fully translate these technologies in Chinese Taipei that operate in into increased exports and rising production chains. incomes, policies must go beyond internet infrastructure. Trade policy • Captive chains in which the lead has to keep pace with communication firm controls a highly differentiated and digitization policy: policymakers product, the key technologies and/or have to reduce border barriers, product standards; suppliers have including tariffs, non-tariff barriers little incentive to move outside the and restrictive rules of origin as well production chain to work with the as other barriers to competition in competitors; leading electronic firms transport and communication. To such as Apple have these types of that end, the African Continental Free supplier relationships. Trade Area (AfCFTA), the Tripartite Free Trade Agreement and efforts to • Hierarchical chains in which the buyer- deepen the regional agreements hold supplier relationship is internal to the firm; enormous promise. auto companies have many suppliers that are internal to the firm; all intrafirm trade Endnotes falls into this category.

1 GVCs differ in degrees with respect References to the extent of market competition within the chain, barriers to access to the final Baldwin, R. (2011), “Trade and market and the control exerted by the lead Industrialization after Globalization’s firm (over technology, product specifications 2nd Unbundling: How Building and and branding). Gereffi, Humphey and Joining a Supply Chain Are Different Sturgeon (2005) distinguish five general and Why It Matters”, NBER Working types of GVCs, each with a different Paper 17716. http://www.nber.org/papers/ “governance” and role of firms: w17716 CHAPTER 2: COMMENTS 69

De Melo, J. and Twum, A. (2020), Supply Gereffi, G., Humphey, J. and Sturgeon, T. Chain Trade in East Africa: Prospects (2005), “The Governance of Global Value and Challenges, London: International Chains”, Journal of International Political Growth Centre. Economy, 12(1): 78-104.

Dollar, D. (2019), “Executive Summary”, in Kunaka, C., Raballand, G. and Fitzmaurice, Dollar, D., Ganne, E., Stolzenburg, V., and M. (2018), “How trucking services have Wang, Z. (eds.), Global Value Chain improved and may contribute to economic Development Report 2019: Technological development: The case of East Africa”, in Innovation, Supply Chain Trade, and Newfarmer, R., Page, J. and Tarp, F. (eds.), Industries without Smokestacks: Workers in a Globalized World, WTO, Industrialization in Africa Reconsidered, IDE-JETRO, OECD, UIBE, World Bank Oxford: University Press. Group, Geneva: WTO. Chapter 3 Opportunities and challenges of e-commerce in Mauritius

Boopen Seetanah, Kesseven Padachi, Sheereen Fauzel, Vinesh Sannassee and Sunil Boodoo* Abstract

This study explores the status, challenges and opportunities of e-commerce in Mauritius. The share of the population making online purchases was 14 per cent in 2017, the second- highest level (after Libya) in Africa, largely due to increases in internet use and penetration, coupled with increased credit card usage and the development of secure online payment systems. And Mauritius topped the United Nations Conference on Trade and Development (UNCTAD) B2C E-commerce Index (e-readiness) for Africa. A survey of customers revealed high levels of satisfaction with online shopping, due to wider choices, the ability to save time, accessibility and the relative ease of searching for products online. Major concerns included uneasiness over disclosure of personal information and limited ability to contact vendors. Respondents who have not shopped online cited concerns over navigating online, payment security and high costs. Online sellers expressed considerable optimism over future market growth, but also were concerned over a local bias towards international websites, technical limitations of internet service and the small market size. Interviews with policymakers cited the strong legal and regulatory framework supporting electronic payments, but described a need for stronger regulatory cooperation with other countries on e-commerce, and more work to collect statistics. Technical assistance would be useful in these efforts.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 72 CHAPTER 3

Introduction Secure by these banks also has helped to minimize fraud risks and Mauritius, a small island in the Indian maximize security when doing Ocean, is well known for its beaches online purchases. The growth of and is widely regarded as a tourist e-commerce also has been destination. Its economy is supported supported by greater awareness by three main pillars, namely the through the media, increased financial sector, the tourism sector information and communications and the information and technology (ICT) and financial communications sector. Since the literacy, higher technological early 2000s, the country has taken penetration, higher interest in online up the challenge of trying to transform shopping (especially among the itself into a cyber-island, given that young), relatively heavy advertising at that time, only 6.8 per cent of the and the potential for saving time. population was using the internet (Hamuth, 2017). However, internet While there are numerous success penetration has risen substantially stories of firms that adopted since then, with access to the internet e-commerce, some firms are still being increasingly “democratized”. lagging behind in establishing According to the latest Internet World an online presence in the country. Stats data (2019), 63.2 per cent of Mauritius faces several e-commerce the population in Mauritius were challenges. For instance, many internet users as of 31 December Mauritians prefer their conventional 2019, an increase in usage of over way of making purchases (that is, 899 per cent since 2000. The rise in at retail locations) rather than internet penetration has greatly purchasing online. Also, even if boosted the e-commerce industry on there are secure payment options, the island, and e-shopping for goods many Mauritians still do not fully and services is gradually becoming a trust online payment. Many way of life. It is widely expected that e-commerce websites, such as such a trend will continue to rise in Amazon, charge high fees to ship the future. goods to Mauritius, and this acts as a barrier to e-commerce. Other changes have contributed to Limited internet infrastructure and the rise in e-shopping, particularly penetration, including low speeds increased use of credit cards and and limited access to some areas, the development of secure online is another challenge. payment solutions. For instance, the Juice MCB app by the Mauritius Empirical research has highlighted Commercial Bank (MCB) is widely the benefits of e-commerce. Reliance used as a means to effect payment. on the internet helps to remove time and space barriers facing businesses The one-time password used by and consumers. It can also foster MCB and the State Bank of improvements in product variety, Mauritius (SBM) e-secure platform thus promoting quality and customer for password-protected online satisfaction, facilitating administrative transactions ensures greater payment processes, improving labour and security. Implementation of 3D management productivity and CHAPTER 3 73 reducing costs (Senarathna and (Hartono et al., 2014; Lee Jr. et al., Wickramasuriya, 2011). Rural 2016). These challenges are businesses are adopting e-commerce confirmed by studies conducted by to add value to their goods and also Salisbury et al. (2001) and Cheng improve customer relationships et al. (2006). Finally, another (Stayner and McNeill, 2003). challenge identified in the literature Finally, e-commerce can contribute is the level of readiness (that is, the to the reshaping of customer- extent of preparedness), which is supplier relationships and the classified at three levels, namely, streamlining of business processes organizational readiness, industry (Lekhanya, 2016). readiness and national readiness (Kurnia et al., 2015). Another strand of the literature has looked at facilitating factors and This chapter explores several issues challenges of e-commerce adoption. related to the growth of online Mittal (2013) argues that trust, purchases in Mauritius. The study privacy and security concerns are assesses the willingness and the three major factors affecting readiness of Mauritians to undertake e-commerce adoption. Studies have online purchases. We discuss the shown that the primary reason for perception of Mauritians towards consumers not adopting e-commerce and online shopping relates analyse the factors to the lack of trust that encourage between the consumer “Mauritius residents to make and the website (Liu topped the online purchases. et al., 2005). A positive UNCTAD B2C We then analyse the interaction with E-commerce opportunities and e-commerce websites Index constraints faced by fosters greater trust traders in online sales with online consumers (e-readiness) transactions. Finally, (Jarvenpaa et al., 2000). for Africa.” we discuss the User satisfaction in challenges and relation to safety, opportunities from well-designed websites and ease a policymaker/regulatory perspective, of use are also identified as key based on a review of existing elements influencing online regulations and discussions purchases (Al-Kasasbeh, Dasgupta and consultations with high-level and Al-Faouri, 2011). Other factors, experts and policymakers engaged like age, income and education, in trade policies. are also determinants of e-commerce adoption (De Muylder, de Oliveira We analyse the opportunities for and and Alves, 2013). Also, the local challenges to e-commerce from both infrastructure is seen to be a key the customers’ and online sellers’ challenge and point of vulnerability perspectives. Regarding online in online transactions. If the shoppers, the study investigates infrastructure or network is their perceptions of the benefits/ not trustworthy, then hackers can advantages of buying online, their access customers’ information concerns and their satisfaction level 74 CHAPTER 3

on a number of dimensions. We also tablets), https://www.facebook.com/ consider the major reasons for the flower.mu (for flowers, wreaths and non-adoption of e-commerce, floral decorations), marideal.mu using data from a sample of (offering deals on hotel bookings), non-e-commerce users. The analysis priceguru.mu or buynow.mu (electrical of customers’ perceptions is based and electronic appliances) and on a survey of 250 respondents. The theshop.mu (groceries, household assessment of the sellers is based items and many other goods). A few on a number of in-depth interviews high street vendors have an online of the top management of a sample presence (for example, galaxy.mu of 12 local firms engaged in online and tfp.mu), allowing for the online shopping across different business purchase of furniture and electrical sectors, including goods. As regards the grocery, hotel fashion industry, and entertainment, popular websites electronic appliances, “The rise include, among others, and fresh fruit in internet tropicalmiss.com.1 and vegetables, penetration has among others. greatly boosted Two public institutions the e-commerce are heavily involved This remainder of the industry on in the provision of chapter is organized as e-services, the follows: the next section Mauritius.” Mauritius Revenue considers the current Authority (MRA) state of e-commerce in and the Registrar of Mauritius; the following section briefly Companies Division. A number of discusses the methodology and then transactions with the MRA can now analyses our findings; and the final be done online, and the Companies section outlines our conclusions. Division allows for the online incorporation of companies and E-commerce in Mauritius document filing, as well as payment of various fees. The Government recently Online sales remain an important launched a shopping portal in 2018, feature of e-commerce in Mauritius. which offers tax-free purchases, in International sales outlets such as an effort to promote e-commerce. Amazon, La Redoute, AliExpress, Alibaba and eBay have been quite In 2013, online purchases amounted successful in Mauritius over the last to only 4 per cent of the total decade. Recently, Mauritian online purchases done in Mauritius sales outlets also have seen a rise (UNCTAD 2018), about the same in sales. These portals offer a wide level as in South Africa, while in the range of products, from electrical United Kingdom, for instance, such appliances to gardening equipment, purchases amounted to 70 per cent. from mobile phones to clothing, from Recent figures on Mauritius from the furniture to beauty products. Examples UNCTAD B2C E-commerce Index include cleverdodo.mu (for trendy 2018 reveals that Mauritius ranked clothing and accessories among second in Africa for the proportion others), mycart.mu (mobile phones and of individuals shopping online, after CHAPTER 3 75

Table 1: Top 10 African countries by proportion of individuals shopping online, 2017

Online Online Shoppers Online B2C Index purchase shoppers Internet (% of Rank Country shoppers rank in (% age (000s) rank use Internet (000s) Africa 15+) 2017 in Africa users) 1 Libya 14.6 629 10 13 20 67% 2 Mauritius 14.4 129 26 1 55 26% 3 Namibia 12.1 184 21 11 31 24% 4 Kenya 9.3 2,614 3 7 39 24% 5 South Africa 7.9 2,929 2 3 59 13% 6 Gabon 6.1 74 29 12 62 10% 7 Tanzania 5.3 1,593 4 16 25 21% 8 Zambia 5.1 459 11 26 24 21% 9 Tunisia 4.7 366 14 4 56 8% 10 Mozambique 4.3 665 9 32 23 19%

Source: UNCTAD B2C E-commerce Index 2018, available at: https://unctad.org/en/PublicationsLibrary/ tn_unctad_ict4d12_en.pdf?user=46.

Libya (14 per cent) (see Table 1). than the value for the country ranked However, Mauritius topped the second in Africa. It is also noteworthy UNCTAD B2C E-commerce that Mauritius scored relatively well in index (e-readiness) for the African all four areas of assessment, namely, continent (with a World Ranking of share of individuals using internet, 55). This index, in addition to share of individuals with an account, registering the number of online secure internet servers and UPU shoppers, also assesses ease of postal reliability score (see Table 2). delivery and payment. The index value for Mauritius (66.9, up from Tables 1 and 2 clearly highlight the 51 in 2016) is 12 points higher significant progress made by Mauritius

Table 2: Top 10 African countries in the UNCTAD B2C E-commerce Index, 2018

Share of Share of UPU Secure Index individuals individuals postal Index Internet value using the with an reliability value World Economy servers change Internet account score (2017 rank (normalized) (2016-17 (2017 or (15+, 2017 (2017 data) (2017) data) latest) or latest) data) 1 Mauritius 55 90 56 66 66.9 -7.2 55 2 Nigeria 42 40 52 85 54.7 5.5 75 3 South 59 69 83 0 52.9 -1.9 77 Africa 4 Tunisia 56 37 51 63 51.7 2.1 79 5 Morocco 62 29 54 59 50.9 NA 81 6 Ghana 39 58 45 53 48.8 7.6 85 7 Kenya 39 82 37 27 46.2 3.7 89 8 Uganda 17 59 31 58 41.5 -3.2 99 9 Botswana 47 51 41 26 41.4 0.1 100 10 Cameroon 23 35 25 78 40.3 3.6 101

Source: UNCTAD B2C E-commerce Index 2018, available at: https://unctad.org/en/PublicationsLibrary/ tn_unctad_ict4d12_en.pdf?user=46. 76 CHAPTER 3

in online trading and the use of and it assesses their level of e-commerce. With the recent satisfaction with their online purchases. introduction of secure payment options, the ongoing integration of Users’ perceptions about fibre-broadband and the continued e-commerce (section B). The democratization of the internet, the questions are mainly 5-point Likert launching of more online shops scale statements addressing security resulting in an increased volume of and privacy concerns, usefulness and e-commerce is expected in the future. convenience of websites, interaction and communication from online Research methodology retailers, common frustrations, and analysis and consumer purchase intention in relation to online shopping. We use both qualitative and quantitative techniques to assess the various Reasons for not using e-commerce opportunities and challenges facing the (section C). The questions mainly use of e-commerce in Mauritius from relate to investigating the reasons three perspectives: customers, online why consumers prefer not to traders and policymakers/regulatory complete transactions online. bodies. A survey of customers with experience in online shopping was Demographic profile of the administered. The questionnaire was respondents (section D). designed to investigate e-commerce practices throughout the sales process The researchers surveyed a sample and also to capture the reasons for of 256 of undergraduates and post- non-online purchases. Thus, the graduate students from publicly funded questionnaire aims at assessing the tertiary education institutions (TEIs). willingness and readiness of Mauritians Given the geographic location of these to undertake online purchases, TEIs and the small geographical area determining the perception of of Mauritius, the sample respondents Mauritians towards e-commerce, are representative of the population analysing the factors that stimulate who are adopters and non-adopters of Mauritian customers to make online e-commerce. The snowball sampling purchases and identifying the main technique was used to reach out to a impediments to completing transactions specific target group such that the online. It is noteworthy that most of sample also covers the self-employed the statements and scales in the and the general public. Care was taken questionnaire were borrowed from to make the sample as representative previous empirical work (Arendt, as possible, taking into account that 2008; Sawmy et al., 2015). The most of the online purchases were questionnaire is structured around done by individuals with relatively high four key themes: educational level (and thus relatively high income as well). Online shopping experience (section A). This section collects information A pilot test was conducted among from buyers about the websites they 10 respondents. A few questions used to make online purchases, and terminologies were amended including the frequency of purchases, to improve clarity. The survey was CHAPTER 3 77 mostly self-administered with discussions with policymakers to clear instructions given on the assess the policy and regulatory questionnaire. The dataset consists framework for e-commerce. of 236 respondents, of which 56 were non-users of online services. Analysis 1: Analysis of survey The data analysis was conducted (customers’ perspective) using the Statistical Package Descriptive analysis for Social Science (SPSS) The respondents’ demographic V20.0 software. profile is summarized in Table 3. There is no marked difference A qualitative assessment was between the online shoppers and conducted to analyse the constraints non-online shoppers. The Mauritian and opportunities faced by online women are the ones who embrace merchants. A series of well- this mode of purchase (61.5 per cent) structured, in-depth interviews was as compared to 38.5 per cent for administered to 15 of them. We also men. Respondents from the age reviewed selected regulations and group 26 to 35 are more frequent laws, and undertook thorough online buyers; this makes sense as

Table 3: Demographic profile: online v. non-online shoppers

Online shoppers Non-online shoppers Gender F % F % Male 69 38.5 16 31 Female 110 61.5 36 69 Age: 16–25 36 20.1 9 17 26–35 76 42.5 20 33 36–50 61 34 7 13 >50 6 3.4 17 32 Income (MUR) None 14 8 9 17 <10,000 3 2 4 7.5 10,000–20,000 33 19 9 17 20,001–40,000 77 43 17 32 40,001–60,000 33 19 9 17 >60,000 17 10 5 9 Occupation Student 15 8.5 9 17 Self-employed 8 4.5 10 19 Professional 148 84 29 55 “Housewife” - - 3 6 Unemployed 5 7 2 3

Source: Survey results tabulated by the authors. 78 CHAPTER 3

they are more likely to have 75 per cent of respondents use these experience with the world of work websites). The most frequent modes than do younger respondents and of payment are a credit or debit card they are more likely to be tech savvy and PayPal (more than 80 per cent of compared to older respondents. online shoppers). Additionally, nearly Income level is a direct determinant 70 per cent of respondents were of the respondents’ purchasing satisfied with their online purchase power: 72 per cent of the online experience (mean score of 3.74). shoppers earn an income above Online shoppers typically use a MUR 20,000 (EUR 500), and most laptop (53 per cent) or a smartphone are professionals. (32 per cent) for their purchases, and mostly rely on a home Wi-Fi It is worth noting that the non-online connection (88 per cent). shoppers share the same demographic characteristics as the online shoppers. Underlying motivations As such, measures geared towards for online purchases increasing their trust should help foster The main reasons for this mode of greater e-commerce usage. purchase are wider choices, saving time, accessibility and the relative Online shoppers ease of searching for products online. On average, respondents purchased This is further reinforced by an item online about once a month, perceptions about the online with clothing, jewellery and experience, where the statement technological products the most “I feel shopping websites are very commonly purchased items (see responsive to customers” and Table 4). The most commonly used “E-commerce has changed the way I websites by Mauritians for their used to buy products and services” purchases are eBay, AliExpress, were highly rated using the 5-point Amazon and Alibaba (more than Likert scale. The majority of

Table 4: Products purchased*

Responses Which products do you buy the most % of cases N % Clothes 122 34.2 81.3 Technology products 68 19.0 45.3 Jewellery 65 18.2 43.3 Hotels/travel 35 9.8 23.3 Travel accessories 22 6.2 14.7 Automotive accessories 21 5.9 14.0 Others 13 3.6 8.7 Shapewear** 6 1.7 4.0 Food and beverage products 5 1.4 3.3 Total 357 100.0 Source: Survey results tabulated by the authors. * Dichotomy group tabulated at value 1. ** Undergarments worn to create a smooth silhouette. CHAPTER 3 79

Table 5: Most common frustration of e-commerce

Most common frustration of e-commerce N Minimum Maximum Mean Difficulty reaching the organization 174 1.00 5.00 3.4713 Lack of fast chat/instant messaging 175 2.00 5.00 3.3600 Lack of information about the products/services 175 1.00 5.00 3.2343 Problems with account/logging in 174 1.00 5.00 2.8793 Trouble at check-out 176 1.00 5.00 2.8636

Source: Survey results tabulated by the authors.

respondents are of the view that This is particularly of concern where shopping websites are flexible and the market covers a wide area, and easy to use, and that the information this issue will have to be addressed. provided on the websites meets their needs. Online shoppers emphasize Furthermore, the survey attempts to the importance of a website’s measure the extent to which online attractiveness (mean score of 3.9) and shopping may increase in popularity its usability and navigation tools (3.8), in the future. The results reveal that among other issues such as prompt respondents are bound to increase response to customer service queries their online shopping and in addition and customer service in general. are prepared to assist other first-time On the other hand, over half of buyers and also to encourage friends respondents agreed with the and relatives to shop online. However, statement “E-commerce does not to maintain the online shoppers’ allow me to inspect goods in advance readiness to adopt this style of of purchase”. shopping, suppliers must guarantee the quality of the product, timely The fear of sharing sensitive delivery and, above all, a secure mode information with third parties without of payment. Table 6 captures the mean buyers’ consent may act as a deterrent score for these priority areas that to transacting online. Respondents are merchants should address; concerns of the view that websites use security over security top the list, with a mean controls to respect the confidentiality score of 4.66. of users and have no problem on this front (mean score = 3.56). However, Shoppers who do not make it is noteworthy that the respondents purchases online appear to be concerned about the The survey instrument was also unauthorized use of their personal designed to capture the reasons information for other purposes. that shoppers do not purchase items online; out of 236 respondents, 56 did The most common negative issues not make any online purchases. Their that Mauritian buyers faced while demographic profile is not too different transacting online were the limited from that of the online shoppers, availability of fast chat/instant except that a smaller share are messaging and their inability to reach professionals and their incomes are the e-shop by phone (see Table 5). somewhat lower. Nevertheless, the 80 CHAPTER 3

Table 6: Rating of priority concerns according to their level of importance

Rating of criteria according to their level of N Minimum Maximum Mean importance Payment security 178 1.00 5.00 4.6573 Quality 178 1.00 5.00 4.4944 Delivery 177 2.00 5.00 4.4802 Choice 178 2.00 5.00 4.3258 Possibility to get back in touch with the merchant 177 1.00 5.00 4.2712

Source: Survey results tabulated by the authors.

majority of the non-online shoppers are mode of purchase. Inhibiting factors professionals or self-employed (see include uneasiness in navigating online, Table 3). Both occupations represent concern over payment security and a non-negligible target for e-commerce a perception of high costs. Table 7 (a substantial share earn a monthly captures the most important reasons income above MUR 20,000), and thus for not buying online, using 13 item their security and privacy concerns statements. It includes, among others, should be addressed. It is worth noting not being acquainted with internet that 69 per cent of respondents are shopping, confusing procedures and female, and 32 per cent are over pessimism about whether privacy is 50 years of age. respected. The rotated solution using the Principle Component Analysis Of the 56 respondents who do not (PCA) data reduction techniques shop online, it is reassuring to note that (refer to Table 8) groups the item 62 per cent may consider adopting this statements into three dimensions,

Table 7: Reasons for not buying online

Reason for not conducting an online purchase N Minimum Maximum Mean Unable to touch and analyse the items 55 2.00 5.00 4.2364 Apprehension about payment security 55 2.00 5.00 4.2000 Doubts the quality of the item 55 2.00 5.00 4.1636 No personal interaction with shop employees 56 1.00 5.00 3.9821 Shipping costs can be expensive 56 2.00 5.00 3.9643 Pessimistic about whether privacy is respected 56 2.00 5.00 3.9286 Delivery fees are high 56 2.00 5.00 3.6964 Not acquainted with internet shopping 56 1.00 5.00 3.3750 Confusing procedures 56 1.00 5.00 3.2321 The systems and the logistics are too complicated 56 1.00 5.00 3.1964 Less variety of items are available online 56 1.00 5.00 3.1964 Too complicated compared to traditional shopping 56 1.00 5.00 3.1607 I do not understand the online process 56 1.00 5.00 2.6429

Source: Survey results tabulated by the authors. CHAPTER 3 81

Table 8: Rotated component matrix*

Component Reason for not conducting an online purchase Uneasy with Payment Navigation Internet I do not understand the online process 0.837 Not acquainted with internet shopping 0.736 The systems and the logistics are too complicated 0.696 Too complicated compared to traditional shopping 0.686 Confusing procedures 0.645 No personal interaction with shop employees 0.714 Less variety of items available online 0.780 Apprehension about payment security 0.690 Shipping costs can be expensive 0.883 Delivery fees are high 0.850

Source: Survey results tabulated by the authors. Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. * Rotation converged in eight iterations.

namely, navigation, uneasiness with conducted in-depth interviews with the internet and cost factor. The final managers of 15 online merchants list consists of 10 item statements operating in different sectors, ranging because three items – pessimism from hotels/hospitality, fresh flowers about privacy, inability to touch and and vegetables, groceries, furniture analyse the item and doubts about and other appliances. A discussion quality – did not load adequately of their responses with respect to the into the three dimensions. perceived opportunities and constraints is synthesized below. The main three areas of concern for non-adopters of e-commerce are not In terms of opportunities, the increased related to product and services quality democratization of the internet as a per se, which indicate the usefulness national strategy is expected to further of a shift of focus towards educating accelerate e-commerce. Moreover, potential users on the internet and the government and business operators navigation tools of the online platform. have medium- to long-term plans to This may have some policy implications further increase internet access and in terms of digital literacy and the speed, while government is also regulation of this mode of commerce. pushing for price reduction by allowing increased competition and through Analysis 2: Interviews with policy measures. Moreover, as Mauritian service providers familiarity with information technology (sellers’ perspective) increases, the number of people To gauge the opinions of sellers on purchasing online will further increase. the opportunities and challenges of Also, the increasing use of credit and making online transactions, we debit cards as well as internet banking 82 CHAPTER 3

on the island, fostered by aggressive products. Despite the considerable marketing and awareness campaigns progress that has been made, from banks, remains a key element consumers remain concerned over the in helping the development of use of debit and credit card information e-commerce. With the introduction of (and other personal information) by new online payment solutions, local websites, especially because customers can make use of their debit e-commerce took off only quite cards to make online purchases both in recently. Customers are also reluctant Mauritius and internationally, which to purchase from local service was not the case prior to 2016. providers because they deem the local Security is very important in business’s refund policies to be either e-commerce, so investments by banks lacking or unclear. A recent study by in new technologies to ensure greater Shoraye and Gungea (2019) confirms security for online transactions and the the above bias in favour of the internet introduction of e-secure platforms for giants. Respondents also discussed password-protected online technical limitations affecting local transactions can enhance customers’ websites, which is linked to the and online merchants’ trust in the absence of a standardized software process. In Mauritius, online shopping (making navigation harder). They were is regulated under the Electronic particularly critical of the relatively low Transactions Act (ETA), which was bandwidth of local sites, which makes enacted in 2000. Online merchants are the shopping experience slower and of the view that while this Act needs to therefore less attractive. However, be revisited to a certain extent, it still merchants argue that they are making constitutes a relatively sound and a substantial investment to facilitate encompassing legal framework online purchases and to improve their governing e-commerce, and as such it software and websites. Greater instils confidence, which is a vital investment in improving connectivity factor. Online traders also believe that also is required to encourage e-commerce provides greater e-commerce. Investments have been marketing opportunities, including made to upgrade to fibre-broadband through social media, in which a to increase speeds to between significant proportion of the population 10–30 MB. However, this remains participates. Some respondents also a medium- to long-term project. argue that e-commerce facilitates Finally, small market size, with the reductions in inventory and distribution Mauritian population currently standing costs and time by providing just-in-time at around 1.3 million people, remains a (JIT) services. In addition, they argue limiting factor for the growth of that the aforementioned services lead e-commerce. Some local merchants to better demand forecasts. argue that the small size of the market may act as a deterrent for large foreign Online shoppers and merchants also operators. In addition, given that face several challenges. For instance, Mauritius is relatively far from online traders feel that Mauritians tend major online service providers, the to favour international e-commerce resulting hefty customs fees and websites (such as AliExpress, Amazon transport costs (particularly given or eBay) over local websites, that island is quite remote) may act especially when acquiring luxury as deterrents. CHAPTER 3 83

Analysis 3: E-commerce records and e-commerce, and foster challenges and opportunities – A the development of e-commerce policy and regulatory perspective through the use of electronic Mauritius is actively participating in the signatures to provide authenticity and e-commerce discussions at the World integrity to correspondence in any Trade Organization (WTO),2 the electronic medium. objective being to elaborate on a multilateral framework to better regulate In a similar vein, privacy protection the sector. To that end, Mauritius has and protection against unsolicited already adopted a number of laws to commercial electronic messages, facilitate and promote e-commerce. which are vital components of First and foremost, the ETA gives e-commerce, are provided through the legal security to documents in Data Protection Act of 2017, the electronic form and provides legal Banking Act of 2004 and the National recognition for the use of electronic Payment Systems Act of 2018. These records and signatures and their secure regulatory frameworks also provide for counterparts. The main goals of the online payment solutions to enable ETA are as follows: cross-border e-commerce. For instance, the Data Protection Act Facilitate electronic communications regulates the cross-border transfer of by means of reliable electronic records; information by electronic means and does not place any restrictions on data Facilitate e-commerce and promote localization, save for the requirement to the development of the legal and inform the Data Protection Office when business infrastructure necessary data is to be transferred abroad. to implement secure electronic commerce; Furthermore, paperless trading, another prerequisite for e-commerce, Facilitate electronic filing of is already a reality. Indeed, all trade documents with government agencies administration documents are and statutory corporations, and electronically available, and electronic promote efficient delivery of versions of trade documents are government services by means of accepted by financial institutions and reliable electronic records; government. In addition to these regulatory frameworks, Mauritius does Minimize the incidence of forged not impose any customs duty on electronic records, intentional and electronic transmissions, and the unintentional alteration of records, underlying principle of National and fraud in electronic commerce Treatment is applicable to local and and other electronic transactions; foreign digital products. Finally, prior authorization by service providers from Help to establish uniformity of rules, the relevant ministries is not required regulations and standards regarding for the delivery of online services, the authentication and other electronic boosting such trade in the country. transactions; and Another element promoting cross- Promote public confidence in the border e-commerce is the integrity and reliability of electronic implementation by Mauritius of the 84 CHAPTER 3

WTO Trade Facilitation Agreement management of e-commerce data, (TFA), which aims to reduce the time building on practices in other and costs involved in cross-border countries, and to build staff capacity trade and also to enhance predictability would be valuable. It is important to and transparency. Indeed, traders are measure accurately the magnitude more aware of existing regulations and of e-commerce trade to inform other costs of trade when placing their development of policies and any orders. Other provisions of the TFA, further legislative framework needed in particular the publication of release to properly regulate e-commerce. time of goods, assist traders in calculating the time their goods would Finally, the regulatory framework in be retained at the border. The single Mauritius may be further improved once window system and risk management a multilateral framework has been provisions also help to streamline the agreed.5 Once this is done, regulations administrative procedures required to in Mauritius could be revisited to obtain necessary clearance online and incorporate international best practices. to reduce the time for clearance of goods at the border. Conclusion

The above highlights the readiness This study has explored the current of the country to promote e-commerce, status of, and the challenges to and but policy challenges still exist. opportunities for, e-commerce in For instance, an online consumer Mauritius. With increased internet protection law has yet to be enacted.3 penetration, the e-commerce industry As of now, there is no platform to has grown rapidly, and e-shopping promote regulatory cooperation on and e-services are used prominently by e-commerce between Mauritius and the local population. Increased credit other jurisdictions. Furthermore, an card usage and secure online payment official and functional e-commerce solutions have also been crucial platform per se is yet to be elements fostering the development established.4 In this regard, the of e-commerce. provision of technical assistance by international institutions, as well as An analysis of the opportunities and on a bilateral basis, to address these challenges of e-commerce has been and other challenges may prove crucial undertaken using a three-pronged for Mauritius in its endeavour to approach, including the online buyer/ promote e-commerce. customer, the online merchant and regulatory agencies/policymakers. Computation of trade data and A survey of buyers indicates that the statistics on e-commerce remains a main reasons for adopting online challenge. Statistics Mauritius does purchases are wider choices, saving not compile e-commerce statistics time, accessibility and the ease of because it lacks a mechanism or searching for products online. The legislative framework to do so. survey also showed consumers’ high Moreover, staff have limited technical degree of satisfaction with respect to know-how for such an exercise. online experience. The survey indicated Technical assistance to develop that respondents were likely to increase mechanisms for the collection and their online shopping in the future, and CHAPTER 3 85 that they were prepared to assist other Protection Act of 2017, the Banking first-time buyers and to encourage Act of 2004 and the National Payment friends and relatives to shop online. Systems Act of 2018, has bolstered In short, the survey results indicate trust and confidence among both considerable potential for online consumers and businesses. However, shopping in Mauritius, although a some aspects of the framework could number of challenges remain. Major be strengthened. For instance, an issues include concerns that websites online consumer protection law is will share sensitive information with yet to be enacted, and there is no third parties without buyers’ consent, platform to promote regulatory the lack of fast chat/instant messaging cooperation between Mauritius and the inability to contact the e-shop and other jurisdictions on e-commerce. by phone (a particular concern in As such, Aid for Trade initiatives to markets covering a wide area). A foster e-commerce are yet to be majority of respondents who had never implemented, while an e-commerce conducted online transactions indicated platform per se is yet to be established. that they would, or were considering Moreover, the compilation of trade doing so in future. Their main motivations data and statistics on e-commerce for not making online transactions related remains a challenge, as this data is to uneasiness over navigating online and not captured by the Statistics Mauritius payment security issues. office. Statistics Mauritius will have to develop appropriate methodologies In-depth interviews of managers of based on best practices to collect 15 online merchants operating in and process data on e-commerce, different sectors (including hotels/ since such data are crucial for the hospitality, fresh flowers and design of sound policies and the vegetables, groceries, furniture and promulgation of a more comprehensive other appliances) indicate considerable regulatory framework. Finally, there is optimism about the potential for online a need to bring together all shopping in Mauritius. Interviewees stakeholders to take stock of the cited the small size of the market with e-commerce situation in Mauritius, considerable scope for growth, identify further actions that may be anticipated increases in internet required and develop a roadmap with penetration, the use of ICT and financial clear timelines and designation of literacy, the increasing use of credit and responsible implementing agencies. debit cards, the growth of internet banking and the establishment of Endnotes secure online payment systems, and the establishment of a comprehensive 1 Other popular shopping sites are regulatory framework for e-commerce. moodesign.mu and mycart.mu. Other However, the low speed and bandwidth sites operated by supermarkets allow of internet connections and the lack of online purchase of groceries, such as infrastructure in some remote areas theshop.mu and winner.mu. Other were seen as major impediments to websites, such as lacase.mu, are focused the growth of e-commerce in Mauritius. on home décor, while tantebazar.com sells fresh and good-quality vegetables, The legal framework for e-commerce, and thewinestore.mu deals in spirits consisting of the ETA, the Data and wines. 86 CHAPTER 3

2 Negotiations on the Trade in Services e-commerce: Brazilian case study”, Agreement (TiSA) has been suspended International Journal of Business and following the 2016 presidential elections in Commerce 2(11). the United States, with e-commerce being part of the negotiations. Hamuth, S. (2017), “Online services: E-commerce gaining ground”, Defimedia.info. 3 Although Mauritius has enacted laws https://defimedia.info/online-services-e- with regards to consumer protection, commerce-gaining-ground competition and data protection, they do not explicitly address consumer protection Hartono, E., Holsapple, C. W., Kim, K. Y., and other issues linked to e-commerce. Na, K. S. and Simpson, J. T. (2014), This remains one area where technical “Measuring perceived security in B2C assistance is required. electronic commerce website usage: A respecification and validation”,Decision 4 The International Trade Division of the Support Systems 62: 11-21. parent ministry has recently undertaken a feasibility study with respect to the Internet World Stats (2019), available at: setting up an e-commerce platform to https://www.internetworldstats.com/stats1.htm trade with the SADC region. The study concluded that while this is possible, the Jarvenpaa, S., Tractinsky, N. and Vitale, M. cost would be quite substantial. Aid for (2000), “Consumer trust in an internet store”, Trade support could be provided to Information Technology & Management establish the platform to boost trade 1(1): 45-71. from Mauritius to the region. Kurnia, S., Choudrie, J., Mahbubur, R. M. 5 It is noteworthy that the FTA with China and Alzougool, B. (2015), “E-commerce contains a section on e-commerce. technology adoption: A Malaysian grocery SME retail sector study”, Journal of Business References Research 68: 1906-1918.

Al-Kasasbeh, M. M., Dasgupta, S. and Lee Jr., J., Warkentin, M. and Johnston, A. C. Al-Faouri, A. H. (2011), “Factors affecting (2016), “A broader view of perceived risk eservice satisfaction”, Communications of during internet transactions”, the IBIMA. Communications of the Association for Information Systems, 38(1): 8. Arendt, L. (2008), “Barriers to ICT in SMEs: How to bridge the digital divide?”, Lekhanya, L. M. (2016), “E-commerce as an Journal of Systems and Information instrument of governing SMEs’ marketing Technology 10(2): 93-108. strategy in an emerging economy”, Risk Governance and Control: Financial Markets Cheng, T. E., Lam, D. Y. and Yeung, A. C. & Institutions. (2006), “Adoption of internet banking: An empirical study in Hong Kong”, Decision Liu, C., Marchewka, J. T., Lu, J. and Yu, C. Support Systems 42(3): 1558-1572. (2005), “Beyond concern – a privacy-trust- behavioral intention model of electronic De Muylder, D., de Oliveira, F. and Alves, F. commerce”, Information & Management (2013), “Consumer behaviour and 42(2): 289-304. CHAPTER 3 87

Mittal, A. (2013), “E-commerce: Its impact on Shoraye, M. and Gungea, M. (2019), consumer behaviour”, Global Journal of “Buy global but never local! Why local Management and Business Studies 3(2): e-commerce websites are losing the battle 131-138. against internet giants – A comparative analysis of services offered by Internet Salisbury, R. P., Pearson, A. and Miller, D. giants and local technopreneurs”, paper W. (2001), “Identifying barriers that keep presented at the E-MiG conference, 14 to shoppers off the World Wide Web: 16 May 2019, Intercontinental Resort Developing a scale of perceived web Mauritius, Balaclava, Mauritius. security”, Industrial Management & Data Systems, 101(4): 165-176. Stayner, R. and McNeill, J. (2003), Changing Business Realities?: The Implications of Sawmy, T. and Damar-Ladkoo, A. (2015), E-commerce Technologies for Rural “Wholesale and retail e-commerce in Mauritius: Non-farm Businesses, University of New Views of customers and employees”, Studies in England, Institute for Rural Futures. Business and Economics 10 (2): 170-18 6 . United Nations Conference on Trade and Senarathna, R. and Wickramasuriya, H. Development (UNCTAD) (2018), B2C (2011), “Organizational factors affecting E-commerce Index 2018: Focus on Africa, e-commerce adoption in small and medium- UNCTAD Technical Notes on ICT for sized enterprises”, Tropical Agricultural Development No. 12 (TN/UNCTAD/ Research, 22(2): 204-210. http://doi. ICT4D/12). https://unctad.org/en/ org/10.4038/tar.v22i2.2829 PublicationsLibrary/tn_unctad_ict4d12_en.pdf 88 CHAPTER 3: COMMENTS

Comments

TRUDI HARTZENBERG*

E-commerce does not yet feature reductions and improved customs prominently in the trade and integration and port management measures, strategy of most African countries. enjoyed priority. While Mauritius has not yet joined the plurilateral e-commerce initiative More recently, policy attention has in the World Trade Organization shifted to the services sector, with a (WTO), this small island economy clearly stated ambition to become a has historically responded to changes hub for information and communications in the global economy very astutely technology (ICT) related services, and tackled the process of structural financial services and education transformation with strong commitment services. The broad policy narrative and ingenuity in policymaking in now centres on supporting digitally its development strategies. It is enabled growth. It is in this context that definitely gearing up to support the development of e-commerce in e-commerce and digital trade more Mauritius is interesting and important. generally, and it is in this context that Mauritius has in recent years topped this chapter makes a useful contribution the rankings for Sub-Saharan Africa to gathering data on e-commerce (SSA) in the United Nations developments in Mauritius. Conference on Trade and Development’s (UNCTAD) Business- The mainstay of this small island to-Consumer (B2C) E-commerce economy was, not too many decades Index (UNCTAD, 2019). For 2019, ago, a single crop, cane sugar, Mauritius is followed by South Africa, which was exported almost exclusively Nigeria and Kenya, putting this small to the European Union under island economy among those that are preferences. An important step in the leading Africa’s ICT sector growth. country’s economic transformation was The tech hubs in Cape Town, Lagos a policy decision to diversify and and Nairobi are supporting vibrant develop its industrial sector. The aim ICT-enabled initiatives in e-commerce, was to attract foreign direct investment finance and more. Africa already has and labour to establish a textile and its own “silicon valleys”. garment sector. Mauritius very soon became a preferred location for the What about e-commerce production of garments for a number of developments in Africa? international clothing brands. To support this industrial development, In addition to the global e-commerce trade liberalization, including tariff giants such as Amazon and Alibaba

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 3: COMMENTS 89

(and AliExpress for consumers), there This presents a significant opportunity are a growing number of emerging to the financial services sector in Africa. African e-commerce start-ups, including Jumia.com, MallforAfrica.com African Union initiatives and its associate MarketPlaceAfrica.com. MarketPlaceAfrica.com, which Members of the Executive Council of provides a global platform for African the African Union (AU) endorsed a sellers (Stuart, 2020), features goods digital transformation strategy for the predominantly produced in Africa. continent at its 36th Ordinary Session, DHL couriers provide delivery services 6–7 February 2020.1 This strategy for the platform to 220 countries, references and emphasizes several mitigating the challenges of poor other AU initiatives,2 including the AU’s postal services in some African flagship projects and development countries. These developments offer partner-supported initiatives that opportunities for small- and medium- are important for e-commerce sized enterprises (SMEs) that are development on the continent: still predominant in most African economies. However, the terms • The Programme for Infrastructure and conditions for access to these Development for Africa (PIDA), platforms will determine whether which includes ICT infrastructure SMEs will be able to thrive and grow. and specifically extending fibre optic connectivity, in particular The main constraints to the development to landlocked countries; of Africa’s e-commerce SMEs are connectivity and the cost of broadband • Electrification and connectivity products. If these can be overcome, of post offices in Africa, which is then various opportunities in ICT a collaborative project of the AU services trade, including e-commerce, Commission and the Universal Postal could also be opened up. The collection Union being piloted in 13 countries. of tourism-related services – This could revitalize post offices in accommodation, travel and event-based some countries, offering lower-cost services – could all be traded alternatives for parcel deliveries; internationally over the internet. This includes Uber and Airbnb, which could • The Malabo Convention on also offer opportunities in rural areas. cybersecurity, which was adopted by the AU in 2014 and aims to mitigate Convenient and cost-effective online security-related obstacles to the payment services are important for development of e-commerce; and e-commerce. So far, 49 African countries are on the PayPal platform. • An EU-funded initiative – the policy This platform (and others) could well and regulatory initiative for a digital support participation by SMEs in Africa (PRIDA) – that works to e-commerce, because it does not facilitate broadband access through require validation of business status more efficient spectrum management and does not charge additional fees. and policy harmonization. Many African countries, however, still lack competitive mechanisms to Review of national legislation to repatriate PayPal funds (Stuart, 2020). support e-commerce across the 90 CHAPTER 3: COMMENTS

continent reveals a mixed picture. D’Ivoire, Nigeria, and, very recently, E-transaction laws, cybersecurity and Cameroon – are from west and central consumer protection laws, as well as Africa. Holding back many African privacy and data protection laws, still countries are concerns about domestic have to be developed in many countries. policy space and their right to regulate, The north African region, followed by their capacity to undertake west and southern Africa, is making commitments and, for some, the fact good progress, but much remains to that this is a plurilateral rather than be done, especially in parts of central multilateral initiative. and East Africa.3 The two regional economic communities E-commerce on Africa’s that have developed e-commerce trade agenda strategies are the Common Market for East and Southern Africa (COMESA) While e-commerce has been formally on and the Southern African Development the WTO agenda since 1998, when Community (SADC). COMESA members adopted a work programme announced in late 2017 that its free on e-commerce, it was only in trade area would be going digital. December 2017 at the 11th Ministerial The COMESA Digital Free Trade Conference that 71 members agreed to Agreement (FTA), which is still to be work towards WTO negotiations on operationalized, will function on three trade-related aspects of e-commerce. tracks: (i) e-regulation; (ii) e-logistics; Confirmation of the intention to start and (iii) e-trade. The e-trade track will WTO negotiations on trade-related include an e-commerce platform. aspects of e-commerce was put forward in January 2019. The work SADC member states adopted an programme has four focus areas: i) e-commerce strategy in 2012, but facilitating electronic transactions; ii) they have not yet implemented it. non-discrimination and liability; iii) online The SADC strategy has four pillars: consumer protection and unsolicited i) an enabled e-commerce environment; commercial electronic messages; and ii) a capacity development programme; iv) transparency, domestic regulation iii) the strengthening of an e-commerce and cooperation. In December 2019, subregional and national infrastructure; WTO members agreed to extend the and iv) an institutionalized framework moratorium on customs duties on to implement, evolve and govern e-transactions until the 12th Ministerial the current strategy at the regional Conference (MC12) in June 2020. level. UNCTAD’s B2C readiness and With the postponement of MC12, and internet penetration assessment the suspension of all WTO meetings (UNCTAD, 2019) puts South Africa, due to the COVID-19 pandemic, it is not Mauritius, and Seychelles in a leading yet clear what will happen to the group ahead well ahead of the other moratorium and how the work member states. None of these is, programme will continue. however, participating in the WTO e-commerce work programme. Very few African countries have been participating in the WTO e-commerce The inclusion of e-commerce on the work programme. Aside from Kenya, agenda of the African Continental the other participants – Benin, Côte Free Trade Area (AfCFTA) has proved CHAPTER 3: COMMENTS 91

to be a contentious matter. The latest available at: https://au.int/en/decisions/ indication is that trade-related aspects council. of e-commerce may be tackled in 2021. Meanwhile the AfCFTA agenda does 2 For details, see: https://www.tralac.org/ include several Annexes to the Protocol documents/resources/africanunion/3013- on Trade in Goods that support the-draft-digital-transformation-strategy-for- e-commerce. Member states are also africa-2020-2030/file.html. currently preparing to negotiate commitments for five priority services 3 Ibid. sectors – financial, transport, communication, business and tourism – References all of which are important for e-commerce development. Indeed, Stuart, J. (2020), “ICTs Services generally, the AfCFTA holds potential, Development and Trade: How Africa Can perhaps most specifically in the Benefit (2020 Update)”, Tralac Working provisions on trade facilitation, Paper. https://www.tralac.org/publications/ customs and border management, article/14417-icts-services-development- the elimination of non-tariff barriers, and-trade-how-africa-can-benefit-2020- services in regulatory cooperation update.html and perhaps, even at a future time, harmonization. These provisions could United Nations Conference on Trade and contribute to improvements in trade Development (UNCTAD) (2019), UNCTAD governance that are much needed B2C E-commerce Index 2019, UNCTAD to boost infra-Africa trade, which was Technical Notes on ICT for Development a key motivating factor to establish No. 14. https://unctad.org/en/Publications the continent-wide free trade area. Library/tn_unctad_ict4d14_en.pdf

Endnotes

1 Decisions of the 36th Ordinary Session of the Executive Council of the African Union, Chapter 4 The digital trade era – opportunities and challenges for developing countries: the case of Kenya

Tabitha Kiriti Nganga and Mary Mbithi* Abstract

E-commerce has grown rapidly in Kenya, supported by laws governing information and communications technology (ICT) services, e-commerce transactions, data protection and access to information. The government has established one-stop shops for the provision of government services to citizens and for trade logistics. The country is well positioned to expand its digital trade with the establishment of the Africa Continental Free Trade Area (AfCFTA), given the policies outlined in the government’s Digital Economy Blueprint. The growth of digital trade will open up new opportunities for the provision of online services, promote export diversification, boost efficiency and growth in manufacturing, improve competition in the financial sector, increase access to market-relevant information and increase market access for micro, small and medium- sized enterprises (MSMEs). However, the potential of digital trade is constrained by lack of access to financial services, low income, limited broadband and fibre coverage, inadequate transport infrastructure and skills gaps. Kenya’s legal and regulatory framework is insufficient to protect against cybercrime, ensure privacy, support the interoperability of mobile money platforms and banks, promote consumers’ trust in online transactions, protect intellectual property and protect digital sites from liability for customers’ posts.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 94 CHAPTER 4

Status of digital using the internet at 39 per cent. trade in Kenya Government institutions increasingly use the internet, including through Digital trade and digitally enabled e-mail and instant messaging, for transactions of trade in goods and receiving feedback from the public, services have been increasing globally. providing public services, collecting In Kenya, the growth of digital trade and data, conducting research, training digitally enabled transactions has been staff, purchasing or ordering goods phenomenal, and digitization1 has and services, advertising, performing become an integral part of numerous banking and other financial services, day-to-day activities and service making phone calls (Voice over IP delivery. The importance of digitization (VoIP)), tracking goods and services, of the Kenyan economy is expected to and recruiting internal and external continue, especially since the country employment candidates. The has recently developed and published a digitization of government processes Digital Economy Blueprint (Republic of was recently taken to another level, Kenya, 2019b). Adoption of technology when the National Population Census and the diffusion of digitization are key was in 2019 through a digital system drivers of the growth of digital trade and that improved efficiency and enabled of digitally enabled transactions in the a more rapid release of the final tally, country. The proliferation of information when compared to previous population and communications technology census rounds. A public sector ICT (ICT) services in Kenya provides survey by the Communications opportunities to leverage business Authority of Kenya (CAK) and the innovations to increase exports and Kenya National Bureau of Statistics imports (in part through improvements (KNBS) in 2017 (CAK and KNBS, in trade facilitation), enhance service 2018a) shows that over 43 per cent delivery and improve access to of government institutions offer information, all contributing to the e-government services, about 20 ease of doing business for the general per cent have websites with facilities public and for international traders. for online payments, and over 49 per E-government has helped strengthen cent use e-procurement systems. the business environment, particularly Notably, e-government has contributed by reducing the number of procedures, to improvements in the business and hence the time and costs, involved environment in terms of access in starting a business and by reducing to government documents and the time required to pay taxes, information on line, easier and faster as evidenced in the country’s delivery of government services, Doing Business indicators (World improved interaction between Bank, 2019). government, industry and citizens and so on (World Bank, 2019). E-commerce has increasingly been used by both government institutions The use of e-commerce by enterprises and private enterprises in Kenya, which also has been increasing. The national ranks 89th globally and 7th in Africa enterprise ICT survey (CAK and in business-to-consumer (B2C) KNBS, 2018b) shows that 39 per cent e-commerce readiness (UNCTAD, of private enterprises are engaged in 2018), with the share of individuals e-commerce. About 27 per cent of CHAPTER 4 95 enterprises receive orders over the 2014, to over 22 million as of June internet, while approximately 33 per 2019 (CAK, 2019a), enhancing access cent (including micro, small and to high-speed internet for better medium-sized enterprises (MSMEs)) service delivery, communication, and place orders over the internet. About accessibility of information including 35 per cent of enterprises use the that needed for international trade. internet to access banking services, 33 per cent to access other financial The use of mobile cellular services services, 36 per cent to provide has also increased. About 91 per cent customer services, approximately 17 of the population used a cell phone as per cent to deliver products online, 34 of June 2019 (CAK, 2019a), higher per cent to track goods and services, than the 80 per cent average for 55 per cent to research information Africa in 2018 (International about goods or services (excluding the Telecommunication Union, 2018). government website) and 40 per cent Mobile telephony, in addition to voice to research and advertise. Additionally, and short message service (SMS), about 93 per cent of enterprises use is used to provide various services, e-government services to file tax including money transfers and returns, obtain trade payments. Mobile licences, register money transfer services businesses, make “In Kenya, have particularly gained enquiries and obtain the growth of popularity, mainly due information, among to the ease of using other business- digital trade and smartphones. For the related services. digitally enabled period April–June 2019, transactions Kenya had over 32.6 At the heart of growth in has been million mobile money digital trade in Kenya is phenomenal, service subscriptions the increased access to that averaged over and use of ICT. The and digitization 270 transactions and availability of internet has become an US$ 7.28 billion (CAK, services, for instance, integral part 2019a) per month. has been driven by of numerous During the same period, the development of day-to-day mobile-commerce internet infrastructure, transactions averaged particularly fibre optic activities and 197 million and KES and mobile broadband, service delivery.” 1.95 trillion (US$ 19.5 but also the availability billion) per month (CAK, of affordable data- 2019a). Mobile internet enabled devices. As of June 2019, access has also risen, with about 41 data/internet subscriptions stood at per cent of enterprises in 2016 49.9 million, with mobile data internet accessing the internet through mobile subscriptions accounting for over 99.9 broadband (CAK, 2018). per cent of these subscriptions (CAK, 2019a). Broadband subscriptions are ICT has changed financial sector about 44.5 per cent of the total data/ operations in Kenya, leading to a internet subscriptions in the country greater volume of transactions and have increased five-fold since and faster transactions, including 96 CHAPTER 4

payments. The Global Findex database (Republic of Kenya, 2019b) is (World Bank, 2018) shows that in expected to build on this foundation. Kenya from 2014 to 2017 the share Furthermore, in 2019 the country of the population (over 15 years of age) enacted a modern data protection who made or received digital payments law (Republic of Kenya, 2019a), which increased from 69 per cent to 79 per is compliant with the European Union’s cent, the share who owned a credit General Data Protection Regulation. card increased from 5 per cent to 7 The new data protection law will go a per cent, and the share with a mobile long way towards creating the right money account increased from 58 environment2 for investments in digital per cent to 73 per cent. These services, as well as the use of these increases in access to financial services by individuals and firms. services have taken place in both urban and rural areas, among older In 2013, the Kenyan government adults and youths, and among both implemented the Huduma (service) men and women, thus contributing to Kenya programme, which aims to a more inclusive financial sector. transform public service delivery by providing access to various public Policies supporting services and information. The digital trade in Kenya programme, through its integrated technology platform, provides one-stop ICT is identified as an enabler for shop citizens’ service centres socioeconomic transformation in Kenya (Huduma Centres) at various counties (Republic of Kenya, 2007). The Kenya in the country. In 2014, the government ICT policy (Ministry of Information and rolled out an e-Citizen web portal to Communications, 2006) and a recent enable public online access to draft revision promote ICT as a government services, including developmental tool, through increased filing returns and payment of taxes, use of information technologies, the renewing drivers’ licences, registering development and use of e-government businesses and applying for passports to improve efficiency and the quality and birth and death certificates, among of public service delivery, and the other services. The platform also development of IT infrastructure. The offers options for payment, including ICT policy is based on the principles through mobile money, debit cards and of keeping pace with changes in e-Citizen agents. These programmes technology, providing universal service have made access to the various public access at an affordable cost, ensuring services and information much easier, adequate competition, encouraging while also improving service delivery innovation, standardizing ICT products efficiency, convenience and timeliness. and services for quality, maintaining global connectivity and safeguarding For cross-border trade, the privacy and security. The policy has government has promoted digitization provided a framework for enhanced and automation of trade transaction use of ICT in both government and processes through the establishment private enterprises. Over 48 per cent of the National Electronic Single of government institutions have an IT Window System (authorized under policy (CAK and KNBS, 2018a). the National Electronic Single Window The new Digital Economy Blueprint System Act, 2016),3 which aims to CHAPTER 4 97 address challenges related to for the mandatory registration of all processing of import and export cargo Kenyan citizens and foreigners resident documentation. This online cargo in the country. Implementation began in clearance platform, launched in 2014, 2019. A single register became the interfaces with and integrates depository for personal information automated export and import under different government information from business and documentation processes, providing a government agencies, issuing national identification number (Huduma documents such as export and import Namba, i.e., service number) to be permits, licences, and certificates, used when accessing all government among others. The system is also services. In addition, the system linked to financial institutions, including aims at ensuring the preservation, banks and mobile payment options, protection, and security of this through the Kenya Revenue Authority’s information, including national online taxation system and the identification cards, foreigner Government’s e-Citizen platform, certificates, birth and death certificates, hence providing a complete driving licences, foreign national’s electronic cargo documentation work permits, passports, foreign platform. The system has facilitated travel documents and student trade by increasing transparency in identification documents. The digital export and import processes, reducing identity effort is seen as a foundation, the number of processes and which the government and the private documents required for processing, sector can use to strengthen other providing a paperless (electronic) programmes, including electoral application by traders on a 24/7 management, public financial basis, and allowing for multiple management, payment systems, payment channels. This improvement health, and social security, among in services has reduced the costs others. NIIMS has, however, raised and time required to complete trade several concerns, among them security transactions. In addition, the platform with regards to access to private accelerates communication, thus data and a possible exclusion facilitating both payments and cross- of the marginalized in the country. border trade. The single window system is the main reason why Kenya The Kenya Information and achieved one of the largest Communications Act of 2009, improvements in the World Bank amended in 2013 (Republic of Kenya, Doing Business indicators (World 2013), governs e-commerce Bank, 2019), including improvements transactions in Kenya, allowing and in trading across borders. recognizing electronic contracts for digital transactions. The Act creates an Additionally, the government of Kenya electronic signature and provides for has promoted implementation of CAK to regulate e-commerce and digitization programmes under the protect consumers. The Consumer 2018 Amendment of Registration of Protection Act of 2012, revised in 2016 Persons Act (Republic of Kenya, (Republic of Kenya, 2016a), provides 2018b), which provides for for the protection of consumers and establishment of a National Integrated prevention of unfair trade practices in Identity Management System (NIIMS) consumer transactions. 98 CHAPTER 4

Data protection in Kenya is provided Response Team – Coordination under various laws. The Registration of Centre (National KE-CIRT/CC) Persons Act prohibits the publication at the CAK, which coordinates or communication of data for reasons the response to cyberattacks and other than those allowed for official remediation of cybersecurity incidents. purposes. The Information and Communications Act provides for Opportunities for digital adequate cybersecurity for government trade in Kenya systems, such as the NIIMS. The Africa Continental Free The Access to Information Act Trade Area (AfCFTA) offers digital provides for protection of personal trade opportunities for its members, data and the right to privacy, and Kenya included. The AfCFTA the Data Protection Act, 2019 brings together all 55 member (Republic of Kenya, 2019a) seeks states of the African Union, covering to protect personal data. The a market of more than 1.2 billion government of Kenya has also people, including a growing middle undertaken several measures to class, and a combined gross enhance cybersecurity at the national domestic product (GDP) of more level. In 2018, the country enacted the than US$ 3.4 trillion. The AfCFTA Computer Misuse and Cybercrimes offers Kenyan small and medium- Act, 2018 (Republic of Kenya, 2018a), sized enterprises (SMEs) an which governs offences relating to alternative route to market their computer systems; facilitates the timely goods, especially those SMEs and effective detection, prohibition, and entrepreneurs who were prevention, response, investigation previously hindered by a lack of and prosecution of computer and connectivity, high transaction costs cybercrimes; and facilitates and information asymmetries. international cooperation in dealing Integrating Africa into a single digital with computer and cybercrime issues. market will create economies of scale This legislation also responds to the and opportunities to grow both local African Union’s convention on and regional economies. Compared cybersecurity and personal data to many other African countries, protection (African Union, 2014), Kenya is in a good position to benefit which requires African Union parties from the AfCFTA due to the Digital to adopt cybersecurity legislation and Economy Blueprint (Box 1), launched regulatory measures against criminal in May 2019, which could set a activities related to confidentiality, precedent for a new digital Africa integrity, availability and survival of and encourage wider cooperation ICT technology systems’ data between African nations. processing and network infrastructure. Additionally, this convention requires Through its disruptive technologies,4 that African countries ensure that a digital economy could spur economic e-commerce activities are exercised development in Kenya. For example, freely, except for gambling and M-Pesa5 was one of the first banking prohibited activities. The country applications to be embedded in mobile has also established the National SIM toolkits. The mobile money Kenya Cybersecurity Incident infrastructure has created a new CHAPTER 4 99

Box 1: The Digital Economy Blueprint

The five pillars of the Blueprint are and data centres. The Blueprint digital government, digital business, acknowledges the digital divide digital infrastructure, innovation- in Kenya and proposes an driven entrepreneurship and improvement generated by digital skills and values. The digital investment from private sector government pillar comprises an operators and government interactive government portal initiatives. This will include the offering e-government services, National Optical Fibre Backbone along with security of data and Infrastructure (NOFBI), investment processes. The goal is to simplify in broadband network infrastructure government’s interactions with and initiatives by the CAK. its citizens, facilitate greater involvement of businesses and The innovation-driven entrepreneurship the general public in decision- pillar is concerned with a system making and improve the business that supports local enterprises in environment. This requires having producing competitive products a solid ICT infrastructure. and services. This would require setting aside funding for research, The digital business pillar giving tax support to enterprises, emphasizes the development of a providing access to public robust marketplace for digital trade, procurement for innovation products financial services and content. and supporting business models This entails having an affordable, that leverage open access and efficient and safe payment system; intellectual property systems, encouraging an improved legal incubators and accelerators framework; and developing regional for innovation. markets for cross-border trading. This pillar calls for e-commerce to The digital skills and values pillar go beyond national borders and for highlights the development of a Africa to integrate into a single digitally skilled workforce based digital market, thus creating on sound ethical practices and economies of scale. socio-cultural values. It emphasizes the importance of artificial The digital infrastructure pillar intelligence, robotics, coding in entails the development of reliable, relevant tools, cybersecurity, the affordable and secure broadband Internet of Things and mobile connectivity. This includes logistics app development. infrastructure, appropriate and affordable devices, management of digital assets, payment systems Source: Republic of Kenya (2019b). 100 CHAPTER 4

market and disrupted the financial The internet in Kenya has opened up industry ecosystem to become a major new opportunities for B2C and competitor for the traditional banking business-to-business (B2B) transactions sector. Mobile money enables in educational, financial, logistics and transferring money from person other services delivered online. to person, buying airtime, paying utility bills, and so on. M-Pesa The use of personal computers connected a population that and mobile phones to access the was hitherto unbanked (people internet has provided a convenient who did not use traditional channel for accepting orders from banking services). retail customers or other businesses, making it a useful means of delivering Disruptive technologies such products and services to many as artificial intelligence, robotics, customers. Kenya has a young, blockchain, drones, the tech-savvy population Internet of Things, big and a fast-expanding data and software- middle class who have enabled industrial “Disruptive computers, mobile platforms have technologies phones and access to great potential to such as artificial internet services either impact economic intelligence, at home or at work. development. For robotics, These groups provide a example, M-Pesa huge market for digital transformed the blockchain, goods and services, financial sector by drones, the internet banking, significantly increasing Internet of international payments financial inclusion, as Things, big data and the purchase and well as opening up the and software- sale of goods and possibilities of new services online. business models and enabled According to the CAK, opportunities such as industrial the percentage of the PayGo, digital credit platforms have Kenyan population using and (for better or worse) great potential to the internet was 98.1 mobile betting (Republic impact economic per cent in June 2019 of Kenya, 2019b). (CAK, 2019a), having Digital technology development.” risen from 45 per cent creates opportunities in 2016 (Internet Live for innovation. New Stats, 2016). technologies give access to markets that were previously closed and Digital platforms can give MSMEs – remove distortions in demand by which make up 98 per cent of all giving customers direct access to businesses in Kenya, create 30 per products that were previously cent of the jobs annually and contribute controlled. Rapid technological 3 per cent of the GDP (Central Bank developments have created new of Kenya, 2018) – the opportunity to markets that now connect consumers, enter new markets and to strengthen lower transaction costs and reduce their (currently limited) linkages with information asymmetry. larger and more productive firms. CHAPTER 4 101

This enables them to supply goods and E-commerce and the use of services that they otherwise would digital platforms afford Kenya the have been unlikely to do, owing to opportunity to diversify its export location constraints and prohibitive markets and move into higher value- marketing costs. added production segments, rather than concentrating on traditional Digital platforms are effective channels exports (e.g., coffee, tea, fruits and for the exchange of value/financial vegetables). Export opportunities exchanges either in the form of goods provided by e-commerce may help to or services. Using digital platforms ensure longer-term firm survival in reduces the use of intermediaries and Kenya. Chacha and Edwards (2017) rent seekers6 between producers and find that only a few Kenyan exporters consumers, enabling a more equitable survive beyond the first year, and distribution7 of accrued value to that selling to a larger number of the different participants along the destination countries (among other value chain. factors) is associated with longer survival in international markets. For example, Travelstart is a digital At the same time, Suominen (2017a), travel-booking platform in Kenya that in a study conducted in 14 developing customers can use to book domestic economies (Argentina, Bangladesh, and international flights. They can Brazil, Chile, Colombia, Ghana, India, also hire vehicles and make hotel Kenya, Mexico, Nigeria, Pakistan, reservations without going to a the Philippines, South Africa and physical travel agency or using Uruguay), shows that on average 63 a travel agent. per cent of online sellers sell to two or more markets, while only one third of E-commerce offers great opportunities offline sellers who export sell to more for Kenya, with the possibility of than one market. Thus it is not trading platforms designed for the surprising that data from eBay suggest Kenyan user. Increased availability that 80 per cent of online exporters of broadband internet has enabled survive as exporters after their first the digitization of the retail sector year, compared to only one third of and enhanced online retailers offline exporters. such as Jumia.co.ke, Kilimall.co.ke, jiji.co.ke, Cheki.co.ke, Shopit.co.ke, Digitization of production presents Mamamikes.co.ke, MIMI online shop important opportunities for Kenyan (www.mi mi.co.ke), Electrohub.co.ke, manufacturing firms in terms of Amanbo.co.ke, and so on. Firms growth and employment creation. use digital platforms to offer Banga and te Velde (2018) find that commercial products and services digitization has helped to boost such as e-commerce (e.g., Amazon, Kenya’s GDP growth by supporting Alibaba, Jumia), search engines retail electronic payment systems and (e.g., Jumia, Masoko by Safaricom), financial inclusion, and increasing the content platforms (e.g., Mdundo, vitality of the financial sector. The Irokotv, Waabeh) or ride-sharing authors contend that the use of digital applications (e.g., Mondo Ride, technologies and robotics by Kenyan SafeBoda, Little Cab) (Republic of manufacturing firms would improve Kenya, 2019b). efficiency and boost their output 102 CHAPTER 4

and exports, and thus employment. between farm and plate. Another benefit Growing digitization in Kenya can to be garnered from a digital economy lead to the establishment of service is precision agriculture, where industries for the repair and computer-guided aerial mapping, data maintenance of these machines, as collection on soil and weather, and the well as industries for data storage and use of global positioning systems (GPS) information processing services, and GPS-computer-guided implements including cloud computing, computer such as tractors and harvesters can be systems design, programming, and used by farmers, hence making farming computer-aided design and digital much more efficient (Ministry of cutting (Banga and te Velde, 2018). Information, Communications and Technology, 2019). ICT has supported increased trade in services in Kenya. For example, some Digital trade challenges health services are now delivered over for Kenya the internet due to ease of internet access. Blockchain technology can Limited access to finance and be used to track the pharmaceutical infrastructure gaps constrain the ability supply chain. Such tracking capability of individuals and firms to purchase would help tackle the issue of digital technologies. While larger firms counterfeit medication, which kills in Kenya are in a better position to approximately 100,000 people in leverage new technologies, MSMEs Africa every year (Ministry of are unable to do so, mainly due to their Information, Communications and lack of creditworthiness and the cost Technology, 2019). of deploying these technologies (Were, 2016). Although Kenya has made great The increasing availability of mobile strides in mobile phone ownership, phones in Kenya has led to a rise in there is still a significant proportion SMS-based information dissemination of the population that does not have services that could improve access to access to broadband internet services information and empower farmers with to benefit from the digitization of trade. weather, market and other relevant Key digital infrastructure constraints information. Digitization has transformed include limited access to fibre and the lives of farmers and others in broadband connectivity due to the agricultural value chains by providing high costs of installation and use, low near real-time agricultural and market availability of spectrum for wireless, information. Farmers get information low availability of public access points from markets, and they also receive and shared access to devices, as payments for the sale of their well as the inability for persons with agricultural output using online disabilities (PWDs) to access and platforms. In other words, the use digital infrastructure. Low-quality digitization of the agricultural sector roads8 and the limited extent of the offers new opportunities through rail network, airports and harbours, innovations that can upscale the coupled with the many informal agricultural value chain. Trade platforms settlements and un-numbered houses have been established that bring and streets in the formal settlements, farmers closer to the traders by result in high delivery costs and lengthy reducing the number of intermediaries delays in the delivery of goods bought CHAPTER 4 103 online. In addition, postal services in 2017), and trading delays due to Kenya are very unreliable, especially non-tariff barriers, slow customs in remote areas (Wanyonyi, 2018). procedures and poor logistics All of this severely limits the reach (Republic of Kenya, 2017). Targeting of e-commerce in the country. skills development to increase the capabilities of the workforce and Poverty and high rates of illiteracy lowering the cost of electricity limit participation in digital commerce. (Muchira, 2018; Shiundu, 2017) are About 36 per cent of Kenyan crucial to promote the use of digital households live below the poverty products and platforms. line, which makes paying for the internet subscription required for online Cybersecurity threats, poor governance shopping unaffordable. Some 38.5 per and instability constrain the success of cent of the Kenyan adult population the digital economy in Kenya. is illiterate, which results in Insufficient regulation, uncontrolled communication challenges and lack access to digital infrastructure, and lack of access to information. For example, of digital hygiene10 predispose all the inability to read can make it hard to participants in the digital economy to obtain information on digital investment cybersecurity risks and threats opportunities or capitalize on the (Australia Computer Society, 2016). availability of information (for example, To address the issues of cybercrime, it is difficult to benefit Kenya has established from SMS alerts if you under the CAK the cannot read). Education, “Consumers’ National KE-CIRT/CC, capacity building and which forms the citizen sensitization on lack of trust in national cybersecurity the usefulness of products and management framework information contained services sold and is Kenya’s national in the digital alerts are online, delivery point of contact on therefore crucial systems, online cybersecurity matters. in order for Kenya Under this framework, to benefit from payments and about 51.9 million digital trade. other online cyberthreats were services remains detected in Kenya during The use of enhanced, an important the 2018–2019 period advanced digital challenge to the (CAK, 2019b). The technology in the National KE-CIRT/CC automotive industry development of coordinates responses is limited by gaps in digital trade.” to cybersecurity matters skills and low at the national level in investment in training as collaboration with evidenced by enrolments in science, relevant actors locally and internationally, technology, engineering and detecting, preventing and responding to mathematics (STEM),9 credit various cyberthreats while interfacing constraints, the high costs of electricity with both local and international ICT and steel compared with those costs service providers and with the Judiciary in neighbouring countries such as for the investigation and prosecution of Uganda (Muchira, 2018; Shiundu, cybercrimes. Kenya has also enacted 104 CHAPTER 4

Table 1: Kenyans’ level of concern about online privacy

Response Weighted sample Proportion (%)

Much more concerned 540 54

Somewhat concerned 148 15

No more or less concerned 102 10

Somewhat less concerned 70 7

Much less concerned 134 13

Total 994 10011

Source: CIGI‑Ipsos (2019).

the Data Protection Act, 2019 (Republic needs to establish a legal framework of Kenya, 2019a). Additionally, the for online consumer protection that African Union’s cybersecurity treaty, enables consumers to seek legal known as the African Union Convention redress in case of breach of trust. on Cyber Security and Personal Data In its Digital Economy Blueprint, the Protection, imposes an obligation on Government has committed itself to Kenya to establish legal, policy and develop a legal framework to enforce regulatory measures to promote digital contracts, resolve disputes cybersecurity governance and and protect consumers. The legal control cybercrime. framework would establish a level playing field between providers and Consumers’ lack of trust in products customers, and advance consumer and services sold online, delivery protection through improved systems, online payments and other supervision, transparency and online services remains an important digital/financial literacy. challenge to the development of digital trade. For example, threats to privacy Lack of protection of intellectual appear to be a growing concern. A property (IP) constrains participation survey in November 2019 by the in digital trade. IP that can be digitized Centre for International Governance is hard to protect since consumers Innovation (CIGI) (2019) finds that 54 can copy and use online content per cent of Kenyans are much more without paying for it or without concerned about their online privacy receiving permission from the rights than they were in 2018, while 13 per holders. Since a majority of Kenyans cent are much less concerned (Table 1). are not aware of how they can protect their ideas and earn income from While the private sector has its own these ideas through trade, the interest in building consumer trust and development of internet services and confidence in e-commerce and online platforms has underlined the need to services, balanced consumer strengthen the legal framework to protection laws can also support protect trademarks and copyrights consumer confidence. Hence Kenya in the internet era. CHAPTER 4 105

Digital platforms such as e-commerce identity systems. The Strategy commits sites depend on user reviews of goods member countries to promote open and services sold on such sites, and standards and interoperability to these platforms need to be protected enhance trust in cross-border from liability for the content generated transactions, personal data protection by the reviewers. Hence, in order to and privacy (African Union, 2019). encourage digital platforms to serve Improvements in digital infrastructure, both the local and international which is one of the pillars in the Digital markets, the Kenyan Government and Economy Blueprint, would increase its East African counterparts should Kenya’s ability to meet these challenges. create and modernize safe harbours that limit the liability of digital platforms Conclusion from user-generated content. Kenya has made significant progress Digital trade and especially cross- in digital trade. Various opportunities border, online trade are enhanced abound. In particular, the launch of the by the existence of secure and reliable AfCFTA will provide a huge market for online payment systems. In Kenya, goods and services that is also a huge there are several national online digital economy. However, a lot payment platforms for both domestic remains to be done, including in ICT and regional transactions.12 Credit development, in order for the country cards, mobile money transfers and to become a competitive global player other forms of internet-enabled in such trade. Considerable efforts are payments facilitate e-commerce and required to strengthen transport robust commercial activities within infrastructure (such as railway systems, Kenya and enable the country to roads, airports and harbours), the trade seamlessly with other Common postal system and trade logistics, Market for East and Southern Africa all of which are important for the (COMESA) and East African Community operation of digital platforms. (EAC) countries. However, for Kenya Continued digitization of border to enhance digital trade with the rest of procedures, the establishment of the world, cross-country collaboration blockchain13 transport corridors in is still needed to fuel interoperability customs and other border agencies and integration among mobile money in the EAC member countries, platforms and banks, so that the strengthened surveillance of payment systems of buyers and cybercrime and more effective data sellers can work seamlessly with protection are equally important. The each other. Enhanced interoperability launching of the African Union’s Digital will reduce friction in e-commerce Transformation Strategy for Africa and transactions, increase ease-of-use Kenya’s Digital Economy Blueprint, for consumers and reduce costs for increasing domestic efforts to enhance platform operators. universal access to and utilization of ICT services and addressing The African Union’s Digital cybercrimes in collaboration with Transformation Strategy for Africa international players will support addresses transboundary challenges, Kenya’s march towards a truly digital especially interoperability of systems, economy and to becoming a global as well as harmonization of digital player in e-commerce. 106 CHAPTER 4

Endnotes 9 According to the Commission for University Education and Kenya National Bureau of 1 The process of converting analog information Statistics, only 1 in 4 undergraduates (pictures, text, sound, etc.) into a digital studied STEM courses in 2017 compared format that can be processed by a computer. to 43 per cent in Business and Humanities (Commission for University Education 2 For example, few procedures in registering (2018)). KES 404 billion (US$ 378 billion) business, shorter time in transacting was spent by African countries on hiring business, efficiency of government expatriates in the STEM fields. regulations and so on. 10 The cleanliness or uncleanliness of a 3 The site, https://www.kentrade.go.ke, is person’s digital habitat for example, meant to simplify trade processes for the posting material such as photos online, private sector. one’s desktop icons, file structure, folder trees, Photoshop files or hard drive, 4 Disruptive technologies are innovations that Facebook, Twitter, Instagram pages or significantly change the way that digital persona, etc. consumers, industries or businesses operate. They sweep away the systems or 11 The percentages have been rounded habits they replace because they have up to 100. attributes that are much more superior. 12 The Kenya Electronic Payment and 5 M-Pesa is a mobile banking service that Settlement System (KEPSS) is a real-time allows users to store and transfer money gross settlement (RTGS) system, meaning through their mobile phones. The service is that transactions are cleared and settled a blend of two entities where M means on a continuous basis. The East African mobile and Pesa means money or payment Payment System (EAPS) and the Regional in the Swahili language. Payment and Settlement System (REPSS) aim to facilitate cross-border payments 6 Rent seekers are people who manipulate and settlements within the East African public policy or economic conditions as a Community (EAC) and Common Market strategy for increasing profits. However, for East and Southern Africa (COMESA) digital platforms connect sellers with regions, respectively. buyers without the need for physical stores or distributors, and they allow space for 13 Blockchain refers to a type of data competition among the sellers to the structure that identifies and tracks benefit of the consumers. transactions digitally and shares this information across a distributed network 7 However, bigger and well-established of computers, thus creating a sort of digital platforms such as Amazon, Google distributed trust network (Okazaki, 2018). and Facebook can acquire monopolistic tendencies and undermine the smaller and References younger online platforms. African Union (2014), African Union 8 Kenya has a road network of about 177,800 Convention on Cyber Security and km, of which only 63,575 km are classified Personal Data Protection. https://au.int/ as in good condition and maintainable sites/default/files/treaties/29560- (Kenya National Highways Authority, 2019). treaty-0048_-_african_union_convention_ CHAPTER 4 107

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https://publications.iadb.org/bitstream/ Wanyonyi, P. (2018), “E-commerce: Poor handle/11319/8166/Accelerating-Digital- infrastructure holds Africa back”, Nairobi Trade-in-Latin-America-and-the-Caribbean. Business Monthly, 7 February 2018. PDF?sequence=1 Were, A. (2016), “Manufacturing in Kenya: Suominen, K. (2017b), “E-commerce features, challenges and opportunities”, SET Development Survey and Index”, Report for Scoping Paper, London: ODI. US Agency for International Development (USAID), April 2017. https://pdf.usaid.gov/ World Bank (2018), The Global Findex pdf_docs/PA00MP8T.pdf Database 2017: Measuring Financial Inclusion and the Fintech Revolution, International Bank Suominen, K. (2017c), “Silver Bullet to for Reconstruction and Development / The Fire Up Small Business Exports: Plurilateral World Bank: Washington, DC. Agreement on De Minimis”, website post, 21 April 2017. https://katisuominen.wordpress. World Bank (2019), Doing Business 2019: com/2017/04/21/silver-bullet-to-fire-up- Training for Reform, International Bank for small-business-exports-plurilateral- Reconstruction and Development / The agreement-on-de-minimis World Bank: Washington, DC. 110 CHAPTER 4: COMMENTS

Comments

NASSIM OULMANE AND MUSTAPHA SADNI JALLAB*

There is a large and growing consensus totalled US$ 27.7 trillion (UNECA, on the role of trade in support of 2018b; WTO, 2018). economic development and economic growth. It is also generally recognized Africa is also experiencing the rapid that having a predictable and transparent growth of e-commerce, with an rules-based multilateral trading system is estimated annual rate of 40 per cent. an important condition that needs to be As a result, the digital economy in met in the fight against poverty (World Africa is expected to grow to over Bank Group and WTO, 2018). The US$ 300 billion by 2025 (McKinsey, trading system is evolving rapidly, with 2013). However, important issues new forms of trade emerging. The remain to be addressed. In 2020, development of information and internet availability in Africa improved, communications technology (ICT) but it remains at 39.3 per cent, which can further support the goal of is low compared to the world average economic development: e-commerce of 58.8 per cent.1 Fixed broadband (Deardorff, 2017). As argued by the availability remains below 1 per cent World Bank Group and the WTO for Sub-Saharan Africa (ITU, 2019; (2018), trade and technology are closely Statista, 2019). Beyond these average related, and technologies are figures, a key issue is the connectivity considerably reducing trade costs of all actors and groups, and the most (Fink, Mattoo and Neagu, 2005). vulnerable, to opportunities through E-commerce has the potential to be a existing institutions that enable major game changer and, subsequently, economic activities (banks, financial an engine for trade and economic institutions, certifications, markets, development within the context of the insurance, etc.). Women do not fully United Nations’ Sustainable benefit from access to the internet, Development Goals 2030 agenda compared to men. The digital gender (UNCTAD, 2017). Indeed, e-commerce gap is quite significant: in 2019, 33.8 has important implications, as business- per cent of the men had access to the to-business e-commerce represents internet while only 22.6 of women did. roughly US$ 15 trillion annually and At the global level, the gap is less business-to-customer transactions significant, as we observed 58.3 around US$ 1 trillion. In addition, the per cent and 48.4 per cent internet value of e-commerce transactions access, respectively (ITU, 2020).

* This commentary represents the opinions of the authors. It is not meant to represent the official position or opinions of the United Nations Economic Commission for Africa (UNECA) or the United Nations African Institute for Economic Development and Planning (IDEP) or its members or any additional and respective institutional affiliations of the authors. It is also not meant to represent the position or opinions of the WTO or its members. CHAPTER 4: COMMENTS 111

The literature recognizes that ICT has firms in developing countries. This is an important role to play in sustaining particularly true, as the authors argue, economic growth and contributing to when a conducive environment is the resilience of economies, especially created and appropriate relevant and during crises, as witnessed today, with sectoral policies are implemented. most economies in lockdown or slowly WTO estimations suggest that emerging from lockdown due to the developing countries’ share in global COVID-19 pandemic and a looming trade could grow from 46 per cent in global macroeconomic recession 2015 to 57 per cent by 2030 (WTO, (UNECA, 2020; IMF, 2020; WTO, 2018). Technological breakthroughs 2020). As the pandemic is having and e-commerce are expected to have systemic effects and in order to ensure a profound impact on labour markets, the social distancing required by health thus affecting the dynamics of future authorities, economic operators, job markets. To illustrate this point, including consumers and producers, currently 60 per cent of the African are increasingly using e-commerce population is under the age of 25, and for their transactions. This trend is it is estimated that between 10 to 15 observed in Africa as million young people join well, where certain Africa’s labour market online platforms have annually. E-commerce recorded huge “Africa is also and digital economies increases, thus experiencing can contribute to significantly facilitating the rapid growth developing new domestic consumption. of e-commerce, opportunities and This is also the case in generating decent jobs, Kenya, where the use of with an estimated especially for women e-commerce multiplied annual rate of and youth (ILO, 2018). by a factor of three 40 per cent.” This requires adjusting during the current crisis policies relating to (CNBC Africa, 2020). education, training and vocational training in order to better One important and timely aspect that match people’s skills with the evolution this chapter highlights is the way in of job requirements. which e-commerce can support economic transformation and This chapter underscores the contribute to increasing market increasing importance of e-commerce opportunities while reducing trade in Kenya, which is strongly facilitated costs. E-commerce and relevant by the government’s proactive policies innovations supported by appropriate in support of economic development. digital applications can promote These policies are geared towards entrepreneurship, contribute to expanding trade within the Africa developing the private sector, and Continental Free Trade Area (AfCFTA), create a new set of jobs (ITC, 2018). as outlined in the government’s Empirical evidence from the WTO Digital Economy Blueprint. The (2018) shows that the reduction of authors clearly identify the huge trade costs could be particularly potential gains the AfCFTA could beneficial to micro, small and medium- generate for the Kenyan economy sized enterprises (MSMEs), including and how the AfCFTA could facilitate 112 CHAPTER 4: COMMENTS

economic transformation through the potential to lead Africa on a path deeper regional integration and better of inclusive and sustainable growth. access to regional and global value To respond to those challenges, many chains. The growth of digital trade in initiatives have been deployed. For Africa will open up new opportunities example, the United Nations Economic for the provision of online services, Commission for Africa (UNECA) has promote export diversification, and developed a Centre of Excellence for boost efficiency and growth in Digital Identity, Digital Trade and manufacturing. It will also improve Digital Economy (DITE) in partnership competition in the financial sector, with the African Union Commission increase access to market-relevant to support African countries to information and enhance market have better access to technologies. access for MSMEs. This trend This could facilitate the smooth will most likely be accelerated by implementation of trade agreements the COVID-19 pandemic and its such as the AfCFTA Agreement or the impacts on human behaviour and measures implemented under the interaction, such as social distancing WTO’s Trade Facilitation Agreement, and remote work, thus transforming with a reduction in administrative trade working methods, accelerating procedures expected to be cost- innovations and boosting the effective. Also technical support on supply of new digital digital strategy or legal solutions to support and frameworks should be develop e-commerce. “E-commerce provided by relevant can support stakeholders. The It is important to recall, economic work on the African however, that many Continental Digital challenges are still transformation Transformation Strategy present in Africa to and contribute (DTS) is another translate the expected to increasing illustration of the efforts gains from e-commerce market made at the continental into tangible economic opportunities level to address those benefits. For instance, challenges. addressing the while reducing infrastructure gap and trade costs.” The authors highlight establishing enforceable, another important relevant and appropriate constraint that results regulatory frameworks remain from a lack of access to finance, strategic to protect society against particularly when considering the cybercrime, ensure privacy, support importance of MSMEs in the Kenyan the interoperability of mobile money economy and on the African continent. platforms and banks, promote Emerging technologies such as consumers’ trust in online transactions, financial technology (FinTech) may protect intellectual property and help to reduce financial exclusion protect digital sites from liability for on the continent. This is particularly customers’ posts (UNECA, 2018b). relevant for Africa – according to the World Bank (2019), despite a While this is a real challenge, the significant improvement recently, blockchain technological revolution has the continent is facing a low rate of CHAPTER 4: COMMENTS 113 bank access, with 56 per cent of need to be addressed to increase adults on the continent not having the coverage and accessibility of access to formal banking services in FinTech services. 2017. It is therefore encouraging to note that in recent years, Africa has To conclude, this chapter evidences seen a boom in FinTech start-ups and underscores the importance of across the continent (UNECA, 2018a). e-commerce for Kenya and East Africa FinTech has had a positive impact as a tool for economic development on e-commerce, and mobile money and fuller integration in the world remains the most advanced platform economy. It clearly demonstrates how today for financial inclusion in Africa access to new technologies, which is through the variety of services especially relevant during the current offered to users (UNECA, 2018b). disruptive time due to the outbreak of To promote the development of COVID-19, has the potential to offer these innovations, many issues tangible opportunities for achieving related to regulatory frameworks inclusive growth. 114 CHAPTER 4: COMMENTS

Endnote International Monetary Fund (IMF) (2020), World Economic Outlook Report: Analysis 1 See www.internetworldstats.com/ on the Global Economic Outlook. stats1.htm. International Telecommunication Union References (ITU) (2019), The State of Broadband: Broadband as a Foundation for Sustainable CNBC Africa (2020), “Kenya Sees Development, September 2019. https:// Increased Demand for e-Commerce Amid www.itu.int/dms_pub/itu-s/opb/ COVID-19”, 2 April 2020. https://www. pol/S-POL-BROADBAND.20-2019- cnbcafrica.com/videos/2020/04/02/ PDF-E.pdf kenya-sees-increased-demand-for-e- commerce-amid-covid-19/ International Telecommunication Union (ITU) (2020), Measuring Digital Development, Deardorff, A. V. (2017), “Comparative Facts and Figures 2019. advantage in digital trade”, in Evenett, S. (ed.), Cloth for Wine? The Relevance of International Trade Centre (ITC) (2018), Ricardo’s Comparative Advantage in the SME Competitiveness Outlook. 21st Century, London: Centre for Economic Policy Research (CEPR). McKinsey & Company (2013), Disruptive Technologies: Advances that Will Transform Fink, C., Mattoo, A. and Neagu, I. C. Life, Business, and the Global Economy, (2005), “Assessing the Impact of New York: McKinsey & Company. Communication Costs on International Trade”, Journal of International Economics Statista, website data. www.statista.com/ 67(2): 428-445. statistics/370681/fixed-broadband-internet- penetration-region/ International Labour Organization (ILO) (2018), Digital Labour Platforms and the United Nations Conference on Trade Future of Work: Towards Decent Work in the and Development (UNCTAD) (2017), Online World. Maximizing the Development Gains CHAPTER 4: COMMENTS 115

from e-commerce and the Digital Economy, World Bank (2019), data catalog. https:// Geneva: UNCTAD. datacatalog.worldbank.org/search/type/ dataset United Nations Economic Commission for Africa (UNECA) (2018a), Emerging Issues World Bank Group and World Trade in ICT in Africa. Organization (WTO) (2018), Trade and Poverty Reduction: New Evidence of Impacts United Nations Economic Commission for in Developing Countries, Geneva: WTO. Africa (UNECA) (2018b), Promoting Financial Technology Startups in Africa, World Trade Organization (WTO) (2020), ECA Policy Brief No. ECA/18/001. https:// “Trade set to plunge as COVID-19 pandemic www.uneca.org/sites/default/files/ upends global economy”, Trade Statistics and PublicationFiles/eca_policy_brief_ Outlook, press release, 8 April 2020. https:// promoting_fintech_start-ups_rev1.pdf www.wto.org/english/news_e/pres20_e/ pr855_e.htm United Nations Economic Commission for Africa (UNECA) (2020), COVID-19 in Africa: Protecting Lives and Economies, UNECA Report. Chapter 5 E-commerce in Africa: issues and challenges

Charlemagne Igue, Alastaire Alinsato and Toussaint Agadjihouédé* Abstract

This chapter analyses the potential for e-commerce activities in Africa. The rapid growth of internet penetration and the use of mobile telephony, along with the adoption of mobile innovations that have greatly boosted financial inclusion and encouraged reliance on electronic payment, have established a strong basis for e-commerce development on the continent. On the other hand, still-low banking rates, fragile laws and regulations governing the sector, and a lack of cross-country harmonization of these rules constrain African e-commerce. Reducing cybercrime, increasing participation in the financial sector and strengthening of the legal framework are key steps to promote e-commerce activities.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 118 CHAPTER 5

Introduction Association (GSMA) identifies 314 technology clusters in 93 cities in 42 Trade improves economic efficiency African countries (Mochiko, 2016). and contributes to poverty reduction The internet is not only increasingly (Krueger, 1998; Stiglitz, 1998; available, but also increasingly used by Zahonogo, 2017). Similarly, information Africans. For example, the proportion and communications technology (ICT) of the population in Africa using the can promote economic and social internet rose from 16 per cent in 2013 development (Kauffman and Riggins, to 18 per cent in 2016 and to 25 2012; UNCTAD, 2019). Trade and ICT per cent in 2018 (UNECA, 2014; therefore have great potential to reduce UNCTAD, 2016; World Bank, 2019). poverty by improving, among other The continent accounted for 12 per things, the production and sale of cent of global internet connections in goods. Currently, there is a growing 2013 compared to 8 per cent in 2010, use of ICT by traditional players and and the contribution of the internet to the new, digital firms to confront the the African economy was 5.3 per cent many challenges facing trade (Ducass of GDP in 2016 compared to 1.1 and Kwadjane, 2015; UNCTAD, 2019). per cent of GDP in 2010 (Berger, 2017; CEA/BSR-AC, 2018). In 2018, The use of ICT by trading firms has Africa had more than 206 million boosted productivity and trade in Facebook users, or 17 per cent of southern countries. Wolf (2001) notes the population (MediaNet, 2018). particularly that, in the 1990s, the use of ICT increased the growth of small In addition to the internet, many of the and medium-sized enterprises (SMEs) building blocks required for the growth in East Africa. A study of Vietnamese of e-commerce, including the spread companies shows that the total factor of mobile telephony and mobile money productivity growth of companies services, increased use of credit cards marketing their products online is 1.7 and increased access to bank percentage points higher than that of accounts, have shown remarkable companies using the internet but not growth in recent years. Nevertheless, performing any online sales (World Africa continues to account for a small Bank, 2016, cited by UNCTAD, 2017). share of global e-commerce. The Wnyoike et al. (2012) back up these limited development of e-commerce results and show that small businesses despite improvements in supporting that adopt e-commerce outperform technology and infrastructure those that do not, because of the underlines the importance of identifying catalytic effect of e-commerce on the constraints on e-commerce in business skills. These proficiency Africa. This chapter analyses in a improvements are driven by the scale descriptive way the context of and network effects associated e-commerce practices in Africa and with the use of ICT by companies provides some insight into this issue. (Corrado et al., 2012). The rest of the chapter is organized as Africa has several technological follows. In the next section, we discuss advantages that can facilitate the growth of mobile telephony and in e-commerce. In fact, the Global financial sector participation, which System for Mobile Communications should provide impetus for rapid CHAPTER 5 119 growth in e-commerce in Africa. to 906 million; it is anticipated that The following section discusses the the number of subscribers will hit 500 conditions delaying e-commerce in million in 2020 (AfDB, 2012; AFD, Africa. The last section concludes 2017; Berger, 2017; ECA, 2014). the chapter. Moreover, over the past few years the share of 3G and 4G mobile coverage Conditions for has increased substantially while the e-commerce in Africa share of 2G has declined, and a rapid transition from 2G to more sophisticated Mobile phone penetration technologies is expected over the next Telecommunications and the mobile five years (Figure 1). For example, the industry have experienced significant share of mobile connections in Africa development in Africa in recent years using 4G technology is forecast to (Ninot and Peyroux, 2018). In 2017, the rise from 5 per cent in 2019 to 21 number of mobile users was 100 times per cent in 2025. These significant greater than the number of landline improvements in both the number of users (World Bank, 2019). Africa is mobile users and the quality of the experiencing exceptional growth in technologies adopted are a major mobile connections, and now has the asset for e-commerce development in second-largest number among global Africa (Centre Africain de Politique regions (GSMA, 2011; GSMA, 2018). Commerciale (CAPC) (2018). From 2013 to 2015, the mobile phone coverage rate in Africa rose from High levels of mobile phone use have 63 per cent to 84 per cent, and the had a significant impact on several number of subscribers from 800 million economic sectors, including agriculture,

Figure 1: Mobile connections per technology in Sub-Saharan Africa

Source: Authors, from GSMA data, 2018. 120 CHAPTER 5

fishing, health, and education, and population (PwC, 2013). The factors mobile phone use is strengthening that explain this low bank rate are democracy by facilitating electoral manifold, including account opening monitoring techniques and improving conditions and high transaction costs participation (PwC, 2013). Mobile (Williamson, 1975). Thus, cash is the phone use makes the economy more dominant mode of payment on the efficient and helps to improve people’s continent. However, the advent of the well-being by reducing both distances mobile telephone and its high and information cost. Mobile telephony penetration rate have promoted the use accounted for about 6.5 per cent of of electronic payments through mobile GDP in 2017, up from 3.5 per cent of money accounts and mobile banking. GDP in 2010 (GSMA, 2011; GSMA, The growth of mobile money providers 2018). Similarly, the contribution of the in Africa exceeds the global average, mobile ecosystem to Africa’s economic and Africa has the highest proportion growth is expected to increase in of adults with a mobile money account relative and absolute terms (GSMA, of any region (Africa eCommerce 2018). Increased use of mobile phones Week, 2018). Data from Findex shows also will have a growing impact on that the proportion of the population e-commerce, as 46 per cent of over the age of 15 with a mobile money customers prefer to buy clothes, account in Africa rose from 11.03 per electronics, leisure goods and music cent in 2014 to 22.56 per cent in 2017, through their mobile phone, compared the largest percentage point increase to 10 per cent from the computer and and the highest rate among global 44 per cent in shops (PwC, 2012). regions (Figure 2). At the same time, applications for mobile phones have Innovations in mobile telephony been developed for marketing, Access to a bank account is still purchasing and selling via the internet. difficult for the majority of the African And some banks in Africa promote

Figure 2: The proportion of the adult population with a mobile money account

Source: Authors, based on Global Findex data. CHAPTER 5 121

Figure 3: Proportion of adults with a bank account or other type of financial institution account

Source: Authors, based on Global Findex data.

Figure 4: Growth rate of bank account opening or other financial institution accounts of adults per continent

Source: Authors, based on Global Findex data. e-banking with applications that allow Bank, 2014), while greater participation deposit and withdrawal transactions in the financial sector is an important via mobile phones. prerequisite for the growth of e-commerce. Increased penetration Financial inclusion of mobile telephones combined with Increased use of ICT is believed to improved access to the internet has improve financial inclusion (World likely contributed to the rapid growth 122 CHAPTER 5

Figure 5: Correlation between bank account ownership and credit/debit card ownership, by region

Source: Authors, based on Global Findex data.

of financial inclusion in Africa. While system have been accompanied by the share of the population with a rapid growth in the use of the internet financial account in 2017 was lower for purchases or payments. During in Africa than in other global regions the period 2014–2017, online (Figure 3), the growth rate of the payments or purchases in Africa opening of bank accounts from 2011 grew by 240.44 per cent, compared to 2017 was higher than in other to 97.55 per cent in Asia, 42.20 regions (Figure 4). The number per cent in Europe, and 69.17 of Africans with a bank account per cent in America (Figure 6). increased from 170 million in 2012 This strong growth in online payments to 300 million in 2017, and this figure or purchasing reflects a sturdy is expected to rise to 450 million in increase in e-commerce in Africa 2022 (EcoFin Agency, 2018). (CAPC, 2018). However, Africa’s share of global e-commerce The use of credit cards also is making transactions remained at less than great progress in Africa. In 2016, 3 per 2 per cent in 2017, and the more than cent of the African population over the 21 million online shoppers in Africa age of 15 had a credit card, and this made up less than 2 per cent of the rate has been increasing steadily global total (Ducass and Kwadjane, (UNCTAD, 2017). Bank account 2015; UNCTAD, 2019). UNCTAD ownership is highly correlated with estimates that the business-to- possession of a credit or debit card, consumer (B2C) e-commerce market the favoured means of payment for in Africa was worth about US$ 5.7 e-transactions or e-commerce (Figure 5). billion in 2017, amounting to less than 0.5 per cent of the continent’s GDP Increases in e-commerce and below the global average of more The rise in mobile telephony and than 4 per cent (Africa eCommerce increased participation in the financial Week, 2018). CHAPTER 5 123

Figure 6: Evolution of online payments or purchasing per continent Percentage

Source: Authors, based on Global Findex data.

ICT and export performance activities but has no effect on of African SMEs collaboration and search for marketing The use of ICT provides many strategic information. In addition, they find that and operational benefits to SMEs. innovation collaboration, and marketing These include development of closer research activities positively and relationships with customers and significantly affect exports, while business partners, intense integration monitoring activities negatively of internal and external processes, influence exports. For a sample of better access to external resources, 43 Sub-Saharan African countries, and improved access to information. Wamboye, Adekola and Sergi (2016) These benefits are likely to improve conclude that the adoption of ICT decision-making, strengthen trade by companies is associated with relations and, in turn, improve productivity growth through an e-commerce development and the increase in output, confirming the international visibility of SMEs existence of a network effect. (Brynjolfsson and Smith, 1999; St-Pierre, Monnoyer and Boutary, To develop e-commerce and increase 2017; UNCTAD, 2018; UNCTAD, 2019). export capacity, an increasing number of African SMEs are working Empirical evidence on the effect of to establish their own digital identity ICT on SME exports is scarce, by creating websites and having their however, due to the lack of data on own e-mail addresses (Coste, 2017; SMEs (St-Pierre, Monnoyer and Dupont, 2018). In Benin, for example, Boutary, 2017; UNCTAD, 2019). the share of SMEs who owned a St-Pierre, Monnoyer and Boutary website rose by 5 percentage points (2017) find that for 294 Canadian from 2009 and 2016, and the share manufacturing SMEs, the use of ICT with an e-mail address increased by stimulates innovation and monitoring 13 percentage points. In Burundi 124 CHAPTER 5

Table 1: ICT, e-commerce and export performance of SMEs per country

Possession of e-mail Country Year Website ownership (%) address (%)

2009 28.00 67.00 Benin 2016 41.00 72.00

2013 45.43 53.16 Burundi 2016 60.42 67.48

2007 8.91 33.00 Ghana 2013 33.33 64.44

2007 16.13 57.08 Kenya 2013 52.11 81.05

Source: Authors, based on Data from Enterprise Survey, 2019.

from 2013 to 2016, the share of rising on the continent. This is a good SMEs with e-mail rose by over base for e-commerce development 14 percentage points and the share in Africa. with a website by 15 percentage points. In Ghana, the share of SMEs Conditions restricting using e-mail rose by more than 31 e-commerce in Africa percentage points, and the share We have shown that e-commerce with a website by more than 24 has significant potential for growth in percentage points from 2007 to 2013. Africa. However, substantial barriers Finally, in Kenya, the share of SMEs to e-commerce development on the with e-mail rose by 24 percentage continent remain, the most important points and the share with a website being cybercrime, a poor legal by 36 percentage points. For Africa framework to support e-commerce, as a whole, the e-retailers’ profile and inadequate consumer protection. study conducted by Oxatis shows that 28 per cent of e-retailers are Cybersecurity SMEs, and that 29 per cent of physical Transaction security is a major shops also have an online shop; the concern for e-commerce participants number of SMEs selling goods retail (UNCTAD, 2018; PayPal, 2013), increased by 30 per cent in 2016 and cybercrime is a major obstacle (Coste, 2017). to the use of ICT and thus to e-commerce development (Gaidosch, In Africa, an increasing number 2018; McAfee, 2018; OECD of SMEs have their own e-commerce and WHO, 2017). Cybercrime sites and e-mail addresses. As is hard to control, given difficulties shown in Table 1, the proportion in identifying cybercriminals (their of SMEs who use e-mail addresses profile is significantly different from in their communication or own their that of conventional criminals) and websites is generally and constantly a lack of data or a strong policy CHAPTER 5 125 agenda (Aggarwal, 2009; Alinsato, The analysis of the legal framework 2012; Giannangeli, 2008; Sutherland, on cybersecurity shows wide 2008; UNCTAD, 2018; UNCTAD, inequalities. Only a few African 2019). Becker (1968) argues that countries, such as Morocco, tough laws are essential to fight Senegal and Tunisia, have achieved cybercrime, and over the past advances in e-commerce in general 15 years, there have been at least and in cybersecurity in particular 246 laws or drafts of laws on (Ducass and Kwadjane, 2015). cybersecurity (UNCTAD, 2018). These countries have promulgated laws on the protection of personal Cybercrime continues to have a data and electronic communications, major impact on Africa (African while others are struggling to Cybercrime Forum, 2018; CFAO, enact laws in these fields (UNCTAD, 2018; Symantec Corporation, 2013). 2015). Thus, the constraint on McAfee (2018) estimates the cost e-commerce due to cybercrime of cybercrime to Africa at 0.20 seems to be easing in these countries per cent of its GDP annually. About compared to other countries on 80 per cent of Africa’s personal the continent. computers are believed to be affected by viruses and other Aware of the importance of cybercrime malware (CFAO, 2018; Gacy, and of the inadequacy of sub-regional 2010). Nigeria, Ghana cooperation (Bekrou, and South Africa are 2015; Hamel and ranked in the top ten in Triclin, 2017), the cybercrime worldwide “Reducing African Union adopted (IC3, 2010). The cybercrime, the “African Union vulnerability rate of increasing Convention on Cyber digital infrastructure1 participation Security and Personal in Africa is 83 per cent in the financial Data Protection” at the above that of other 23rd Ordinary Session continents (James, 2019). sector, and in Malabo (African strengthening Union, 2014) on 27 The high probability of the legal June 2014 to promote of being a victim of framework the harmonization and cybercrime severely are key steps development of constrains e-commerce cybercrime regulations. in Africa (African to promote Paragraph 1 states Cybercrime Forum, e-commerce that: “States Parties 2018; Alinsato, 2012; activities.” are committed to CFAO, 2018; UNCTAD, ensuring that the 2018; UNCTAD, 2019). legislative and/or The African agenda of laws and regulatory measures adopted to texts ignores important aspects of combat cybercrime strengthen the cybercrime, such as the illegal use possibility of regional harmonisation of services and the electronic of these measures and respect the payments (CAPC, 2018; Ducass principle of double jeopardy”. The and Kwadjane, 2015), which are creation of the Continental Free Trade holding back online businesses. Zone (CFTZ) by the African Union will 126 CHAPTER 5

Table 2: Estimated impact of tax cuts over a 5-year period (2019–2023) for Guinea

Additional Increased Price of Total of Number investment GDP tax the mobile new of jobs in the growth revenues services subscribers created economy up to 2023

Elimination of excise duty on call bonuses -4.4% + US$ 14 M + 663,000 + US$ 57 M + 4,156 + US$ 13 M (telephone consumption tax (TCT)) Removing the US $0.12 -42.3% per minute (price of surcharge entering + US$ 24 M + 927,000 + US$ 89 M + 13,193 + US$ 8 M on incoming international international calls) calls (SIIC)

80% reduction in annual fee -4.4% + US$ 9 M ++ 220,00 + US$ 22 M + 3,798 + US$ 2 M on wireless beams

Source: Authors, based on data from Enterprise Survey, 2019.

also support the control of cybercrime. Legislation in the Among the specific objectives of the e-commerce field CFTZ are the implementation of trade Most African countries lack many facilitation measures and the of the basic requirements of a legal establishment of a dispute resolution framework for e-commerce. For mechanism (Article 3 of the CFTZ example, apart from Algeria, no Agreement). The CFTZ is an country has laws providing for the opportunity to fight cybercrime, as it acceptance of electronic signatures will bring countries to harmonize their (UNCTAD, 2015). A few countries, various policies, including their including Algeria, Côte d’Ivoire, electronic payment security policy, Ethiopia, Morocco, Senegal and and should promote e-commerce Tunisia, have made progress in development (UNCTAD, 2019). establishing a legal framework for The Executive Council’s President, e-commerce (UNCTAD, 2015), while of the African Union, calls on the the others still lag behind. There also countries to promote digital identity is a lack of harmonization of the and the implementation of digital legal frameworks of African identification systems across the countries (CAPC, 2018; Ducass continent (African Union, 2018). and Kwadjane, 2015). In short, the CFTZ will facilitate the development of a digital economy GSMA (2012) identifies major in African countries (African obstacles to the development of Union, 2018). the mobile industry and, in turn, CHAPTER 5 127 e-commerce in Africa due to the non-compliant goods, assign absence, or poor quality, of legislation. responsibility for problems and identify These include the high the relevant jurisdiction cost of licences, the (Ndiaye, 1999). heavy taxation of mobile “Africa has phone imports, the lack several Conclusion of clarity on tax and regulatory requirements, technological This study analyses and the need for better advantages that the challenges harmonization of the can facilitate facing e-commerce spectrum for mobile e-commerce.” in Africa. Mobile telephony throughout phone penetration, the region. GSMA innovations in mobile (2018) argues that a reduction in telephony, financial inclusion, the taxes in the technology sector would CFTZ and the use of ICT by lower prices and spur investment. In African SMEs that improve their Guinea, for example, eliminating the export performance are key factors excise duty on call bonuses would in the development of e-commerce. reduce the price of services by Lack of control of cybercrime, 4.4 per cent and would boost the defects in the legal framework number of mobile subscribers by and inadequate consumer protection 663,000, leading to an additional are key obstacles to e-commerce US$ 14 million in investment in the development. These issues should economy and a rise of US$ 57 million be addressed by harmonizing the in GDP (Table 2). All this would lead legal agendas of the different to the creation of more than 4,000 countries on the continent, on new jobs and an increase in tax the one hand, and by inaugurating revenues of more than US$ 13 new laws on cybersecurity, million. Similar effects result from consumer protection, and the removing the US$ 0.12 per minute development of e-commerce, on the surcharge on incoming international other hand. In addition, enforcement calls and reducing the annual fee on should be strengthened and efforts wireless beams by 80 per cent. made to inform citizens of the legal framework and the opportunities Consumer protection involved in e-commerce. Countries Strong consumer protection is crucial such as Algeria, Morocco, Senegal in the development of e-commerce. and Tunisia can serve as models for It gives confidence and encourages e-commerce development in Africa, consumers to buy online. Many because of their efforts to improve countries in Africa lack any legislation their legal agendas in favour governing consumer protection, and of e-commerce. some of the legislation in this area is of poor quality. For example, the laws Endnote governing consumer protection in some African countries take into 1 The vulnerability rate includes a country’s account only the subsidiary aspects resilience to natural disasters and of the consumers’ rights and neglect cyberattacks, and its ability to recover aspects such as the inability to return in the aftermath. 128 CHAPTER 5

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Comments

PIERRE SAUVÉ*

Major technological advances over (first reached in 1996 and revised (and the past two decades have led to the expanded) in 2015) has proven key to development of new business models, eliminating tariff barriers on a wide range an increase in the complexity of of information and communications production systems and a sharp technology (ICT) products. rise in the volume of cross-border transactions conducted over digital Provisions dealing more specifically networks. Digitization presents a with e-commerce have become an number of novel regulatory challenges increasingly common feature of for trade rule-makers. These stem in contemporary trade governance in no small measure from the increasingly recent decades. Launched in 1998 blurred distinction between goods and with the aim of building consensus over services and the resulting uncertainty the key parameters of global digital as to the applicable trade rules. governance, the WTO Work Programme on Electronic Commerce has, however, World Trade Organization (WTO) rules produced little by way of tangible on goods and services and the trade progress over the past two decades. body’s jurisprudence have long Growing frustration over the glacial pace confirmed that digital trade is subject to and inconclusive nature of discussions trade law disciplines. At the multilateral held under the 1998 Work Programme level, the 1994 General Agreement on prompted a group of 70 like-minded Trade in Services (GATS) and its WTO members to issue a Joint annexes (particularly that on basic Statement on Electronic Commerce telecommunication services agreed aimed to “initiate exploratory work in 1997) are of primary importance toward future WTO negotiations on for enabling services that underpin trade-related aspects of electronic the digital world and digitally enabled commerce” at the Eleventh Ministerial services. In the case of digitally enabled Conference of the WTO (MC11) in trade in goods, the General Agreement December 2017.1 Following a year of on Tariffs and Trade 1994 (GATT 1994), exploratory talks, 76 WTO members including the Trade Facilitation accounting for 90 per cent of global Agreement concluded in 2013, provides trade agreed, on the margins of the important measures while the WTO’s January 2019 edition of the World Information Technology Agreement Economic Forum in Davos, on a

* The author is a Senior Trade Specialist within the Macroeconomics, Trade and Investment Global Practice of the World Bank Group. The views expressed in this note are those of the author and should not be ascribed to the World Bank Group or its member countries. The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members.

CHAPTER 5: COMMENTS 133

Ministerial Declaration setting out relating to digital trade based on their their intention to launch plurilateral content and scope of application negotiations on electronic commerce (Herman, 2010; Monteiro and Teh, 2017; open to all WTO members.2 Weber, 2015). A range of studies have addressed all disciplines and obligations The experimental role of impacting digital trade, beyond preferential trade e-commerce (Meltzer, 2015; Mishra, agreements 2016; Wu, 2017). In overall terms, In the absence of globally agreed norms disciplines deemed of direct relevance on digital trade, preferential trade to digital trade include provisions on agreements (PTAs) have served as data and consumer protection; rules on laboratories in which to experiment with paperless trade, electronic authentication, – and adopt – elements of a nascent and digital signatures; provisions regulatory regime governing electronic governing cross-border data flows transactions and digital trade (Wu, and measures relating to data 2017). While extensive attention has localization; rules calling for the been devoted to the political economy (temporary or permanent) prohibition forces underpinning the recent sharp of custom duties levied on electronic rise in PTAs and their transactions; provisions growing influence in on regulatory cooperation; norm-setting, research “Digitization and treaty language devoted to analysing the defining e-commerce digital trade-related presents a and digital products. The provisions found in number of novel very fine contribution of PTAs and the factors regulatory colleagues from the influencing their inclusion challenges WTO Chair in Cotonou and substantive remit for trade devoted in this volume to remains largely incipient. the African e-commerce This can be explained in rule-makers.” landscape recalls how part by the fact that any comprehensive digital technology for policy response to commercial purposes is itself a relatively e-commerce must of essence tackle a recent phenomenon, dating back to the wider range of measures extending mid- to late 1990s, as can be seen by beyond trade law to areas such as the scant explicit attention paid to financial inclusion, payments systems’ electronic transactions in the relevant regulation and battling cybercriminality. legal texts establishing the WTO in 1994. It can further be inferred from the The studies cited above usefully track fact that the first PTA featuring specific the evolving scope and depth of provisions on e-commerce – on disciplines governing electronic paperless trading – was that entered commerce in PTAs. Monteiro and Teh into by New Zealand and Singapore a (2017, note 3), for instance, found that mere two decades ago, in 2000. almost 30 per cent of the 275 PTAs that had been notified to the WTO by May Studies devoted to the treatment of 2017 featured e-commerce provisions. e-commerce in trade agreements have Their work also documented the marked allowed for a finer understanding of recent rise in the number of PTAs how to identify and classify provisions featuring disciplines on e-commerce, 134 CHAPTER 5: COMMENTS

a conclusion shared by Hofmann, WTO+ provisions found in its PTAs Osnago and Ruta (2017). served the commercial interests of its leading exporting firms and were more Wu (2017, note 4) corroborates the likely to be enforceable. above findings, noting that the scope of e-commerce provisions found in Wunsch-Vincent (2006) and Ferracane PTAs has progressively expanded to and Lee-Makiyama (2017), both of encompass an ever whose work explored the broader range of issues. conceptual framework Echoing much recent “Provisions underpinning the literature devoted to the dealing more negotiation of digital study of the comparative specifically with trade disciplines, remit of PTAs and the showed that the WTO (Roy, 2014; Roy, e-commerce European Union and the 2019; Roy, Marchetti and have become United States tended to Lim, 2006), Wu (2017) an increasingly rely on differing finds that PTAs featuring common feature negotiating parameters, an advanced economy of contemporary though a closer look at trading partner, such as the latest generation of the United States or the trade governance PTAs entered into by European Union, tend to in recent both parties suggests address a significantly decades.” that the “normative broader and deeper distance” between them range of digital trade has been reduced on issues than do PTAs conducted along some key negotiating issues such as South-South lines. data localization while remaining significant on other key negotiating items Much attention has also been devoted in such as the regulation of cross-border the academic literature to uncovering the data flows and data privacy. In the underlying political economy of PTAs case of China, arguably the world’s third and the forces influencing a country’s major player endowed with norm-making recourse to bilateral or regional trade influence, Ferracane and Lee-Makiyama agreements to advance its digital trade (2017) find that the country’s more policy agenda (Van Grasstek, 2011). An restrictive stance towards information important strand of such literature has and communications technology and, concerned itself with the study of the consequently, its negotiation of role that various economic and disciplines on digital trade are strongly geopolitical factors play in shaping the influenced by a set of non-trade content of specific disciplines found in considerations, including national PTAs. For instance, in assessing the security and public order concerns, provisions of the PTAs entered into by as well as by the predominance of the European Union and the United state-owned enterprises. States, Horn, Mavroidis and Sapir (2009) determined that the European Overall, while contemporary PTAs Union showed an early tendency to use feature a broad set of digital provisions, trade policy as a vehicle for “declaratory there remains wide variance across diplomacy”, whereas the United States agreements in terms of the depth and tended to ensure that any so-called breadth of issues covered, with many CHAPTER 5: COMMENTS 135

Figure 1: Parties to PTAs developing countries, while only with e-commerce chapters 6 per cent were conducted among developed economies (see Figure 1).

In terms of geographical representation, not all regions are represented equally. Among developing economies, economies in South-East Asia and Latin America countries have been far more active in this area, with a recent trend showing South-South agreements involving parties from both regions. On the other hand, African countries are still largely absent. In Share PTA configuration Africa, only Morocco is party to a 64% North - South PTA with an e-commerce chapter (Developed-Developing) (with the United States). The European 30% South - South Union’s Economic Partnership (Developing-Developing) Agreements (EPAs) with Côte d’Ivoire 6% North - North and Ghana only contain an (Developed-Developed) understanding that the parties will Source: WTO (2018). cooperate to facilitate the conclusion of an agreement in trade in services and electronic commerce, as well as provisions framed as “best endeavours” other areas. or soft law disciplines not subject to dispute settlement (Meltzer, 2015). The above considerations hold The regulatory precaution on display is important implications for African perhaps less than fully surprising given nations as they contemplate the the extent to which technology tends to normative contours of continent-wide outpace regulation in cyberspace. disciplines on e-commerce called for under the recently established A closer look at membership in PTAs African Continental Free Trade Area featuring e-commerce provisions (AfCFTA). As relative latecomers to reveals a striking diversity of digital governance, African governments participating countries. While can consider the different regulatory e-commerce provisions were long models on offer globally within latest- found mainly in PTAs involving generation PTAs and adopt those developed economies (concluded provisions best tailored to the either with developing or other continent’s needs, capacities and developed economies), provisions policy priorities. dealing with digital trade are today increasingly found in agreements Digital trade governance: reached among developing countries. African challenges and In an examination of a sample of 63 perspectives recently notified PTAs featuring The potential for digital trade to drive e-commerce provisions, the WTO found economic development and that 30 per cent were concluded among transformation in Africa remains largely 136 CHAPTER 5: COMMENTS

unexplored. While there is still a long As noted above, in coming late to way to go to bridge the continent’s the dance, African governments retain digital divides, important recent gains considerable policy space within which in connectivity have helped improve to develop a continent-wide governance lives in many parts of the African regime for digital transactions. African continent. Of all regions of the world, countries can in effect learn from the Africa registered the strongest doing of others and reap the late-mover growth in internet use, with the benefits deriving from the normative percentage of people using the experimentation of other countries internet increasing from 2.1 per cent and regional groupings in the digital in 2005 to 24.4 per cent in 2018, sphere. By drawing on selected aspects according to ITU data (ITU, 2019). of an evolving mosaic of PTA-embedded rules on e-commerce and digital trade, While e-commerce is thriving in the AfCFTA’s built-in agenda can help several individual African countries, governments adopt digital rules that has spawned far-reaching gains are best aligned to the continent’s in inclusiveness, and led to significant diverse development, infrastructure, innovation, notably regulation and digital regarding electronic literacy landscapes. payments, all too often “Building a advances have been robust African Digital trade and its confined to domestic benefits for development markets and inadequately digital economy can essentially be scaled for regional or will require harnessed in two ways. continental uptake. deepened First, through the growth Moreover, in many parts regional of e-commerce and its of the continent, digital cooperation use of digital platforms to trade proceeds within facilitate trade in goods embryonic regulatory and the pooling and services capable of ecosystems still in of resources both physical and digital the process of and information delivery. Expanded being established. sharing on opportunities for African emerging best economies can materialize The AfCFTA, which through the increased came into effect on 30 practices across connectivity of both local May 2019 and features several key and foreign markets that a built-in negotiating areas.” AfCFTA-led integration agenda on e-commerce will help promote on a and digital trade, continental scale. provides African countries with a Growing internet use in Africa has been ready-made setting in which to design instrumental in providing new sources of a Pan-African digital strategy and market access for the continent’s micro, action plan aimed at accelerating the small and medium-sized enterprises development and regulatory (MSMEs) and entrepreneurs long sophistication of the continent’s shackled by weak cross-border digital ecosystem and enhancing the connectivity, punitively high trade volume of digitally enhanced cross- costs and a host of asymmetries in border transactions. market information. CHAPTER 5: COMMENTS 137

Second, and perhaps of even greater all of which are critical building blocks importance for Africa’s longer-term for an effective digital economy. growth prospects, digital uptake can speed up the adoption and diffusion of Regulatory frameworks also need to be innovative technologies, leading to supported by efficient ICT infrastructures, economy-wide gains in efficiency and which provide the critical backbone of productivity and boosting the the digital economy. As the note by the competitiveness of the continent’s WTO Chair in Cotonou documents well, agricultural and manufacturing sectors.3 Africa needs to close its digital gap with Increased digitization in both sectors the rest of the world if more of the will also fuel demand for ICT and continent’s consumers and businesses business services, enhancing the are to operate online and for levels of performance of tertiary production internet connectivity, digital literacy and and exchange in the process. access to latest-generation ICT infrastructure and broadband are to Many WTO members from Africa have converge with global norms. expressed reservations about ongoing negotiations on e-commerce at the Plurilateral negotiations on e-commerce WTO, arguing that considerable at the WTO have offered the somewhat uncertainty continues to surround the disquieting spectacle of non- regulation of digital trade domestically engagement by a majority of African and how it should be governed across members who have chosen to stay on borders. For many, engagement in the side lines and effectively leave to negotiations at the global level appears others the task of developing agreed premature in light of prevailing digital norms of digital governance. In so doing, and technological divides and they forego the significant learning inadequate or incomplete domestic externalities embedded in a multilateral regulatory frameworks. The AfCFTA negotiating journey characterized is seen by most players as offering a by considerable normative discovery more attractive setting in which to pool and to which, as sovereign nations, regional efforts to strengthen capabilities none need be bound by at the end and progressively scale-up digital of the process. Care will therefore economies. There is much to learn need to be taken to ensure that the from and draw on from recent PTA AfCFTA’s potential for strengthening experiments in doing so. the continent’s digital capabilities is harnessed in full and constitutes a key A sophisticated legal and regulatory building block for heightened regional framework that enables digital and global connectivity. transactions is vital for fuller participation in digital trade, be it regionally or While there is still time to hop on the globally. To date, only a few African digital train and to do so first at the countries have put in place the continental level, Africa does not have regulatory toolkit required for secure the luxury of acting slowly. Absent faster cross-border transfers of data, the digital transformation, African nations protection of personal data and will likely not generate the huge number consumer rights on digital platforms, of new jobs needed to match their the policing of cybercrime, and the population growth. Moreover, as noted recognition of electronic transactions, above, trade rules alone will not suffice. 138 CHAPTER 5: COMMENTS

Building a robust African digital World Bank Group. https://undatacatalog. economy will require deepened regional org/dataset/hofmann-claudia-alberto- cooperation and the pooling of osnago-and-michele-ruta-2017-horizontal- resources and information sharing on depth-new-database-content emerging best practices across several key areas, including digital infrastructure, Herman, L. (2010), “Multilateralising digital literacy and skills, digital financial Regionalism: The Case of E-commerce”, services, digital platforms and digital OECD Trade Policy Papers No. 99. entrepreneurship and innovation. Horn, H., Mavroidis, P. and Sapir, A. (2009), Endnotes “Beyond the WTO? An anatomy of EU and US preferential trade agreements”, Bruegel 1 Joint Statement on Electronic Commerce, Blueprint Series 7. WT/MIN(17)/60, Eleventh Ministerial Conference, World Trade Organization, International Telecommunication Union (ITU) 13 December 2017. (2019), “Boosting Africa’s digital economy: How tech is transforming Africa”, ITU News, 2 See https://www.wto.org/english/news_e/ 27 March 2019, Geneva: ITU. https://news. spra_e/spra300_e.htm. itu.int/boosting-africas-digital-economy-how- tech-is-transforming-africa/ 3 For instance, the combination of the Internet of Things, big data and cloud Meltzer, J. P. (2015), “A New Digital Trade computing for precision agriculture results Agenda”, E15 Initiative. http://e15initiative. in more accurate crop and weather org/publications/a-new-digital-trade-agenda/ monitoring. For a fuller discussion of sources of innovation in agriculture, see Mishra, N. (2016), “Data Localization Laws WIPO (2017). See also Fuglie, Gautam, in a Digital World: Data Protection or Data Goyal and Maloney (2020). Protectionism?”, The Public Sphere.

References Monteiro, J.-A. and Teh, R. (2017), “Provisions on Electronic Commerce in Ferracane, M. and Lee-Makiyama, H. Regional Trade Agreements”, WTO Staff (2017), “China’s Technology Protectionism Working Paper, No. ERSD-2017-11. and Its Non-Negotiable Rationales”, ECIPE Working Paper. Roy, M. (2014), “Services commitments in preferential agreements: surveying the Fuglie, K., Gautam, M., Goyal, A. empirical landscape”, in Sauvé, P. and and Maloney, W. (2020), Harvesting Shingal, A. (eds.), The Preferential Prosperity: Technology and Productivity Liberalization of Trade in Services: Growth in Agriculture, Washington, DC: Comparative Regionalism, London: Edward World Bank. https://openknowledge. Elgar, 15-36. worldbank.org/handle/10986/32350 Roy, M. (2019), “Elevating Services: Hofmann, C., Osnago, A. and Ruta, Services Trade Policy, WTO Commitments, M. (2017), “Horizontal Depth: A New and their Role in Economic Development Database on the Content of Preferential and Trade Integration”, G-24 Working Paper, Trade Agreements”, Policy Research Washington, DC: Intergovernmental Group Working Paper No. 7981, Washington, DC: of Twenty-Four. https://www.g24.org/ CHAPTER 5: COMMENTS 139

wp-content/uploads/2019/02/Roy_G24_ World Intellectual Property Organization paper__Jan_2019.pdf (WIPO) (2017), Global Innovation Index 2017: Innovation Feeding the World, Roy, M., Marchetti, J. and Lim, A. H. (2006), Geneva: WIPO. https://www.wipo.int/ “Services Liberalization in the New edocs/pubdocs/en/wipo_pub_gii_2017.pdf Generation of Preferential Trade Agreements (PTAs): How Much Further than the World Trade Organization (WTO) (2018), GATS?”, WTO Staff Working Paper, No. “E-commerce in Regional Trade Agreements ERSD-2006-07. https://www.wto.org/ (RTAs)”, Background Note prepared for english/res_e/reser_e/ersd200607_e.pdf structured discussions on e-commerce, Geneva: WTO. VanGrasstek, C. (2011), “The Political Economy of Services in Regional Trade Wu, M. (2017), Digital Trade-Related Agreements”, OECD Trade Policy Papers Provisions in Regional Trade Agreements: No. 112. Existing Models and Lessons for the Multilateral Trade System, RTA Exchange, Weber, R. H. (2015), “The Expansion of Geneva: ICTSD and the IDB. E-Commerce in Asia-Pacific Trade Agreements”, The E15 Initiative. http:// Wunsch-Vincent, S. (2006), The WTO, the e15initiative.org/blogs/the-expansion-of-e- Internet and Digital Products: EC-US commerce-in-asia-pacific-trade-agreements/ Perspectives, Oxford: Hart Publishing. Chapter 6 China’s e-commerce development and policy relevance

Yue Jiang, Lei Zhang and Yunhang Jin* Abstract China’s e-commerce The dollar value of e-commerce transactions in China has increased enormously over the past 20 years, development and supported by improved infrastructure, the rapid growth of mobile telephony policy relevance and increased financing. The market also is characterized by increasing diversity, for example, the growth of e-medical services, the expansion of cross-border e-commerce and the development of online-offline transactions. China’s national government has played an important role in the development of e-commerce through policies elaborated in five-year plans, while regional governments also have participated in planning and adjusting the e-commerce policy framework in light of local conditions.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 142 CHAPTER 6

China’s e-commerce US$ 144.81 billion (CNY 999.2 billion) development: past and in 2017, with a year-on-year growth current situations rate of 71.5 per cent.

China’s e-commerce market emerged China’s e-commerce development has 20 years ago. China’s e-commerce experienced four phases (Yin, 2018): transactions increased from only US$ 1.16 trillion (CNY 8 trillion) in 2012 to 1. Germination stage (1997–1999) US$ 4.58 trillion (CNY 31.63 trillion) in During this period, few people were 2018 (Figure 1). In 2018 (the last year informed about the market or for which data are available on the participated in online shopping, and composition of e-commerce), online shopping platforms were in e-commerce transactions of goods and their infancy. The main impact of services equalled US$ 4.44 trillion e-commerce was to assist small and (CNY 30.61 trillion) with a year-on-year medium-sized enterprises (SMEs) to growth rate of 14.5 per cent.1 participate in international business- to-business (B2B) transactions. The In 2018, the transaction scale of demand for customer-to-customer China’s online retail sales reached (C2C) transactions had not yet US$ 1.3 trillion (CNY 9 trillion), arisen. Major e-commerce accounting for 28.5 per cent of the companies during this period were market.2 Sales of e-commerce services Alibaba, 8848 and EachNet. have increased rapidly since their development in 2013. According to 2. Construction stage (2000–2007) Yang (2016), the online-to-offline The internet bust led to a reshuffling (O2O) transaction volume of local of e-commerce firms, as over living services was expected to reach one-third of internet websites

Figure 1: China’s e-commerce transactions have increased rapidly

Source: Research report on market prospects and investment opportunities of China’s e-commerce industry in 2019–2024, China Business Industry Research Institute, 2019, available at: https://www.askci.com/news/chanye/20190722/1129101150117.shtml. CHAPTER 6 143

disappeared. Nevertheless, the end of 2016, Alibaba launched increased acceptance of online a new retail concept, leading shopping led to the rapid e-commerce enterprises to enter the development of C2C transactions. offline market. At present, Alibaba However, there were important has emerged into a relatively mature defects in logistical support for operational mode. In addition to e-commerce, and sales of continuous increases in the variety counterfeit goods were a major issue. of goods and services offered and improvements in logistics and 3. Evolution stage (2009–2015) after-sales services, e-commerce China’s e-commerce market was enterprises are also actively fully developed, and competition expanding their cross-border among e-commerce enterprises online shopping, developing rural was fierce. 3G was officially e-commerce, and providing commercialized in 2009 (Shen and maternal and child medical care, home Chen, 2018). The number of user decoration, local living services clicks for online shopping reached and other services to consumers. 100 million. The business-to- SMEs have joined the platform, consumer (B2C) and market segment platform Tmall went competition is intense. online. Purchases of “The market also clothing, shoes and is characterized Key segments of the handbags, as well as by increasing e-commerce market, of household goods in particular B2C and services, diversity, transactions in rural increased. The for example, areas and cross-border number of internet the growth transactions, are users and firms of e-medical expected to continue providing express services, the to grow. The collection logistics services and analysis of user showed explosive expansion of data, particularly growth, while the use cross-border through use of artificial of mobile phones to e-commerce and intelligence techniques undertake e-commerce the development to mine “big data” to transactions rose of online-offline glean insights into sharply. consumer behaviour, transactions.” is an important and 4. Mature stage (2016 growing market. until the present) China’s e-commerce platform The rapid growth of e-commerce is pattern has evolved into a new stage inseparable from the development of with the emergence of new business internet software and hardware, as models. After several years of well as other infrastructure. In 2018, high-speed growth, the mobile revenue from fixed data and internet shopping market growth rate started services reached US$ 34.5 billion, to slow down in 2016 and the with a period average of US$ 32.6 e-commerce Monthly Active Users billion (Figure 2). Revenue from mobile (MAU) increment also decreased. At data and internet services reached 144 CHAPTER 6

Figure 2: Revenues from fixed data and internet businesses in China have increased sharply

billion, CNY

eement ied data and nternet bsiness reene

Source: Ministry of Industry and Information Technology of the People’s Republic of China (billion CNY), http://www.miit.gov.cn/n1146312/n1146904/n1648355/c6633265/content.html.

US$ 100.95 billion, and accounted had been registered in China.3 for 46.6 per cent of total telecom However, the increase in the share revenue (Shen, 2016). of the population using a mobile phone is expected to slow. The use of mobile phones has risen sharply. As of September 2019, about Firms involved in e-commerce have 1.6 billion mobile phone subscriptions absorbed considerable equity

Figure 3: Financing of e-commerce firms

Source: “E-commerce industry private equity investment and financing statistics: China mobile internet industry private equity investment and financing pattern analysis”, China Business Industry Research Institute, 2019, available at: https://www.askci.com/news/chanye/20190722/1129101150117.shtml. CHAPTER 6 145

Figure 4: Forms of equity investment services, including information in e-commerce firms, 2018 transmission, software and information technology services (3 per cent) and leasing and business services (2.1 per cent). The gross merchandise volume (GMV) of China’s e-commerce in 2018 totalled CNY 152,424.5 billion, again dominated by manufacturing (36.7 per cent) and wholesale and retail trade (22 per cent), followed by information transmission, software and information technology services (7.3 per cent), transportation, storage 34% Angel round investment and postal services (3.4 per cent), 27% A round of financing and leasing and business services 10% B round of financing (2.8 per cent).5 8% Pre-A 8% Others 5% Seed investment 2. Spatial distribution 4% C round of financing The level of e-commerce development 4% Strategy investment varies greatly across provinces in China. In 2018, e-commerce Source: “E-commerce industry private equity investment and financing statistics: China mobile enterprises were mainly located in the internet industry private equity investment and eastern coastal areas, including the financing pattern analysis”, China Business Industry Research Institute, 2019. provinces of Beijing, Fujian, Guangdong, Jiangsu, Shandong and Zhejiang. The total number of enterprises engaged in e-commerce transactions was more than 5,000 per investment and other forms of province, and Guangdong, Shandong financing. Total private equity and Zhejiang reached more than investment and financing peaked at 10,000 each in 2018. From the coast US$ 767 billion in 2015, but had fallen to the inland, the development of to US$ 373 billion by 2018 (Figure 3). e-commerce in the provinces of Anhui, The largest share of financing came Chongqing, Guizhou, Hebei, from angel investors, followed by the Heilongjiang, Henan, Hubei, Hunan, A round of financing and the B round Jiangxi, Liaoning, Shanghai, Shanxi, of financing (Figure 4). Sichuan and Yunnan is only moderate, with the number of enterprises engaged Characteristics of in e-commerce transactions ranging Chinese e-commerce from 1,000 to 5,000 per province. The development of e-commerce in the vast 1. Industry distribution central and western regions and parts Of the CNY 85,597.78 billion in of the northeast provinces is limited, e-commerce purchases4 in 2018, the with the number of enterprises bulk represented manufacturing (44.2 engaged in e-commerce transactions per cent) and wholesale and retail below 1,000 per province. On the trade (39.1 per cent). The rest of the whole, the level of e-commerce market consisted of information development declines as one moves 146 CHAPTER 6

Figure 5: An index of the development of e-commerce across provinces is closely related to the number of firms, 2017

Source: 2017–2018 China E-commerce Development Index Report.

from east to west, which is closely to the e-commerce development related to the level of economic index, but ninth according to the development and degree of number of firms engaged in marketization in each region. e-commerce. In 2017, the e-commerce development indexes of nine provinces The number of firms is not a very were above the average, and the precise indicator of the potential of indexes of two more provinces were the e-commerce market. An index very close to the average (Figure 5).6 has been constructed to measure the level of e-commerce development in 3. Platform distribution each province, taking into account the New e-commerce platforms in scale, growth potential, market China have emerged in recent years. penetration and supporting Alibaba, JD.com and NetEase Koala environment. According to this are the major traditional e-commerce e-commerce development platforms, while WeChat, Pinduoduo index, Guangdong, Zhejiang, Beijing, and Xiaohongshu are promoting the Shanghai and Jiangsu have had the use of social e-commerce, which has highest level of e-commerce intensified competition for the development for some time. While traditional platforms. Alibaba has each province’s ranking in the accounted for more than 90 per cent e-commerce development index is of traditional e-commerce transactions closely associated with the number since 2014. The total turnover of of enterprises engaged in e-commerce Tmall products (owned by the Alibaba transactions, the ordering of provinces Group) reached CNY 2.13 trillion in according to these two indicators of 2018, accounting for the largest e-commerce development is not market share of China’s e-commerce identical. For example, in 2017, industry. Social e-commerce remains Shanghai was ranked fourth according smaller, but its growth has been quite CHAPTER 6 147 rapid. WeChat transactions have information processing, application increased seven times from 2014 systems, technical consulting and to 2019, and Pinduoduo has doubled other outsourcing services).8 its sales since 2017. Xiaohongshu released e-commerce services on First, the 11th five-year plan clearly its platform for the first time in 2015, emphasizes the construction of and its average annual turnover public e-commerce service projects has increased by 100 per cent and promotes the formation and since then.7 development of e-commerce service formats with third-party platform The central government’s services (Mao, 2007). The plan urges plan for the development government departments to make full of e-commerce use of specialized third-party e-commerce service platforms to The Chinese government formulates outsource information processing, data a plan every five years to promote hosting, application systems and other the development of e-commerce. information technology applications. Since 2006, there have been These efforts should help to establish three five-year plans stable and large-scale addressing e-commerce demand for such development, each “The dollar value services. Second, emphasizing different of e-commerce the 11th five-year issues. plan emphasizes transactions the importance of 1. The characteristics in China has popularizing e-commerce and changes of the increased applications to attract three five-year plans enormously greater involvement by The 11th five-year plan over the past 20 SMEs and consumers in 2007 put forward (Qiongni, 2014). The the strategic task years, supported plan urges SMEs to use of developing the by improved third-party e-commerce e-commerce service infrastructure, service platforms, industry for the first the rapid growth comprehensively time. The plan defines of mobile implement outsourcing e-commerce services of various production to include web-based telephony and and business activities, transaction services increased and strengthen their (web-based procurement, financing.” management and sales and related profitability. At the authentication, payment, same time, the plan credit investigation and encourages the development of other services), business outsourcing new services for different levels of services (web-based product design, consumers, focusing on the development manufacturing, management and of mobile e-commerce including new other outsourcing services) and technologies, new applications and information technology system new models, and further enhancing the outsourcing services (mainly web- market penetration of e-commerce based equipment rental, data hosting, applications (Wang, 2007). 148 CHAPTER 6

The 12th five-year plan emphasizes the use of e-commerce platforms various efforts to boost the role of to expand marketing channels by e-commerce in economic and social means of market-based operations development. Key areas include such as equity investment, risk research to accelerate the compensation and interest rate transformation of the e-commerce discounts. The regions should market, efforts to popularize and encourage e-commerce platforms deepen e-commerce applications, to cooperate with manufacturing creation of a strong institutional enterprises to optimize the product and social environment to support supply chain and supporting services e-commerce security and improving and to build a new generation of the efficiency of resource allocation e-commerce platforms closely (Meng, 2017). The plan calls for connected with manufacturing pragmatic steps to support the enterprises. Efforts also are required healthy and orderly development to promote innovations in O2O of e-commerce, a focus on innovation e-commerce applications and to and effectiveness, facilitate the and development of combination of online technical standards. “Key segments of and offline trading, the e-commerce with an emphasis on The 13th five-year plan market, in innovations in business pointed out the models and importance of integrating particular B2C technology innovation. traditional industries into transactions in Finally, the regions e-commerce. According rural areas and should also create to the 13th five-year cross-border O2O e-commerce plan, e-commerce transactions, models and cultivate development should new formats for the be led by “coordination are expected provision of and innovation” that to continue e-commerce services. promote the integration to grow.” of e-commerce into The 13th five-year traditional economic plan provides for fields; steadily promote improvements in the legal framework the integrated development for e-commerce, based on the three of e-commerce in agriculture, principles of simultaneous development manufacturing, logistics, related and standardization, parallel services and other sectors; and competition and coordination. comprehensively drive the Compared with the previous transformation and upgrading of exhortation of “standardizing in the traditional industries. Policies should development and promoting the strengthen the integrated development development by standardizing”, the of e-commerce in manufacturing, new development principle not only agriculture and industry. Efforts should guarantees and maintains stakeholders’ be made to support innovative rights, but also requires them to fulfil enterprises (to demonstrate the value corresponding obligations and of innovations to other firms) and to responsibilities. New ideas are assist manufacturing enterprises in required to promote development CHAPTER 6 149

Table 1: Evolution of the five-year plans

11th five-year plan 12th five-year plan 13th five-year plan

E-commerce Popularize Deepen applications

E-commerce Standardize Open regulation

E-commerce Construction Upgrade platform

Traditional industries Integration

and standardization and to create period of e-commerce development, a more open e-commerce business the 11th five-year plan emphasized environment. The government also the construction of public e-commerce will continue to standardize service projects and the importance development through innovative of popularizing e-commerce approaches to establish an open, applications. With the gradual fair and honest e-commerce market. popularization of e-commerce Efforts to ensure competition and applications, the 12th five-year plan coordination will be designed to emphasized deepening e-commerce protect fair competition and minimize applications in order to improve the administrative interference in the efficiency of resource allocation. market. At the same time, the The 13th five-year plan highlighted government will promote the strengthening the integration of complementary and coordinated e-commerce and traditional industries development of e-commerce and and improving the legal framework traditional industries, online and for e-commerce. offline, as well as e-commerce activities in urban and rural areas. The changes in the plans concentrate The government gives equal emphasis on four aspects over time (see Table 1). to openness and security, and The 11th five-year plan proposed encourages enterprises to actively to construct the e-commerce participate in international market platform, while the 12th five-year competition, so as to develop plan proposed its upgrade. The international e-commerce featuring emphasis in the plans changed from convenient logistics, mutual popularizing e-commerce applications recognition of standards, to deepening them over time. complementarity of production E-commerce regulation in the capacity and market sharing. plans changed from emphasizing standardized principles to emphasizing In general, three five-year plans open norms. Additionally, because have specific emphasis in regard e-commerce development has now to e-commerce based on different entered the mature stage, the 13th development periods. Because five-year plan proposed the integration 2007 witnessed the construction of traditional industries and e-commerce. 150 CHAPTER 6

2. The value of the plans system for the e-commerce market The plans facilitate the upgrade of based on a unified social credit e-commerce platforms. The plans system. E-commerce enterprises take regard e-commerce platforms as a the five-year plans as guides, establish core to improve the efficiency of a traceability mechanism that includes allocation of social resources, and they online product transactions and offline advocate for enterprises to take full service, and gradually develop advantage of the “internet +”. To standardized operations, professional illustrate, firms need to make full use of management, standardized logistics the internet, cloud computing, big data, and scientific supervision. mobile internet and other technologies, with the aim of constantly improving The plans are conducive to creating platform functions to make them more a benign and open e-commerce user friendly. E-commerce platforms environment. The plans propose to should promote the integration of optimize the governance environment multiple resources in the industrial of e-commerce, emphasizing the need chain, including producers, traders, to strengthen the construction of users, financial e-commerce information institutions, logistics infrastructure, and to agencies and technical implement effective service agencies; “Fast logistics is supervision based on eliminate information the foundation internet technology barriers; optimize for the rapid regulations and law. resource allocation; development The development of and realize operation of China’s e-commerce needs coordination and to reinforce industry optimization on the e-commerce.” guidance and create a whole. By upgrading healthy and open e-commerce platforms, environment. The firms could use the advantages of development of e-commerce also internet connectivity and resource needs to abide by the basic principles integration to create more value. of equal emphasis on competition and coordination, adhere to the promotion The plans help to build a standardized of fair market competition and open service system. Standardization of development, prevent and suppress product information and delivery monopolistic and vicious competition, processes is the basis for the efficient and establish an open, fair and honest operation of e-commerce. However, market order through supervision. China is relatively lagging in standardization of product information The plans contribute to deepening and delivery process, lacking a the integration of traditional industries standard process for warehouse and e-commerce. Due to incomplete management, logistics distribution, market competition and asymmetric financing management and contract information, enterprises are faced with management. Plans encourage four major difficulties in production and enterprises to actively participate in operation decisions – what to produce, the construction of e-commerce how much to produce, for whom and regulations and establish a real-name how to produce. The plans proposed CHAPTER 6 151 that e-commerce firms may effectively non-governmental organizations solve the difficulties of what to within the region to promote the produce, how much to produce and for popularization, dissemination whom by integrating online and offline and penetration of e-commerce transaction resources and creating an awareness, knowledge and skills integrated ecosystem of production (Deng, 2013). and distribution, including procurement, sales and logistics, etc. 3. The government can take steps to In order to solve the problem of how support production and processing to produce, e-commerce enterprises supply chains, find and cultivate need to further promote the integration modern online businesses and assist of big data into the traditional industrial with operation and marketing links. A chain, including manufacturing, key principle is to encourage trials operation management and sales and innovation, which allows for services. Through the sharing of mistakes and failures. knowledge and information, e-commerce enterprises may break 4. The government should provide down the boundaries between sectors policy and legal guarantees for and realize intensive production and the development of e-commerce the coordination of production, service, and help solve data security and procurement and sales. The deep related problems. integration of the e-commerce and traditional industries facilitates the Local governments also play an active cultivation of modern online businesses role in boosting the development of and the upgrade of production. e-commerce. Zhejiang province, for example, is a leader in the field of The role of government in the e-commerce in China, and it vigorously development of e-commerce promotes the e-commerce applications of industrial enterprises and Government has the opportunity to encourages SMEs to rely on third- play a leading role in the development party e-commerce platforms to carry of e-commerce in four areas. out online sales. Zhejiang also encourages qualified enterprises to 1. The government promoted the develop online brands and supports development of the basic the rapid establishment of online retail e-commerce infrastructure based on and distribution systems for industrial the development characteristics and products that suit the characteristics realities of local enterprises. of Zhejiang industry.

2. The government helped facilitate Lessons from China’s the popularization of e-commerce. experience of rapid The primary task of government e-commerce development is to carry out a wide range of e-commerce training and 1. Fast logistics popularization activities. In addition, Fast logistics is the foundation for government can guide the the rapid development of China’s spontaneous formation of business e-commerce. There are many logistics associations and other companies in China’s e-commerce 152 CHAPTER 6

market, such as Shunfeng, Yuantong entry of their information technology and Yunda. China’s goods delivery products in international markets systems consist of a “backbone and promote the development transportation network” with high- of e-commerce. speed rail, highways and civil aviation; a “general mainline network” with Endnotes high-grade highways, ordinary speed railways and inland waterways; and a 1 Research report on the development and “service network” with rural roads market prospects of China’s e-commerce and branch railways.9 Developing industry in 2019, China Business Industry countries should strengthen transport Research Institute, available at https://wk. infrastructure and promote competition askci.com/details/410b8e0556bd422 among various courier companies to 3b5085696e00028d0/ improve the speed and quality of their logistics services. 2 China E-commerce Development Report 2018–2019, 2019 Global Electronic 2. Convenient platform Commerce Conference, Xiamen, 8 The availability of a user-friendly September 2019. internet platform is a major feature of the rapid development of China’s 3 See https://www.statista.com/ e-commerce. Consumers can easily statistics/278204/china-mobile-users-by- search for various products and month/ compare their function and price through the platform. Various means 4 E-commerce purchases here refer to the of payment are available, including total goods and services purchased by through online commercial banks, enterprises through online orders. Alipay and WeChat. Upgrading e-commerce shopping platforms is 5 Data from National Research Network essential to facilitating consumers’ Database, available at: data.drcnet.com.cn online purchases. (accessed 13 January 2020).

3. Regulating market 6 Ibid. The rapid development of China’s e-commerce also benefited from 7 “WPP China Social E-commerce White regulating e-commerce, based on Paper”, 2019. international agreements. China continues to fulfil the Agreement 8 Liu, Guiqing, 2007, Highlights of the on Information Technology proposed 11th five-year plan for the development at the WTO Ministerial Conference of e-commerce Shanghai Business in Singapore in 1996. In addition, (08): 28-29. China has participated in the negotiation of the Information 9 “Backbone transportation network”, Product Agreement, and China may “general mainline network” and “service participate in the negotiation of the network” refer to three types of logistics e-commerce agreement. Accordingly, in China based on transport infrastructure developing countries should actively developments and geographical features. join the WTO’s agreement on “Backbone transportation network” e-commerce, which will facilitate the is the most common one, followed CHAPTER 6 153

by “general mainline network” and platform under network environment, “service network”. Zhejiang Gongshang University.

References Shen, D. (2016), “Difficulties faced by e-commerce in China and countermeasures”, Deng, Q. (2013), Research on government Western Leather 38(14): 71. functions in e-commerce ecosystem, Zhejiang Gongshang University. Shen, W. and Chen, J. (2018), “Problems and countermeasures of e-commerce Hui, Y. (2018), Research on national development in China”, Science and happiness effect of international trade, East Technology Economic Guide 26(22): 5-7. China Normal University. Wang, H. (2007), “Prospect of the Mao, B. (2007), “China’s e-commerce development trend of e-commerce based on development focus? Interpretation of ‘the the ‘eleventh five-year plan’ of e-commerce eleventh five-year plan for the development of development”, E-commerce 9: 11-13. e-commerce’”, Internet World 9: 8. Yang, Y. (2016), Dynamic research on the Meng, F. (2017), “China’s e-commerce impact of e-commerce development on development in the 13th five-year plan from China’s export to “One Belt and One Road” the 12th five-year plan”, Informatization countries, Jiangxi University of Finance and Construction 7: 38-40. Economics.

Qiongni, Z. (2014), Model, mechanism and policy of regional collaborative innovation 154 CHAPTER 6: COMMENTS

Comments

QING YE*

E-commerce transactions, including the e-commerce. This chapter discusses cross-border ones, have been growing China’s e-commerce growth in general; rapidly and have transformative effects China’s cross-border e-commerce on the global economy. As Chapter 6 development could also be included and indicates, China’s e-commerce further illustrated. In fact, cross-border transactions have seen a tremendous e-commerce in China began to grow growth in the past 20 years. In fact, significantly in 2011 and has become an China has become one of the largest important part of Chinese foreign trade. e-commerce markets in the world. Cross-border e-commerce transactions, The global value of e-commerce particularly in business-to-consumer reached US$ 29 trillion in 2017, which (B2C) terms, encompass e-transactions, corresponds to 13 per cent growth e-payments and logistics. There are a over the previous year, according to mass of cross-border e-commerce estimates by the United Nations market players in China, including Conference on Trade and Development e-platforms, e-payment operators, (UNCTAD, 2019b). China’s total e-vendors, warehousing operators e-commerce sales value was estimated and express shippers, which jointly at US$ 1.9 trillion in 2017, making it the operationalize massive online third largest e-commerce market after transactions and offline deliveries on Japan and the United States. However, a day-to-day basis. According to according to UNCTAD’s Digital Chinese Customs’ statistics,1 the value Economy Report 2019, China’s total of China’s cross-border e-commerce e-commerce sales value in 2017 trade in goods was around CNY 134.7 represented only 16 per cent of its gross billion in 2018, with an annual growth domestic product (GDP) (UNCTAD, rate of 20 to 30 per cent for the period 2019a). This share was nearly three from 2013 to 2018. It is noteworthy that times less than in the United States exports took the majority share of and four times less than in Japan. It China’s total cross-border e-commerce indicates China’s e-commerce transactions in goods at the level of market still has tremendous potential 83.1 per cent in 2015; however, imports to grow, particularly in business-to- surpassed exports in less than three business (B2B) e-commerce and years and reached 58 per cent of the cross-border e-commerce. total share in 2018.

Statistics typically include both domestic Cross-border e-commerce impacts and international transactions, so it is economies in different ways. For important to single out cross-border example, it: (i) enables diversified

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 6: COMMENTS 155 products from all over the world to be • encouraging enterprises to engage in supplied to consumers; (ii) encourages international trade through small and medium-sized enterprises e-commerce; (SMEs) to participate in international trade; (iii) improves economic • strengthening major e-platforms; competitiveness; (iv) spurs innovation (e.g. many Chinese e-platforms are • enhancing customs and quarantine utilizing “big data” to analyse and procedures; monitor cross-border e-commerce transactions); and (v) creates jobs – • improving cross-border payment there are over 2 million people working services; in the field of e-commerce in China (WCO, 2017). • providing financial support to e-commerce companies; and Chapter 6 divides China’s e-commerce development into four phases – • promoting the functions of trade germination, growth, accelerate and associations. mature – that follow the same logic as that of other scholars.2 Other initiatives Differences mainly occur include encouraging when defining the later “E-commerce e-commerce cooperation stages; if marked by transactions, with countries along the milestones in government Belt and Road, policies, later stages including the increasing the efforts to could also be classified cross-border support Pilot Free Trade as “The Standardization ones, have Zones to deepen reform Stage” and “The been growing and opening up and Globalization Stage” rapidly and have facilitating cross border (Yue, 2017), which is transformative e-commerce. At the compatible with Chapter local level, municipal 6’s government policy effects on the governments in some discussion. The global economy.” cities are encouraged Standardization Stage to explore ways in which covers the period from they can integrate 2008 to 2014, when key policies to different administrative resources and promote e-commerce development in provide comprehensive services in order China were formulated and regulatory to promote cross-border e-commerce. policies for China’s e-commerce had For example, Zhejiang Province has launched by its end. The Globalization established a cross-border e-commerce Stage has developed with the significant work mechanism, with Hangzhou and growth of China’s cross-border Ningbo as the main pilots, for a e-commerce. In June 2015, the Chinese management system and set of rules on government rolled out its strategy to global cross-border e-commerce, foster cross-border e-commerce in a especially a “single window” for document titled “Guiding Opinions to logistical and legal matters. Promote Healthy and Rapid Development of Cross-Border E-commerce”,3 which Critical lessons learned from China’s encompassed the following measures: experience of rapid e-commerce 156 CHAPTER 6: COMMENTS

development can be summarized as Improving access to reliable and follows: (i) creating well-designed affordable ICT infrastructure is essential national strategies and roadmaps for for e-commerce to thrive. Strengthening boosting the development of e-commerce; logistics and transport infrastructure is (ii) refraining from measures that may stifle imperative for both domestic and the development of e-commerce, such cross-border e-commerce facilitation. as streamlining the administrative Poor logistics remain a barrier to procedures for taxing related e-commerce in many developing businesses and enhancing services; countries, and investment in (iii) providing a more conducive infrastructure is often much needed. business environment based on trust, The solution may partly lie in providing fostering entrepreneurship and direct government funding in innovation, and providing access infrastructure investment or adopting to financing for digital start-ups; and private-public partnerships for the (iv) strengthening the protection of deployment of networks, as China did intellectual property in the cross-border in its e-commerce development growth e-commerce industry and cracking down phase. Taking the best practice from on counterfeiting and infringement. the globalization phase of China’s e-commerce development, policymakers Most of the debate on digitalization could explore and harness relevant and development has concentrated opportunities to embrace cross-border on the extent to which countries have e-commerce and create conditions, affordable access to various procedures and resources that enable technologies and whether the cross-border e-commerce to thrive. technologies benefit each country. The digital divide remains a real On a global scale, international concern to many developing countries, cooperation plays an important role. particularly least-developed countries In certain markets, regulatory (LDCs), and many face challenges of requirements regarding cross-border drawing benefits from vibrant digital e-commerce fail to keep up with the trade owing to the lack of adequate dynamics and trends of e-commerce digital capacities. Further studies on in terms of their efficiency and the policy implications of China’s effectiveness, posing substantial e-commerce development can help demands for international cooperation developing countries to engage in and on trade facilitation, customs revenue benefit from the expansion of collection, cybersecurity, etc. Existing e-commerce. In practice, the following trade facilitation solutions, such the key policy areas need to be addressed WTO Trade Facilitation Agreement when formulating national e-commerce (TFA), include provisions that aim to strategies: information and modernize border clearance communications technology (ICT) procedures and streamline processes. infrastructure, trade logistics, legal Such efforts become even more and regulatory frameworks, online important in the evolving development payment solutions, digital skills, public of cross-border e-commerce. e-procurement and stakeholder Implementation of the TFA will improve participation in policy formulation customs procedures and formalities so and implementation (OECD and that shipping time can be reduced, WTO, 2017, Chapter 7). which is critical for small parcels sent CHAPTER 6: COMMENTS 157 from SMEs on the cross-border References e-commerce platforms. Mao, Y. X. and Zhao, L. (2016), Big Data When considering legal frameworks, Age - Business Ethics Frontier Issues, a key question for policymakers is to Northeastern University Press. ascertain whether existing laws and regulations allow for a level playing field Organisation for Economic Co-operation and between e-commerce and regular trade. Development (OED) and World Trade This particularly applies to physical Organization (WTO) (2017), Aid for Trade goods that can be digitized and sent at a Glance 2017: Promoting Trade, across borders digitally. Since the WTO Inclusiveness and Connectivity for General Council adopted the Work Sustainable Development, Geneva: Programme on Electronic Commerce in OECD and WTO. 1998, WTO members have periodically renewed, on a provisional basis, the United Nations Conference on Trade and commitment not to apply customs duties Development (UNCTAD) (2019a), Digital on electronic transmissions. Other Economy Report 2019, Value Creation and cross-cutting issues include an adequate Capture: Implications for Developing legal and regulatory framework on cross- Countries, Geneva: UNCTAD. https://unctad. border data flow, cybersecurity, org/en/PublicationsLibrary/der2019_en.pdf competition laws and intellectual property rights. To facilitate cross-border United Nations Conference on Trade and e-commerce, it is important to develop a Development (UNCTAD) (2019b), “Global global regulatory framework that e-Commerce sales surged to $29 trillion”, supports the growth of digital trade for press release, 29 March 2019. https:// all. This will require an ongoing dialogue unctad.org/en/pages/PressRelease. and a collaborative effort among all aspx?OriginalVersionID=505 countries, from all regions of the world and all levels of development. Wang, B. (2017), “China’s e-commerce network retail industry evolution, competitive Endnotes situation and development trends”, China’s Circulation Economy 31(4). 1 See http://english.mofcom.gov.cn/article/ newsrelease/press/201902/ World Customs Organization (WCO) (2017), 20190202837696.shtml “Cross-border e-commerce in China,” WCO News 84. https://mag.wcoomd.org/ 2 Mao and Zhao (2015) present in six phases: magazine/wco-news-84/cross-border-e- germination, growth, accelerate, mature, commerce-in-china/ outbreak and transformation. From the perspective of industry economic theory Yue, H. (2017), “National Report on cycle, Wang (2017) identified China’s E-Commerce Development in China”, e-commerce evolution in four periods: Inclusive and Sustainable Industrial germination, growth, eruption and Development Working Paper Series WP 17, integration. UNIDO. https://www.unido.org/sites/default/ files/2017-10/WP_17_2017.pdf 3 See https://www.chinalawupdate.cn/ wp-content/uploads/sites/206 /2015/06/E-Commerce-guidelines.pdf Chapter 7 Engaging in the digital economy: issues and agenda in the quest to adopt Indonesia’s e-commerce roadmap

Riza Noer Arfani, Maharani Hapsari and Putra Perdana* Abstract

The study explores structural and practical issues following the adoption of Indonesia’s e-commerce roadmap (2017–2019) and its implications for the future of the country’s digital economy. Two major categories of issues are examined in order to identify problems and challenges confronted by related stakeholders. The first category, i.e. the structural one, relates to the larger governance context of the country’s digital economy to which e-commerce activities are attached. The governance context includes the legal and regulatory context, the institutionalizing mechanism and the implementing phases, which involve socio- and politico-economic interplays among its key players. The second category represents practical dimensions, which involve questions on the mitigation of and adaptation to concepts, models and practices in the digital economy. Indonesia’s position on the moratorium on e-commerce and the local initiatives on digital economy are presented to illustrate mitigation efforts by related stakeholders in areas where disagreements and negotiations on certain structural and practical policy issues have arisen, i.e. on Indonesia’s position on the World Trade Organization (WTO) moratorium on e-commerce and local initiatives (such as the ones in Yogyakarta) to develop a digital economy.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 160 CHAPTER 7

Introduction For emerging economies, e-commerce can contribute to the reduction of The importance of e-commerce has transaction costs along the commodity been indicated in various international chain. This occurs particularly in policy contexts, particularly under the sectors where global buyers have existing WTO Work Programme on created production and distribution Electronic Commerce since its systems to meet the requirements establishment following the adoption of without themselves taking ownership the Declaration of Global Electronic of production or distribution facilities Commerce at the 2nd WTO Ministerial (Humphrey et al., 2003, p. 29). Conference (Geneva, May 1998). Open foreign investment policy E-commerce is defined as the has contributed to more flexible market production, distribution, marketing, encounters between domestic and sale or delivery of goods and services international market players (Tan and by electronic means Ouyang, 2002). The (WT/L/274, 30 conduct of e-commerce September 1998). The “For emerging also involves continuous scope of e-commerce interplay between includes good and economies, domestic and services transacted e-commerce international policy or exchanged can contribute contexts. Inter-firm both domestically to the reduction networking and the 1 and internationally. of transaction coordination of international trade are International e-commerce costs along important systemic services are mainly the commodity international factors. taken in the form of chain.” Mode 1 and 2 of the Previous studies have General Agreement on provided sufficient Trade in Services (GATS) involving ground to locate the Indonesian the cross-border supply of services case within the available analytical that could include: (i) digital products framework, theoretical assessment (music, videos, apps and games) and empirical experience of other downloaded and paid online; or countries. This study adopted the (ii) services transactions completed “inter-actionist” approach2 by Molla online between a consumer and a and Licker (2005) to understand the supplier located in different countries. contextual and organizational factors Traditional commerce includes all four that affect e-commerce adoption. modes of supply (as defined under the This approach is articulated in the GATS) not necessarily involving online Perceived eReadiness Model (PERM), transactions as a major feature (e.g. which is built on two constructs: international shipping, international Perceived Organizational eReadiness tourists, companies with foreign (POER) and Perceived External investments supplying a service to eReadiness (PEER). POER indicates local consumers or the temporary innovation imperative attributes, the movement of a service supplier to commitment of an organization’s another country to supply a service) managers and organizational (Tuthill, 2016). imperative attributes such as CHAPTER 7 161 resources, processes and business Indonesia’s e-commerce infrastructure. Meanwhile, PEER roadmap 2017–2019 represents environmental imperative attributes. The model allows an The Government of Indonesia launched analysis that connects the Presidential Regulation (Peraturan organizational adaptive capability Presiden No. 74/2017 (Perpres No. shaped by culture and the broader 74/2017)) on the Indonesia E-Commerce environmental settings (including Roadmap 2017–2019. Enacted in national policy and international August 2017, the roadmap highlights competitiveness) (Molla and Licker, eight main points in the country’s 2005, p. 882). e-commerce development: (1) funding; (2) taxation; (3) consumer protection; National practices contribute to a (4) education and human resources; unique combination of state leadership (5) logistics; (6) communication; and market mechanism that shapes (7) cybersecurity; and (8) management. opportunities and constraints for Key ministries and institutions, including e-commerce beneficiaries. The role of the Ministry of Communication and government is considered very crucial Informatics (MOCI), the Central Bank in providing the overarching national (Bank Indonesia), the Coordinating framework that allows e-commerce Ministry of Economic Affairs (CMEA) entrepreneurs to expand their business and the Ministry of Finance (MOF), with sufficient degrees of risk were involved in the formulation of this management especially in developing regulation.3 Table 1 outlines the focal countries (Durbhakula, points and featured Vijay and Kim, 2011) plans and programs and in the legal and outlined in the roadmap. policy environment that “E-commerce ignites substantial also involves Challenges in impacts (such as continuous implementing the internet taxation, interplay roadmap came from encryption and digital between introducing implementing signature, online patent provisions (Government and copyright domestic and Regulation (Peraturan protection, network international Pemerintah (PP) on security and privacy policy contexts.” trading transactions safeguards) (Zhu, over electronic systems). 2009). Examining how Three issues are e-commerce operates in the context currently unresolved: (i) e-commerce of a national governance framework, data collection; (ii) local e-commerce this study discusses the current participants’ empowerment; and governance landscape that provides an (iii) the definition on digital goods/ overarching framework for government products and services.4 The resolution leadership in e-commerce in Indonesia of the issues is subject to a complex and the contemporary issues that coordination mechanism among emerge in the public debate as regards different state ministries and to the practical and structural agencies/institutions, harmonization dimensions of the adoption of an of their respective roles/functions e-commerce roadmap. and legal administration. 162 CHAPTER 7

Table 1: Indonesia’s e-commerce roadmap focal points and plans and programs

Focal points Featured plans and programs

• Small Businesses (SMEs) Credit (Kredit Usaha Rakyat (KUR)) for Platform Developer Tenants • Grant for Business Incubator of Start-up Partners • USO Fund to Digital SMEs and Start-up E-commerce Platform Funding • Angel Capital • Seed Capital in the Forms of Venture Capital • Crowd Funding • DNI Opening • Tax Redemption for Local Investors who Invest in Start-ups • Simplification in License and Taxation Procedures for E-commerce Start-up Taxation whose Profit Is Below IDR 4.8 Billion/year • Tax Regulations Equality for All E-commerce Entrepreneurs • Government Regulation on Trading Transaction using Electronic Systems Consumer • Regulatory Harmonization protection • Payment System for Government Goods/Services Trading via E-commerce • Progressive National Payment Gateway (NPG) • E-commerce Awareness Campaign • National Incubator Program Education and • E-commerce Curriculum human resources • E-commerce Education for Consumers/Players • Law Enforcement • Utilization of National Logistics System (Sislognas) • Local Courier Company Empowerment Logistics • SMEs Logistics Data Development • Logistics Development from Village to City

Communication • Communication Infrastructure via Broadband Network Construction

• National System Supervision Arrangement in E-commerce Transaction • Cyber Crime Public Awareness Cybersecurity • Standard Operating Procedure (SOP) in the Arrangement related to Consumer Data Records • Certification for Consumer Data Security • Establishment of Executing Management for Monitoring and Evaluating Management E-commerce Roadmap Implementation

Source: Majalah ICT No. 50 (December 2016).

Indonesia’s e-commerce empowerment of local e-commerce current situation and participants; and (iii) the definition on state of play digital goods/products and services. Recent e-commerce policy dynamics Implementation of the roadmap has indicate that data queries are a major reached a new stage with the aspect to be integrated in the adoption enactment of Government Regulation of the national roadmap given the (PP) No. 18 (25 November 2019), ongoing coordinating mechanism that which offers implementing provisions evolves across government agencies. on trading transactions over electronic Additionally, the roles of key systems (Perdagangan Melalui Sistem stakeholders need to be strengthened Elektronik (PMSE)). The regulation to mitigate the anticipated structural and covers three major issues relating to practical policy issues in Indonesia’s e-commerce: (i) data collection; (ii) the e-commerce governance. CHAPTER 7 163

E-commerce and digital Indonesia’s e-commerce sales have economy in Indonesia: made up only 3.1 per cent (2017 figure, data queries as recorded by GDP Venture 2018) of total retail sales.7 Approximately 65 per Under the roadmap, two key parties cent of e-commerce users prefer to use contribute to e-commerce and digital cash on delivery (COD), while the rest economy data collection: (i) the prefer to use debit or credit cards. Indonesian E-commerce Association E-commerce or digital buyers make up (IdEA),5 which is the main partner/ 10.6 per cent of Indonesia’s total targeted agency of the central population (of approximately 260 million government’s statistics agency people). There are three major factors (i.e. the Central Statistics Bureau or that have driven Indonesian digital buyers: Badan Pusat Statistik (BPS)) for (i) payment options (which they consider data recording (as of January 2018), to be fast and secure); (ii) deals (which including statistics on e-commerce include special price offers); and free transactions, local and foreign home delivery service. The average time investments, transactions, payment spent on e-commerce or digital shopping methods, employees and technologies; is 90 minutes per month, ranking second and (ii) the Indonesian Internet Service globally. Indonesia is also ranked second Providers Association (Asosiasi in terms of digital travel growth in the Penyelenggara Jasa Internet Indonesia Asia Pacific region, first in mobile gaming (APJII)), which provides surveys on revenue in Southeast Asia, and first in internet users and uses (for example, growth of fin-tech-related apps it conducted surveys on business worldwide (with a 200 per cent increase sectors in 2013; user profiles in 2014; from 2016 to 2017). MOCI, CMEA and the device, network and apps (DNA) MOT are in the process of selecting an ecosystem in 2016; and penetration and agency to serve as an integrated data user behaviors in 2016 and 2017). centre for data-collection activities.

APJII surveys offer a basic estimation The roadmap: key and overview of the Indonesian digital stakeholders and structural landscape over the past five years. and practical policy issues As of 2017, Indonesia had more than 143 million internet users, with the The analytical frameworks of POER highest penetration rate among and PEER, in conjunction with the 34- to 54-year-olds and 19- to 33-year- roadmap’s eight focal points, allowed olds, who comprise 30 per cent and delineation of issues and agenda to be 49 per cent, respectively, or a combined taken into account by the Indonesian 79 per cent of the total users. The government in light of the roadmap highest penetration rate, however, implementation (see Table 2). Policy is among 13- to 18-year-olds, who issues categorized under “practical” comprise 75 per cent of the total users. focal points refer mainly to questions Ninety per cent of internet users in the relating to POER at the firm level. country use smartphones, with 88 per Policy issues under “structural” focal cent of users spending time on apps points concern PEER, which are on a daily basis (on average, using linked to governance, regulation, 40 apps and having 80 apps installed implementation aspects and the role on their phones).6 of government. 164 CHAPTER 7

Table 2: Mapping of key stakeholders and structural and practical policy issues in Indonesia’s e-commerce roadmap 2017–2019

Focal points: key stakeholders Structural/governance (PEER) Practical/firm level (POER)

Funding • Scheme of funding and SMEs loan financing (e.g. • E-commerce SMEs and start-ups encounter • Governmental agencies: Coordinating Ministry of Economic Affairs (CMEA), Ministry of State Owned on Kredit Usaha Rakyat (KUR) distribution, banks/ initial difficulties when they begin in the Enterprises (MSOE) and Ministry of Communications and Informatics (MOCI) (as lead agencies), Ministry non-banks as KUR distributors) registration phase of accessing KUR due of Cooperatives and Small Medium Enterprises (MCSME), Otoritas Jasa Keuangan/Financial Services • Scheme of grants and subsidies for business to business licensing processes and lack of Authority (OJK/FSA), Bank Indonesia/Central Bank (BI), Ministry of Trade (MOT), Ministry of Industry incubators and start-ups, including the ones collateral assets, thus a solid funding scheme (MOI), Ministry of Research and Higher Education (MRHE), Ministry of Finance (MOF), Badan Ekonomi originated from SOEs and private firms’ corporate to face such difficulties is a must Kreatif/Creative Economy Agency (BEKRAF), MNDP/Bappenas (Ministry of National Development social responsibilities • Media and universities could serve as catalysts Planning/Badan Perencanaan Pembangunan Nasional (National Development Planning Agency)) • Alternative funding and schemes of grants and and facilitators to meet the needs of start-ups • Private/firm associations: Indonesian E-Commerce Association (IdEA), Asosiasi Penyelenggara Jasa subsidies for digital economic ecosystem, including and early-stage incubators, SOEs and large Internet Indonesia/Indonesian Association of Internet Service Providers (APJII), State Owned Enterprises by utilization of: (1) Universal Service Obligation e-commerce firms, e.g. in the form of workshop (SOEs), venture/angel capital associations funding and public services agency as Universal series, trainings and installation of co-working • Academia/non-governmental organizations: media, universities Service Obligation fund distributors for digital SMEs spaces where proposed scheme of grants and and start-ups, (2) angel capital and seed capital, subsidies are collaboratively designed (3) crowd funding, and by opening up tiered Daftar and implemented Negatif Investasi/Investment Negative Lists Taxation • Simplified tax procedures for e-commerce players • Difficulties relating to classification of • Governmental agencies: MOF, MOT and CMEA (as lead agencies), MCSME, BEKRAF and MOCI with turnover below IDR 4.8 billion (approximately e-commerce goods/services that affect • Private/firm associations: IdEA US$ 330,000 with an exchange rate of US$ 1 = IDR licensing processes by e-commerce players • Academia/non-governmental organizations: media 14,500) per year, plus additional tax incentives as changes of e-commerce goods/services • Registration procedures for e-commerce players trade patterns are common via issuance of Transaksi Perdagangan Melalui • Ease of access to logistics and increasing Sistem Elektronik/Trade Transaction via Electronic variety of virtual payment systems cause System (TPMSE) identity numbers (or e-commerce difficulty in imposing taxes on e-commerce licensing) by MOT transactions, thus creating certain challenges • Tax parity principles and regulation for e-commerce not only for tax agencies but also for players, both local and foreign e-commerce players Consumer protection • Government Regulation on TPMSE • As there is not yet a specific law regulating • Governmental agencies: MOT, CMEA, MOF and BI (as lead agencies), Ministry of Labour and Human • Harmonization of regulations related to TPMSE e-commerce consumer protection in Indonesia, Resources (MLHR), Ministry of State Secretariat (MSS), MNDP/Bappenas, MOCI, Badan Pusat for classification of e-commerce players, reference shall be made to the existing law Statistik/Central Statistics Agency (BPS), Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah/ electronic certification, accreditation process, regulating general consumer protection, i.e. Government Goods and Services Procurement Policy Agency (LKPP), Otoritas Jasa Keuangan/Financial payment mechanism policy, e-commerce Law No. 8 (1999) Services Authority (OJK/FSA) consumers’ and players’ protection, online • In terms of transparency, LKPP’s best practice • Private/firm associations: IdEA dispute settlement, adoption of e-commerce on having an online government procurement • Academia/non-governmental organizations: Yayasan Lembaga Konsumen Indonesia/Indonesian consumer protection principles, application of procedures and database could set a model to Consumer Agency Foundation (YLKI) and media e-commerce information system emulate and adopt • Development of Progressive National • NPG shall offer an explicit link to the Payment Gateway (NPG), especially for proposed cybersecurity schemes/programs electronic retail payment under the roadmap

Education and human resources • Awareness campaign/education for e-commerce • Indonesia ranks 73rd (out of 139) in the • Governmental agencies: MOCI, MOT, BEKRAF, Ministry of Research and Higher Education (MRHE) and SMEs, consumers and ecosystems, including networked readiness index (World Economic Ministry of Education and Culture (MEC) (as lead agencies), MCSME, MSOE, Lembaga Administrasi informal programs such as Harbolnas Forum, 2017), so e-commerce participants Negara/State Administration Institute (LAN) and MOI • Training of Trainers (ToT) for public officials related (and also other related stakeholders, including • Private/firm associations: IdEA, APJII and Kamar Dagang dan Industri Indonesia/Indonesia Chamber of to e-commerce and TPMSE YLKI representing consumers) encounter quite Commerce and Industry (KADIN) • Incubator programs for e-commerce start-ups a significant challenge in terms of the country’s • Academia/non-governmental organizations: YLKI, media and universities • Formal education for e-commerce talent overall e-commerce ecosystem preparedness • Development of TPMSE facilitators and how each participant mitigates such a challenge Communication infrastructure • Enhancement of communication infrastructure, • The existing infrastructure, which is insufficient, • Governmental agencies: MOCI (as a lead agency), Coordinating Ministry for Political, Legal and Security particularly internet speed, networks and security presents a major challenge Affairs (CMPLSA), MNDP/Bappenas • Broadband internet infrastructure, free domains for • Due to its geographical conditions as an • Private/firm associations: APJII TPMSE growth archipelagic country, Indonesia has a significant • Academia/non-governmental organizations: media and universities gap in communication infrastructure networks (ranking 105 of 139) CHAPTER 7 165

Focal points: key stakeholders Structural/governance (PEER) Practical/firm level (POER)

Table 2: Mapping of key stakeholders and structural and practical policy issues in Indonesia’s e-commerce roadmap 2017–2019 (continued)

Focal points: key stakeholders Structural/governance (PEER) Practical/firm level (POER)

Logistics • Enhancement of e-commerce-based logistics • From the point of view of local logistics service • Governmental agencies: CMEA and MSOE (as lead agencies), Ministry of Transportation (MOTR), MOF, industry via Sistem Logistik Nasional (Sislognas)/ providers, schemes on funding, incentives, MOT, MOCI, Ministry of Public Works and Housing (MPWH), BI, OJK/FSA, Ministry of Agriculture National Logistics System blueprint and electronic grants and subsidies for e-commerce players (MOA), MOI, MCSME, Ministry of Villages, Development of Disadvantaged Regions, and Transmigration data standardization/exchanges under Sislognas need to be in parallel with their capacity building • Private/firm associations: PT Pos Indonesia, National Logistics Association for e-commerce and restructuring programs • Academia/non-governmental organizations: media and YLIK • Outsourcing of logistics facilities for e-commerce • Schemes of logistics facilities that outsource SMEs to e-commerce SMEs need to take into • Capacity building for local and national logistics account SMEs’ levels of business capacity service providers, including PT Pos Indonesia and digitalization to meet with their specific revitalization, modernization and restructuring “localized” digital and e-commerce ecosystem • Development of “village to city” logistics system • As an SOE, PT Pos Indonesia could serve as via application of electronic-based trade for fishery, a “localized and ad hoc distribution centre” for agriculture, etc.; e-commerce education; IT-based the proposed pilot projects, which could also be local/regional distribution centres; village-level a “clearing house” for “village to city” logistics ICT infrastructure; and pilot projects on certain systems (given its nationwide outreach) agricultural products, such as onions, chilis and other vegetables Cybersecurity • Enhanced security for electronic transactions • A real-time surveillance and monitoring system • Governmental agencies: CMPLSA and MOCI (as lead agencies), CMEA, MOF, BI, MOT, OJK/FSA, activities by adoption of cybersecurity principles is needed as issues on anonymity in electronic police headquarters for e-commerce players and any other online transactions are the most apparent challenges • Private/firm associations: IdEA, APJII operators, i.e. via Standard Operating Procedure in the overall e-commerce ecosystem • Academia/non-governmental organizations: YLKI, media and universities and regulation on cybercrime, certification on • A moral hazard inducement – which might be a consumer data protection loophole in the current proposed cybersecurity • Public awareness campaign on cybercrime programme and scheme – shall be mitigated • Development of National Cyber Surveillance/ by linking it to education and human resources Monitoring System for E-Commerce Transactions focal points, i.e. under an awareness campaign on cybercrime Operational management of e-commerce roadmap • Establishment of implementing agency of the • Media, universities, think tanks and NGOs, • Governmental agencies: CMEA and MOF (as lead agencies), MOCI and MNDP/Bappenas e-commerce roadmap, including appointment as well as IdEA, APJII and other e-commerce • Private/firm associations: IdEA, APJII of experts and setting up a task force or an associations, are partners offering expertise, • Academia/non-governmental organizations: media and universities implementing body technical assistantships, apprenticeships, internships and networks

Source: Compiled by authors from various sources. CHAPTER 7 167

Focal points: key stakeholders Structural/governance (PEER) Practical/firm level (POER)

Key stakeholders are attempting to mitigate disagreements among themselves, particularly relating to Box 1: The Yogyakarta city the local practice and e-commerce government initiative initiative by the Yogyakarta city on digital economy government within the framework of national roadmap implementation Yogyakarta city provides a (Box 1) and on Indonesia’s position good example of local on the WTO moratorium on government initiatives, which e-commerce (Box 2). a number of districts and municipalities in the country Conclusion aspire to. Aimed at gaining from the growth in the digital The study explores issues (the economy, such initiatives possibilities and problems encountered focus on local regulations and by key stakeholders) and agenda (the policy incentives, local digital difficulties and challenges in the policy entrepreneurships, human design) that occurred during the resources and capacity implementation of Indonesia’s building, cooperation among e-commerce roadmap (2017–2019). key stakeholders and local It begins with the idea that policy innovation. Yogyakarta e-commerce involves the continuing has collaborated with its interplay between domestic and provincial government to boost international policy contexts, within digital transformation by which its scope and definition are establishing technology negotiated and eventually agreed. This centres resembling those of study offers a conceptual framework/ Silicon Valley in the United model that fits the organizational and States (Jakarta Post, 22 external environment of e-commerce February 2018). In addition, players in a developing country such the city participated in the 100 as Indonesia. This specific model has smart cities programme mapped out key stakeholders and initiated by MOCI. During the structural and practical policy issues. programme’s implementation Finally, it assesses efforts by relevant from 2017 to 2020, e-commerce players and stakeholders Yogyakarta also collaborated to deal with discrepancies in the areas with the city of Bandung identified and outlined in the roadmap, (West Java) to adopt the smart and as suggested in the overall cities programme. mapping assessment of the eight focal points. Regarding the development of its digital ecosystem, the city has also hosted a variety of digital start-ups and business incubators, of which Jogja Digital Valley (JDV) is one of its major initiatives.8 Initiated and funded by PT TELKOM CHAPTER 7 169

(a telecommunications SOE), programs offered at the national JDV is the second ICT business level have provided a incubator after Bandung Digital springboard for local players to Valley (BDV), its debut initiative help them set up convenient in Bandung. It aims to increase departure strategies both as the number of game, music, start-ups and incubators. edutainment, animation and other Because the city is surrounded software services developers in by clusters of creative industries Yogyakarta by facilitating (such as handicrafts, art co-working and meeting spaces galleries, performance spaces, for potential developers and festivals, MICE (Meetings, start-up companies in the field of Incentives, Conferences and creative content development. Exhibitions)-related events, In the area of communication and culinary and thematic tourism, telecommunication infrastructure, etc.), an integrated logistics the city has also collaborated system that adopts digital with a private digital firm to technology and promotes procure and use the city’s e-commerce (in light of adoption existing fibre optic poles of the designated village to city (as outlined in the city electronic-based logistics cooperation agreement with system) would be of great benefit PT Media Sarana Akses).9 to the development of the city’s digital economy. Seen from the enactment of a national-level e-commerce roadmap, the Yogyakarta city initiative (as also applied in other cities involved in the 100 smart cities programme) works in parallel with other proposed programmes and schemes. The designated focal points of funding, taxation, logistics, communication infrastructure, education and human resources offer a mitigation map for local e-commerce and digital economy players in the city. The local regulatory framework currently being discussed will eventually have common ground as its foundation. Also in the realm of the development of digital and e-commerce entrepreneurships, a variety of schemes and 170 CHAPTER 7

Box 2: The moratorium decision, to impose tax and on e-commerce (WTO customs duties on digital goods Work Programme): by 2018 to other key stakeholders, Indonesia’s position e-commerce players (especially via IdEA), other relevant ministries Despite the setback it and government agencies, media, encountered during the last NGOs and universities. WTO MC 11 in Buenos Aires in 2017, the Government Such dynamics bring to light of Indonesia insisted on both the differences among proceeding with imposing key stakeholders and their e-commerce tax and import willingness to compromise, as duties on digital products, shown during a focused group such as downloadable music, discussion facilitated by MOT e-books, software and the like, and hosted by the WTO Chairs to be started in 2018 (Ribka, 2017). Programme at the Center for The government has consulted with World Trade Studies, Universitas the WTO Director-General, Gadjah Mada (WCP-CWTS following the WTO decision to UGM) in Yogyakarta on 30 May extend the moratorium on 2018. Disagreement over legal e-commerce in MC 11 for another harmonization on tax incentives two years. The results of the and supports for e-commerce consultation were then circulated SMEs were shared between among members during MC 11 as MOT, MOF’s Customs Bureau, reflected in the statement by MCSME and IdEA representatives. Indonesia titled “Facilitator’s These stakeholders do not agree Consultation on Electronic on the scope and definition of Commerce, MC 11 Declaration digital goods and services and and Other Relevant Plenary data collection. During the WTO Session” (WTO, 2017). General Council meeting in December 2019, WTO members Prior to and after the decision, agreed to maintain the current key stakeholders have mitigated practice of not imposing customs and are ready to implement the duties until MC 12 in Kazakhstan. decision. The lead agencies This issue is a domestic priority (in parallel with the roadmap for Joko Widodo’s presidency, focal points on taxation) are MOF, particularly in order to maintain MOT and CMEA. MOT, whose an equitable market for both minister was the head of the traditional and e-commerce Indonesian delegation at MC 11, players. Indonesia will also carries out the country’s mission to make a careful consideration call for an end to the moratorium. of the structured discussions MOT also has the task of under the Work Programme on communicating and disseminating Electronic Commerce initiated the position, and eventually the in 2020. CHAPTER 7 171

Endnotes 5 As of September 2018, IdEA had 319 members classified as follows: online 1 E-commerce is distinguished from retail (online shops with their own traditional commerce along domestic and websites/domains where sellers have international lines. In terms of trade in product stocks/services and sell them goods, domestic e-commerce allows a to online buyers (147); marketplace consumer to buy a product from a domestic (business models where related domains/ online store. In traditional commerce, websites conduct not only product consumers buy products from a domestic promotion, but also facilitate online retail store. Internationally, a consumer transactions for online traders (52); orders a product from an online store and payment gateway (21); travel (17); the product is shipped from the producer/ logistics (19); infrastructure (30); retailer in another country directly to the directory (1); daily deals (6); classified consumer. In traditional commerce, the ads (19) and banks (7). major feature is bulk import and export of goods by international trading companies. 6 The survey also finds that the digital In terms of trade in services, a service is video viewer penetration rate for the supplied from a domestic supplier through country reached 67.4 per cent of all the internet (e.g. e-banking services internet users in 2017, or approximately provided by domestic banks or online 68 million viewers, and that there are educational or training services provided three main factors behind such a by domestic educational institutions/ phenomenon: (1) affordable smartphones; organizations). Traditionally, a consumer (2) better connections; and (3) shorter receives a service offline from a domestic attention spans (GDP Venture, 2018). supplier (e.g. conventional banking services via a teller in a local bank office or 7 Other sources, such as ASEANup.com, conventional education services at local have recorded an even more conservative schools/colleges or a haircut in a local figure – 1 per cent of total retail sales salon) (Tuthill, 2016). (ASEANup.com, 2019). As recorded by Bahar (2017), percentages of 2 Molla and Licker (2005) differentiate the e-commerce sales have been steadily “inter-actionist” approach from four other increasing since 2013: 0.5 per cent dominant perspectives, i.e. managerial, (2013), 0.63 per cent (2014), 0.76 per organizational, technological and cent (2015) and 0.83 (2016). In 2016, environmental (see pp. 878-879). the country’s overall retail sales were estimated at US$ 543.1 billion with 3 This particular part of the section, including e-commerce/online sales of US$ 4.5 discussions on provisions/programs of billion (Bahar, 2017). those eight focal points presented in the two subsequent paragraphs, is based on 8 See http://jogjadigitalvalley.com/. and summarized from Agarwal (2017). 9 City cooperation agreement for 2017–2020 4 These issues need to be discussed with PT Media Sarana Akses (2017), thoroughly among MOCI, CMEA and MOT. document no. 83/PERJ.YK/22017. 172 CHAPTER 7

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Comments

MARCELO OLARREAGA*

The chapter by Arfani, Hapsari The comparative disadvantage that and Perdana provides an interesting countries such as Indonesia may have and illuminating description of today on electronically transmitted Indonesia’s e-commerce roadmap goods and services is clearly due to that can be useful to other countries their relatively weak infrastructure; a trying to jump-start their e-commerce strong one is needed to support the sector. It clearly identifies the main digital sector. Low internet stakeholders one needs to consider e-commerce and credit card when countries engage with the penetration and problems with technological and societal challenges postal services are hard barriers associated with the Fourth Industrial to overcome when trying to increase Revolution (Schwab, 2016). the competitiveness of electronically transmitted goods and services. A perhaps surprising element for a country trying to invest in the However, it is difficult to see how competitiveness of its digital economy taxing imports of electronically is Indonesia’s push at transmitted goods the multilateral level for and services can lifting the World Trade “Placing help address this. The Organization’s (WTO) economic principle of e-commerce moratorium barriers to first best suggests (see Chapter 7, Box 2) imports of that the best policy to be able to tax digital goods solution to an electronic transmissions is unlikely to economic problem of digital goods. help Indonesia’s is the one that directly Consistent with this tackles the problem. strategy at the multilateral e-commerce Therefore, if the level, the government of competitiveness.” problem is low internet Indonesia amended its penetration, then one customs law in 2018 to needs to fix low internet be able to tax digital goods such penetration. If the problem is credit card as downloadable music, e-books penetration, then this is what needs to and software. Below I survey a be addressed. Trade-distorting taxes few of the reasons why placing are never going to be the first-best barriers to imports of digital goods policy instrument, as by definition, is unlikely to help Indonesia’s they are not targeting the source of e-commerce competitiveness. the problem.

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 7: COMMENTS 175

An argument that is often advanced I would suggest issuing government when arguing for the lifting of the bonds: borrowing at the current WTO’s e-commerce moratorium is interest rates is likely to be the that it hurts developing countries’ cheapest way of funding growth- ability to collect revenue at the border, enhancing policies. If borrowing is not and for many low- an option, many other income countries, this taxes are less distorting can be an important “Low internet than tariffs. Land taxes, source of government sales taxes, VAT and revenue. This foregone e-commerce taxes on firms’ profits revenue could have and credit card will all be less distorting been used to fund some penetration and and, therefore, more better internet and problems with likely to increase overall credit card penetration, postal services government revenues. or more efficient and reliable postal and are hard barriers If none of these taxes transport services. to overcome are available because when trying of a government’s low There are at least two to increase the capacity to tax, we are problems with this competitiveness left with import tariffs argument. First, as at customs. However, shown by Lee- of electronically at this stage, one Makiyama and transmitted should probably start Narayanan (2019) in an goods and wondering whether excellent study of the services.” improving the revenue impact of the competitiveness of WTO moratorium, the electronically transmitted lifting of the moratorium would goods should be a priority for such a result in a loss of overall tax revenue country. Let us assume that this still in most low-income countries. The makes sense, thus the question is why reason is that taxes on digital goods tax electronically transmitted goods. hurt the competitiveness of these Taxation theory tells us that we should countries and their gross domestic be taxing the products that will product (GDP) growth. There will generate the largest amount of certainly be more taxes collected on revenue, and this will be the products digital goods through these digital with the less elastic demand. These taxes, but this will be done at the are unlikely to be electronically cost of larger tax losses on other transmitted goods. In fact, the goods and services. In the case products with the lowest average of Indonesia, Lee-Makiyama and import demand elasticity is waste and Narayanan (2019) estimate the tax scrap beryllium (used for copper), revenue loss at around US$ 23 million followed by brakes for motor vehicles. (associated with a GDP loss of So large tariffs on these products will US$ 164 million). generate a lot of tariff revenue. And this additional tariff revenue can be If there is a need to fund better used to fund the projects that will help internet, e-commerce and credit card improve the competitiveness of penetration, or better postal services, Indonesia’s digital economy. 176 CHAPTER 7: COMMENTS

Note that I carefully chose the term software content if WTO members “tariff revenue” and not “customs notify it to the WTO Secretariat. We revenue” or “government revenue”. know how unreliable WTO members As tariff revenue increases, it is have been at notifying anything to the possible that customs revenue WTO, but 48 members have notified declines, because other taxes are that they are excluding the value of the collected at customs and as you software content. These countries reduce the volume of trade coming include Brazil, Canada, China, the through customs with the higher European Union, Japan, the Russian import tariffs you will be collecting Federation, South Africa, the United less sales tax or VAT. So, again, it is States and even Indonesia itself. They not clear that these tariffs on relatively represent more than 80 per cent of inelastic products will result in higher world trade. overall revenue for the government (and this is before you take into So if one of these countries were account the growth impact of these to tax electronic transmission of higher tariffs). software, it would be introducing a distortion that creates incentives to A related and important point is that send software by physical means the Uruguay Round Agreement on through customs rather than Implementation of Article VII of the electronically. This would be clearly General Agreement on Tariffs and inefficient and, more importantly, Trade 1994 (Customs Valuation it does not help efforts to address Agreement) allows for the valuation of global warming as all that software electronically transmitted products and those e-books would be using the value of the carrier medium unnecessarily shipped across alone, excluding the value of the oceans and transported by truck. CHAPTER 7: COMMENTS 177

References Schwab, K. (2016), The Fourth Industrial Revolution, World Economic Forum. Lee-Makiyama, H. and Narayanan, B. (2019), “The Economic Losses from Ending the WTO Moratorium on Electronically Transmitted Goods”, ECIPE Policy Brief 3/19. Chapter 8 Taxation of international e-trade: Russian particularities

Alexander Pogorletskiy and Sergei Sutyrin*1 Abstract

Tax rates on e-commerce in Russia should remain moderate, given the small size of its digital trade operations (so the rise in tax revenues from higher rates would be small) and substantial growth prospects (so future tax revenues from a developed sector could be quite large). The Russian Federation’s (Russia’s) taxation of e-commerce activities presents two important challenges. First, consumer goods purchased directly from foreign online sellers enjoy significant tax advantages compared to imports purchased in Russian retail outlets, undermining the profitability of Russian importers and reducing tax revenues. Second, the value-added tax (VAT) levied on foreign exporters of electronic services creates uncertainty because the legal definition of electronic services is unclear and impedes the operations of multinational companies in Russia because VAT is taxed on intra-firm imports of services. Russian authorities are establishing effective automated systems for collecting taxes and customs duties on cross-border e-commerce, calculating VAT compensation to exporters and accounting for receipts from online stores. These systems will help to prevent abuse of the tax system, as well as reduce the cost of compliance by firms.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 180 CHAPTER 8

Introduction The basic idea developed by the authors is that the tax regulation Issues of tax regulation on of international e-trade should be international e-trade transactions implemented very cautiously. Cross- became relevant immediately border e-commerce transactions in following the emergence of the value terms are still very modest virtual component of international compared to traditional trade in goods trade at the turn of the 21st century. and services. At the same time, they Over the past 20 years, the most have a clear potential for impressive obvious problems in this area have growth. Thus, a large portion of the been solved, for example, the revenues from taxing international remoteness of transactions and the e-trade incomes and operations in the related complexity of determining the short term could be foregone in the jurisdiction of the sales revenues interest of supporting the long-run formation, the qualification of sales growth of the sector through low/ revenues in the context of existing moderate taxation. We also argue double taxation agreements, and the that expansion of international application of indirect taxes, especially e-commerce in its turn would facilitate VAT and sales taxes, to e-commerce overall trade and gross domestic transactions. Modern information product (GDP) growth (see also technologies and the digitalization of Sokolovska, 2016). the economy contribute to the improvement of tax administration Particularities of foreign methods and the tax control of trade and its virtual electronic foreign trade transactions, component development including those operating on the basis in Russia of intergovernmental cooperation. At the same time, the taxation of cross- Some of the necessary tools to border e-commerce transactions in encourage foreign trade are taxes national economies in the current and duties, which can also be used conditions of global economic to obtain the necessary resources for development is still beset by a number the targeted budget financing of state of challenges actively discussed by the programmes that support foreign academic community. economic operations. With the digitalization of the national economies This chapter analyses features and the entire system of international of the tax regulation of international economic relations, an increasing (cross-border) e-trade operations number of transactions take place in the Russian Federation (Russia). in a virtual form. This is also true for We note the particularities of foreign international trade, which firstly can trade and its virtual component be carried out in the field of export development in Russia, discuss and import of tangible goods and the intricacies of cross-border services based on new digital e-commerce transaction taxation technologies, and secondly gradually and consider the tax specifics of includes in its turnover an increasing international e-trade operations with amount of virtual digital content. digital content in Russia, as well Taxation should also adapt to such as tax administration issues. e-commerce operations by properly CHAPTER 8 181 regulating related transactions 2019). The rapid growth rate of the with tangible goods and digital cross-border e-commerce segment is items, including e-services and obviously an interesting issue for tax virtual content. regulation in Russia, especially in the context of the stimulating role of Both e-trade as a whole and its taxation (OECD, 2018; Sperling, cross-border component are small Orszag and Gale, 2001). That is, in comparison with retail sales in the maintaining moderate tax rates on domestic market or with the foreign e-trade (rather than increasing tax trade in goods and services (Table 1). rates) would support its continued, Nevertheless, while e-commerce is rapid growth. And given economies of only 4 per cent of Russia’s retail trade scale in this market, encouraging the turnover, cross-border e-trade is growth of e-trade could eventually already 27 per cent of the total Russian result in large, profitable firms that internet trade market (Central Bank provide substantial extra tax revenues. of the Russian Federation, 2018, pp. 52-53). Moreover, cross-border The small size of e-commerce in Russia e-commerce sales have increased is roughly in line with international rapidly (by 20 per cent in 2018), as trends. Currently, less than 1 per cent have international parcels related to the of the value of world exports and delivery of tangible goods ordered in imports are digital products, and their foreign internet stores to Russian share has in fact decreased: in the early buyers (25 per cent in 2018) (IEP, 2000s, it exceeded 2 per cent (WTO,

Table 1: Key characteristics of cross-border e-trade in Russia

2019 2017 2018 (estimated)

Sales (in billions, RUB) 262 316 360–380

Sales (in billions, US$) 4.5 5.0 –

Share in total e-commerce sales 25% 26% 27% in Russia

Share in total retail sales in Russia 3.5% 4% –

Share in total export and import goods 0.60% 0.61% – and services trade of Russia

Share in GDP 0.35% 0.44% –

Volume of international parcels of Russian 264 330 – Post (in millions) The main country of departure of international parcels to Russian recipients China (91%) China (94%) – (share of all countries) Average declared value of an international parcel to the Russian recipient (RUB, with – 564 (7.6) – equivalent in (EUR))

Source: The Gaidar Institute for Economic Policy; Bank of Russia, available at: http://www.cbr.ru/ collection/collection/file/5913/bulletin_18-03.pdf. 182 CHAPTER 8

2018, p. 93). E-trade accounts for a exchange using the internet, then such relatively small proportion of the total operations can be characterized as amount of retail operations. The share electronic commerce (e-commerce or of e-commerce in global retail sales e-trade). Thus, any purchase of both is just over 10 per cent (Amasty, material goods or services and virtual 2018). Thus, for all its potential digital content, if carried out using a attractiveness, e-commerce – computer or a mobile device especially cross-border – is not yet a connected to the internet, can be significant component in the business- characterized as e-commerce in a to-consumer (B2C) segment.2 At the broad sense of the word. In view of the same time, it is necessary to consider rapid spread of relevant technologies, its high growth potential; the growth many worldwide trade operations – as of sales in global e-commerce interpreted by UNCITRAL in 1996 – transactions in 2018 was 21.6 are based on electronic channels of per cent (Merehead, 2018), data exchange between the seller and significantly outstripping both the the buyer. Major components of the growth of the world economy (3.1 process include the search for goods, per cent in 2018) and the growth of services and digital products; their global exports in goods and services order; order confirmation by the seller; (4.3 per cent in 2018).3 non-cash payment by the customer of the purchase using electronic bank All of the above suggests that, at payments; and issuance of an present, due to the limited importance electronic cash receipt to inform the of e-commerce, including cross-border, buyer of the delivery of the paid goods. the fiscal effect of its taxation on national budgets (including the Russian From the point of view of our one) is insignificant. Thus, the tax discussion, e-commerce transactions regulation of cross-border e-commerce should be divided into two should not focus on increasing the components: collection of direct and indirect taxes, but rather should seek to support the 1. Remote purchase of material goods rapid growth of e-commerce activities. through virtual stores or platforms, where the delivery of goods is Features of taxation of carried out through the sales cross-border e-commerce channels mechanically with transactions electronic payment or cash to the courier (representative of the The United Nations Commission on seller); and International Trade Law (UNCITRAL) Model Law on Electronic Commerce 2. Remote purchase of digital content provides for the inclusion in the (including electronic services) and relevant transactions of any sales its order, payment and delivery, carried out through an electronic data which is carried out virtually using interchange (UN, 1999). Accordingly, modern information and if the order, payment or delivery of communications technologies. products (tangible goods, virtual content and services) is carried out The problems in the first case are through the channels of information related to the tax regulation and control CHAPTER 8 183 of sellers’ activities, but the movement (VAT/sales tax, customs duties and of goods can be tracked and subject excise duties) are involved as the main to indirect taxes. In the second case, tools of regulatory impact on the the digitalization of trade complicates movement of tangible goods, external controls of the receipt of electronic services and digital content. payments by sellers, as well as the This is not typical for international tax fact of delivery of virtual content law, the object of which is usually only to consumers. direct taxes. At the same time, VAT (sales tax) payers also can have Figure 1 presents the main tax cross-border fiscal consequences, implications for cross-border which are particularly unusual in e-commerce transactions in goods international tax law. Indeed, the and digital content (including already established world practice for e-services). As is evident from the remote sales of electronic services and scheme, cross-border e-trade may digital products requires the seller from affect revenues from the income tax country A to register as a VAT payer in (corporate profit tax), the VAT/sales destination country B. Thus, the seller tax, export and import customs from country A will pay VAT on its duties, and excise taxes. intangible products imported by the buyer from country B to the budget of From the international tax law the destination country B. Thus, in perspective, cross-border operations addition to the two generally accepted of e-commerce are notable for the principles of international taxation, the fact that indirect taxes and duties residence principle and source

Figure 1: Tax consequences of cross-border e-commerce transactions

VAT refund GOODS on export Import duties physical delivery VAT/sales taxes by transport (post) Excise duties paid by the buyer

Export duties, export excises paid by the seller Buyer Seller Remote order and payment in virtual form (Consumer) Country A Country B

Tax on income from sales of goods, services and digital products ELECTRONIC SERVICES AND DIGITAL SERVICES Import VAT remote delivery (Google tax) using electronic paid by seller communication channels VAT refund on export 184 CHAPTER 8

principle, the sphere of international Furthermore, after the goods cross the tax regulation has gradually included a border of the buyer’s jurisdiction, the third principle – the destination one. obligation to pay the import duty for This principle was formerly applied remote deliveries (without the for VAT imposition in international participation of resellers in the country transactions with tangible goods. of destination) is assigned to the buyer. Previously VAT was used only as an In certain instances, especially in incoming tax for importers of wholesale deliveries for resale, the commodities to equalize domestic buyer will also have to pay VAT prices in comparison with foreign (sales tax) and excise tax (for ones. Now VAT is applicable both excisable goods). for commodities and services plus virtual context in e-trade. When providing remote cross-border services, the seller (exporter) in its In the process of cross-border jurisdiction is exempt from VAT but e-commerce transactions, the will have to pay VAT (“Google tax”4) movement of tangible goods between in the country of the services’ final countries can be tracked and the destination. The delivery of digital payment of the relevant indirect taxes content largely resembles the export and duties can be controlled. At the of electronic services. In addition, same time, the country of the buyer of course, the seller pays tax on the location does not claim to tax the income from the cross-border sales income of the remote seller – a of goods, services and digital products resident of a foreign jurisdiction. in its own jurisdiction. However, the jurisdiction in which the goods are finally consumed may The issues concerning taxation require remote retail exporters to pay in the cross-border supply of digital VAT as well as excise duties, which are content have been resolved by based on the customs value of the the Organisation for Economic goods in their budget. This is done to Co-operation and Development equalize the conditions of competition. (OECD). Since 1998, the OECD In the case of the cross-border supply has defined criteria for the of digital content, which is closely classification of the place of origin related to intellectual property rights, of income from a sale transaction as well as taking into account the rapid and the interpretation of existing tax digitalization of services, it is also agreements, taking into account difficult to control the fact of delivery e-commerce transactions with digital of such virtual products (crossing the products. Accordingly, the main border of the destination country). problems in the area of the taxation of That clearly complicates taxation. cross-border e-commerce transactions currently relate to the movement of In the case of remote order and tangible goods ordered through virtual payment via electronic electronic channels of data exchange communication channels, the seller, as between sellers and buyers, as well as an exporter, is reimbursed for the value the application of destination-based of VAT upon delivery of tangible goods. VAT to the remote seller upon delivery Meanwhile, the seller will have to pay of electronic services and digital export duties (if any) and excise taxes. products. Now, let us consider the CHAPTER 8 185 relevant features of the taxation 3. Transactions in which a Russian of cross-border e-commerce personal buyer (consumer) receives transactions in Russia. a parcel of goods ordered in a foreign online store from a foreign Tax consequences for retail seller – B2C import transactions: international e-commerce operations with tangible Russian import duties according to goods in Russia the rates shown in Table 2; for postal items weighing less than 31 The main taxes applied in the field of kg and a declared customs value of cross-border electronic trade in goods less than EUR 500 during one in Russia are as follows: calendar month, import customs duties in Russia are not applied 1. Transactions in which a Russian (starting in 2020, the cost limit remote retail seller delivers goods becomes EUR 200 while removing purchased in an online store to a restrictions on time and number of foreign buyer (consumer) – B2C received parcels). export transactions: 4. Transactions in which a Russian Russian profit tax of 20 per cent wholesale buyer purchases goods of the seller’s income from sales online from a foreign wholesaler for of goods. resale – B2B import transaction:

2. Transactions in which a Russian Russian import duties according to remote wholesaler delivers goods the rates shown in Table 2; and purchased in an online store to a foreign wholesale buyer (reseller) Russian import VAT (rates of 10 or – B2B export transactions: 20 per cent) and excise taxes for excisable products. Russian profit tax of 20 per cent of the seller’s income from sales of One of the problems of e-commerce goods; and development in Russia is the tax competitive advantages of foreign Russian export duties (rates 0–80 remote sellers of goods sold through per cent (Garant, n.d.)) apply internet platforms. Indeed, differences mostly for raw materials and in taxation in cross-border and mineral oils and export excises domestic online sales often put paid by the seller. Russian online retailers in a less advantageous position. For instance, The Russian remote wholesalers Russia currently has a very high share that export excisable products of cross-border e-commerce (such as tobacco, alcohol, mineral transactions with China: more than oils, etc.) of their own production 90 per cent of foreign orders of are exempt from the payment of Russian retail customers come via excise taxes. In addition, the parcels from Chinese online stores wholesaler receives a VAT refund (Lenta, 2019). Given the low value of on export (VAT rates in Russia are most purchases (usually less than EUR 0, 10 or 20 per cent). 200), customs duties are not charged 186 CHAPTER 8

when sending goods to Russia by mail. VAT, and from the reduction in tax Import VAT (standard rate is 20 per revenues from the incomes of large cent) is also not charged to retail importing companies and individuals buyers in the case of purchase for employed in the import-oriented sector personal consumption. Accordingly, of the national economy. the final price of foreign goods for the Russian buyer is only the cost of their In contrast, if the Russian online production plus a small profit for the retailer supplies goods to China, manufacturer and distributor of the then almost 70 per cent is added goods, as well as the constantly to the original price of goods when decreasing cost of postal delivery. crossing the Chinese border – import After crossing the Russian border, VAT (17 per cent), consumption tax the price of Chinese goods will not (its rate varies between 1–56 per cent change in any way in comparison depending on the type of commodity with the cost of the internet order products, on average about 42 per (moreover, a remote exporter/Chinese cent) and customs duty (about 10 seller can even return VAT, the amount per cent). Considering the previously of which in China is 17 per cent). withheld and included in the customs The price of goods imported from value Russian VAT of 20 per cent China by a legal Russian wholesale (which is impossible to compensate importer is at least 25 per cent higher for when exporting through electronic than the price of goods purchased from trading platforms in retail format), the the Chinese online store (the import price of Russian goods intended for customs duty equals 5–20 per cent the Chinese market is almost twice plus 20 per cent for VAT, which can the price of those for the domestic be offset by the compensation of Russian market. As a rule, these Chinese export VAT). In other words, products cannot compete with e-commerce makes direct retail similar goods made in China. purchases from Chinese manufacturers with the delivery of goods to the final Thus, the task of the tax regulation consumer by mail more lucrative. of e-commerce operations in Russia At the same time, the Russian budget with tangible goods is to create equal suffers both from the loss of potential competitive conditions for domestic import customs duties and import and foreign internet sellers by levelling

Table 2: Rates of customs duties on imports delivered by post in Russia in 2019

Standard rate customs Customs duty rate for Customs value (RUB) duty (RUB) electronic declaration (RUB) Less than 200,000 500 375 200,000.01–450,000 1,000 750 450,000.01–1,200,000 2,000 1,500 1,200,000.01–2,500,000 5,500 4,125 2,500,000.01–5,000,000 7,500 5,625 5,000,000.01–10,000,000 20,000 15,000 More than 10,000,000.01 30,000 22,500

Source: https://www.glavbukh.ru/art/97949-tamojennyy-sbor-import-2019. CHAPTER 8 187 the low tax burden of remote retailers and excise rates between the from countries that actively stimulate EAEU countries could stimulate their exports. At the same time, cross-border e-commerce but increasing the fiscal burden on significantly distort tax revenues for imports through online stores should the budgets of the member states, be a goal approached with caution, especially Russia. as higher prices due to higher taxes would have a negative impact For example, the excise duty on beer in on consumers, reducing their Russia is twice the duty in the Republic disposable income. of Belarus, and almost two and a half times the Most Russian purchases “Two main duty in Kazakhstan in foreign online stores directions should (Table 3). In addition, are of relatively low-cost be distinguished there is a noticeable goods (the average in contemporary difference in the declared value of standard VAT rate, an international parcel to cross-border which in Russia and the Russian recipient in e-commerce Belarus is 20 per cent, 2018 was less than EUR activity in Russia: and in Kazakhstan 8 – see Table 1). Since transactions in only 12 per cent. consumers are turning tangible goods Accordingly, beer to foreign online stores ordered in Belarusian or to save money, any and transactions (especially) Kazakhstani attempt to tighten tax in digital goods online stores delivered and customs control and services.” to the Russian consumer over imports in the field will, due to differences of e-commerce instead in national tax rates, be of increasing tax collections and significantly cheaper compared to the protecting the domestic market from retail price in Russia. foreign competitors could lead to opposite results. In contrast to that, a The solution to this problem lies in the large volume of mail at low customs tax harmonisation (coordination) tariffs will bring additional revenues to process in the EAEU. This process has the budget. Therefore, it is necessary already begun: from 1 January 2019 in to increase the fiscal burden on the EAEU countries, a single customs consumers and operators of e-trade tariff for imported parcels has been very carefully, and in some cases this introduced (Pro2019god, 2019), and should be completely avoided, taking the harmonisation of VAT and excise advantage of the economies of duties is the next step. scale from the growth of trade in goods through internet platforms Tax consequences for with low taxes. international e-commerce operations with electronic Another important problem with the services and digital content participation of Russia in the cross- in Russia border e-trade in goods relates to the framework of the Eurasian Economic The main types of taxes and their rates Union (EAEU). The difference in VAT in Russia in the implementation of 188 CHAPTER 8

Table 3: Differences in level of excise duties on beer in Russia, Belarus and Kazakhstan (2018)

Russia Belarus Kazakhstan Excise duty per 1 litre of beer with a volume RUB 21 BYN 0.35 KZT 48 fraction of ethyl alcohol up to 7% (RUB 10.9) (RUB 8.6)

Sources: http://znaybiz.ru/licenzirovanie/otdelnye-vidy-deatelnosti/akcizy/na-pivo.html#i-2; https://nalogikz. kz/taxcode/2018/51.html; https://www.gb.by/novosti/nalogi/kakie-stavki-aktsizov-deistvuyut-segodny.

cross-border e-commerce with Currently, one of the serious tax e-services and digital products are problems in Russia for cross-border as follows: e-commerce in terms of trade in digital content is VAT levied on foreign 1. Transactions in which a Russian exporters of electronic services and remote seller delivers electronic products, the so-called “Google tax”. services and digital products to a This tax has a clearly expressed fiscal foreign buyer (consumer), both orientation: after the introduction of the individual and corporate – B2C “Law of Google tax” in 2018, foreign and B2B export transactions: internet companies in Russia paid RUB 12 billion VAT on sales of electronic Russian profit tax of 20 per cent content (digital products and services) for the seller’s income from sales to individuals (B2C segment), and the of e-services and intangible amount of VAT paid to the Russian products; and budget after the appearance of the Law (1 January 2017) increased in 2018 by VAT refund on export operations 28 per cent.5 “Electronic services” in (excluding e-services and digital accordance with Russian tax legislation products initially exempt from VAT include the transfer of rights to use under Article 149 of the Russian programmes, advertising, website Tax Code: medical intangible support, storage and the processing of products and services, educational information. At the same time, the and financial e-services, licences definition of electronic services in the and exclusive rights for software, Russian legal field is blurred; many data bases etc.). documents, including licences and technical contracts, come under the 2. Transactions in which a Russian law. Therefore, due to the current buyer (consumer), both individual uncertainty, large parts of Russian and corporate, receives e-services subsidiaries suspended payments for or digital products ordered online services to foreigners provided via from a foreign seller – B2C and electronic communication channels. B2C import transactions: From 1 January 2019, the provisions VAT at the appropriate rates of 0, of the Tax Code came into force, 10 or 20 per cent imposed on the according to which foreign companies foreign remote seller that has to that remotely supply electronic be registered as a VAT payer (using services to Russia must pay VAT when corresponding tax accounting) in working with corporate customers the Russian jurisdiction. (B2B segment). The problem is that CHAPTER 8 189 even transactions related to the effective automated systems for provision of cross-border electronic collecting taxes and customs duties in services within the same corporate terms of cross-border e-commerce structure fall under the Russian incomes and operations. In Russia, “Google tax”. In particular, the German there are digital platforms on which the company Siemens bears additional accounting of VAT revenues, the control tax costs when working in the Russian of the movement of excisable goods market, a point emphasized by its and the payment of customs duties are representatives. In addition, many built. In addition, special electronic foreign companies delivering their algorithms are used to identify possible digital products and services in Russia abuses by companies and individuals (including Cisco, IBM, Qiwi, Opera engaged in foreign economic activity. Software, Siemens and NokiaSolutions) via the mode of remote access from There are also mechanisms for VAT abroad had to register with the Federal compensation to exporters and even Tax Service of Russia (FTS) to pay accounting for receipts in online the “Google tax” (Vesti Ekonomika, stores. This prevents abuses in 2019). Under the circumstances, e-trade, making the sale of virtual transnational companies will be content similar in its tax transparency reluctant to establish subsidiaries in to the sale of tangible goods. The Russia, with a resulting loss in future lies in the exchange of data investment and technology transfer. between national specialized VAT and Presumably the imposition of VAT on excise control systems, as well as their B2B services will reduce Russian integration, especially within regional firms’ access to new technologies. trade and economic communities such as the EAEU. This can be of serious In total, approximately 1,500 foreign help to the process of tax harmonisation companies that are suppliers of (coordination), contributing to the electronic services and products in convergence of tax base calculation Russia were registered with the FTS methods and the equalization of tax as “Google tax” payers by the end of rates and tax benefits. spring 2018. The first 200 of these began paying the “Google tax” back in In modern Russia, the regulator, which 2017 for selling online games, music, often used rather strict methods of tax e-books and other digital content as administration and control during the B2C transactions. In the first year of the initial stage of the national tax system introduction of the “Google tax” (2017), formation (in the 1990s), including the the FTS managed to collect RUB 9.4 demonstrative power to affect taxpayers, billion in VAT, and it collected RUB 12 has now moved to cooperative billion in 2018 (Finmarket, 2019). methods of working with business and individuals. The FTS currently Tax administration issues positions itself as a service structure in Russia related to cross- that convinces businesses and border e-commerce individuals of the importance of the reputation of an honest taxpayer. The The FTS and the Federal Customs activities of the FTS are supported by Service of Russia have already created advanced digital technologies, which and are successfully testing fairly on the one hand facilitate the payment 190 CHAPTER 8

of taxes, including in the field of Endnotes e-commerce, and on the other hand highlight the possibility of the rapid 1 The chapter was funded by RFBR and identification of unfair taxpayers. CASS according to the research project No. 19-51-93009. Conclusion 2 According to Statista’s preliminary data for Based on the above, we can draw 2019, the value of the global business to the following conclusions: business (B2B) e-commerce market (US$ 12.2 trillion) is six times more that of The rather modest share of the B2C market (Statista, 2019). e-commerce transactions in the total amount of foreign trade operations in 3 The World Bank (https://data.worldbank.org/ Russia does not make e-trade fiscally indicator). attractive for the Russian budget. Moreover, the high positive dynamics 4 The law of the Russian Federation No. of cross-border e-trade development 244-FZ dated 3 July 2016 (Consultant, and its significant share of internet 2016) obliged from 1 January 2017 that trade transactions in Russia imply the VAT should be paid by foreign companies need for caution in imposing providing electronic services and selling substantial taxes on the sector. digital content to buyers in Russia. Since the list of electronic services subject to Two main directions should be VAT includes internet search engines, distinguished in contemporary including Google, this law in Russia cross-border e-commerce activity was unofficially named “the law of in Russia: transactions in tangible Google tax”. goods and transactions in digital goods and services. In each case, tax 5 FTS: “Tax on Google” in 2018 brought in implications will vary – customs duties RUB 12 billion to the budget. Rambler, and excise duties are more important Finances, 8 February 2019, available at: for visible goods, while the VAT on https://finance.rambler.ru/money/41679127- imports is more important for fns-nalog-na-google-v-2018-godu-prines- e-services and digital products. byudzhetu-12-mlrd-rubley/. This is also relevant to the global trends in e-trade. References

Russia has the necessary practical Amasty (2018), Global e-commerce trends experience in the taxation of cross- and statistics 2017-2018, Amasty blog. border e-commerce transactions https://amasty.com/blog/global-e-commerce- (for example, in terms of VAT trends-and-statistics-2017- collection from international 2018/#GLOBAL_E-commerce_STATISTICS_ e-trade transactions or via the OF_2017 concept of the friendly interaction of tax authorities, businesses and Central Bank of the Russian Federation citizens, which is the basis of national (2018), “What do trends say”, tax policy), and this experience is a Macroeconomics and Markets 3(23). http:// useful asset that can be utilized by www.cbr.ru/collection/collection/file/5913/ other countries. bulletin_18-03.pdf CHAPTER 8 191

Consultant (2016), Federal law: “On tamozhennye-poshliny-s-1-yanvarya-2019- amendments to parts one and two of the Tax goda/ code of the Russian Federation”, 3 July 2016, N 244-FZ (latest version). http://www. Sokolovska, O. V. (2016), “Trade freedom consultant.ru/document/cons_doc_ and revenue from trade taxes: A cross- LAW_200490/ country analysis”, Vestnik of Saint-Petersburg University, Series 5, Economics 2: 52-67. Finmarket (2019), “In Russia, the number of ‘Google tax’ payers increased six times”. Sperling, G. B., Orszag, P. R. and Gale, W. http://www.finmarket.ru/news/4986979 G. (2001), Stimulating the Economy Through Tax Policy: Principles and Applications, The Gaidar Institute of Economic Policy (IEP) Brooking Institution. https://www.brookings. (2019), Report on Research Work on the edu/research/stimulating-the-economy- Topic: “Overview of the E-Commerce Market through-tax-policy-principles-and- State in the Russian Federation”, Moscow: IEP. applications/

Garant (n.d.), Export customs duty rates. Statista (2019), In-depth: B2B e-Commerce http://ivo.garant.ru/#/document/108095/ 2019. https://www.statista.com/study/44442/ paragraph/7094:0 statista-report-b2b-e-commerce/

Lenta (2019), Transboundary paralysis. United Nations (UN) (1999), UNCITRAL https://lenta.ru/articles/2019/03/25/it_ Model Law on Electronic Commerce with market/ Guide to Enactment 1996 with additional Article 5 bis as adopted in 1998, New York: Merehead (2018), Trends and Tendencies of UN. http://www.uncitral.org/pdf/english/texts/ E-commerce 2018. https://merehead.com/ru/ electcom/V1504118_Ebook.pdf blog/7-top-ecommerce-trends-2018/ Vesti Ekonomika (2019), FTS: in 2018 Organisation for Economic “Google tax” provides 12 billion rubles Co-operation and Development (OECD) to budget. (2018), Tax Policies for Inclusive Growth in a Changing World: OECD Report to G-20 World Trade Organization (WTO) (2018), Finance Ministers and Central Bank World Trade Report 2018: The Future of Governors, July 2018. http://www.oecd.org/ World Trade: How Digital Technologies Are g20/Tax-policies-for-inclusive-growth-in-a- Transforming Global Commerce, Geneva: changing-world-OECD.pdf WTO. https://www.wto.org/english/res_e/ publications_e/world_trade_report18_e.pdf Pro2019god (2019), Custom duties from 1 January 2019. https://pro2019god.ru/ 192 CHAPTER 8: COMMENTS

Comments

DÉSIRÉE M. VAN GORP*

The growth of e-trade in the past years discussed in Chapter 8, is an has done more than revolutionize the interesting case because the country’s way business is done around the budget suffers from tax losses globe. It eliminates distance-related reflected in the fact that despite the barriers to trade increase, while it may growing significance of e-trade as a also increase the digital divide between portion of overall international trade, technologically advanced and less the fiscal effect of its taxation on advanced countries with technological national budgets is insignificant. This deficiencies. At the same time, it may chapter suggests focusing on the serve as a tool for many developing stimulating role of taxes in international countries to further engage in trade rather than on increasing the international trade by entering the collection of taxes, whereby the online marketplace with a global emphasis on customs duties and increase in the number of internet excises is more important for visible users. Traditional tax systems need to goods, while for e-services and be reviewed because the taxation products, import VAT becomes more issues of e-trade are more complex important. This line of thinking may and demand new frameworks for fair be useful to consider for other taxation while at the same time allowing countries in their effort to make their enough room for innovation. Russia, as tax systems e-trade proof.

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 8: COMMENTS 193 Chapter 9 Assessing trade facilitation implementation in the era of e-commerce: a comparative analysis of Jordan, Oman and Hong Kong, China

Taleb Awad-Warrad, Houcine Boughanmi and Youwon Hwang* Abstract

The emergence of e-commerce is driving important changes in the ways of conducting international trade. It has become clear that improvements in trade facilitation implementation should be supported by electronic systems. Through a comparative study of a number of reports issued by international organizations – the International Telecommunication Union (ITU), the Organisation for Economic Co-operation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD) and the World Bank – on topics of e-commerce, logistics and trade facilitation, we examined the status and performance of Jordan, Oman and Hong Kong, China. Based on this analysis, Hong Kong, China, shows one of the best practices of modern trade facilitation and customs, and we found that governmental willingness is influential in expediting trade facilitation provisions. Jordan and Oman recently made trade reforms to improve trade facilitation, but they still need to bridge the gap between policy and actual practice in all governmental organizations in terms of trade facilitation and e-commerce, as well as build citizens’ capacity. By improving the implementation of trade facilitation measures and increasing e-commerce capacity as Hong Kong, China, has done, Jordan and Oman will succeed through trade prosperity driven by the global digital economy.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 196 CHAPTER 9

Introduction place digitally, while the delivery process can be either online or When e-commerce crosses countries’ offline. E-commerce can facilitate the borders, trade facilitation becomes one sales of goods and services whether of the most critical issues to global domestically or across borders consumers, because the status of through reducing the final costs of trade facilitation implementation in transactions and enabling closer each country significantly affects the customer relations among different cost of trade. Improving the efficiency actors from businesses, households of trade logistics is a key element to and governments. However, to reducing trade costs and promoting succeed on the e-commerce front, global and regional trade. Trade costs it is crucial to have a well-developed are still high despite the reduction in logistics system, that is, smoothly trade barriers and improvement of working road transport, ports, postal communication brought by the digital delivery services and customs, to help technology. Trade costs are estimated ensure effective order fulfilment. Trade to be equivalent to a 170 per cent logistics, including trade facilitation, tariff on international trade globally and is one of the seven policy areas that, 231 per cent for developing countries according to the United Nations (WTO, 2016c). Trade facilitation has Conference on Trade and Development been referred to as the “the grease (UNCTAD), are essential to help create in the wheel” of international trade, an environment that is more conducive as it focuses on reducing all the to reaping the benefits of e-commerce transactions costs associated with (UNCTAD, 2017). the enforcement, regulation and administration of trade policies A large number of studies found a (Staples, 2002). Available figures positive relationship between improving indicate that implementing the the trade facilitation environment and multilateral Trade Facilitation international trade flows. According to Agreement (TFA) would reduce trade Anderson and Marcouiller (2002), a cost by an average of 14.5 per cent 10 per cent increase in a country’s (Hillberry and Zhang, 2015) and index of transparency and impartiality increase global export between leads to a 5 per cent increase in its US$ 750 billion and US$ 1 trillion imports. Hoekman and Nicita (2008) per annum (WTO, 2016c). Developing found that improvements in logistics countries gain proportionally more from performance and trade facilitation have trade facilitation as they have more a greater effect on increasing trade for room for improvement. a country than lowering tariffs. According to gravity trade model, E-commerce and reducing transaction costs related to trade facilitation trade, by changing public policies and improving regulations and procedures Any sales activity, whether conducted for import and export supply chains, is domestically or internationally, is critical for enabling a country to expand composed of a set of processes: its trade opportunities. ordering, paying, shipping and delivering. A transaction is considered The emergence of e-commerce is to be e-commerce if the ordering takes driving the huge movement in the CHAPTER 9 197 international trade arena. Estimated the provision of efficient infrastructure global sales through e-commerce of transportation and logistics (Jordan are expected to surpass US$ 2.3 Investment Commission, 2018). Jordan trillion (Gain, 2017). In order to identified digital development as a high provide e-commerce-based services, priority for the country’s social and other technologies, such as economic development (Harake, telecommunications, internet, logistics, 2019). The launch of 4G LTE services transportation and electronic systems, in Jordan has led to a growth in data should be available in advance. revenues for mobile operators (De Therefore, it is important to identify Rosbo, 2020). whether current infrastructures are available to support e-commerce and Revenue in the e-commerce market trade facilitation implementation in the in Jordan is expected to reach selected economies – Jordan, Oman US$ 525 million in 2020, and the and Hong Kong, China – for the number of e-commerce users will comparative study. be around 3.3 million (Statista, 2020b). Jordan became one of the first Logistics, trade facilitation countries in the MENA region to and e-commerce enact laws regarding information and communications technology Jordan (ICT) related transactions following Transportation infrastructure in Jordan the spread of internet use. The has been evaluated as comparatively Electronic Transaction Law (ETL), well-developed among the Middle East drafted first in 2001, covers a wide and North Africa area of internet (MENA) region transactions including (Jordan Investment “Improving computer information Commission, 2018). the efficiency transactions, general Thanks to Jordan’s sale of goods and strategic location, the of trade logistics services via the internet transport sector is a key element and other inter-party contributed around to reducing transactions conducted 10 per cent of the GDP trade costs online (Yaseen, 2016). in Jordan, and employed and promoting Jordan and the United about 7.2 per cent of States signed the Joint the work force (Harake, global and Statement on Electronic 2019). The annual regional trade.” Commerce in 2000. growth of the However, a clear set of transportation and regulations and tax laws logistics sector is estimated to covering e-commerce transactions has increase from 5 to 6 per cent by 2030 not been prepared yet. (Jordan Investment Commission, 2018). In Jordan, the air transport In 2019, the Cabinet decided to infrastructure and connectivity is impose customs fees on online among the highest in the MENA region purchases of foreign clothes, shoes, (World Economic Forum, 2017). foodstuffs and children’s toys over Jordan’s abundance of electricity and JOD 200 per month, with an annual telecommunications services support cap of JOD 500 (Jordan Post, 2019). 198 CHAPTER 9

The Jordanian people were concerned that, in its five-year development plan, that imposing higher customs fees Oman is expecting to invest OMR 6 on e-commerce commodities might billion in building and expanding have a negative effect on online trade. airports and seaports in three main Still, Jordan Post referred the hubs: Salalah, Sohar and Duqm). The establishment of a special centre full operation of these three main ports to deal with e-commerce items and is expected to reduce trade cost by 10 took the first step to develop an per cent (Al Shammakhi, Akintola and electronic tracking system for serving Boughanmi, 2018). The results show the global market and its customers that trade facilitation improvement will (Jordan Post, 2019). have a positive gain in terms of GDP (an increase of 4.3 per cent) and Oman welfare (an increase of almost The logistics sector plays a vital role in 1.3 per cent) (Al Shammakhi, Oman’s modern economy and is Akintola and Boughanmi, 2018). viewed not only as a core sector but also as the backbone of the economy, The Omani government issued the facilitating the growth of many other Electronic Transactions Law in 2008, sectors. With revenues amounting to which covered the fast development of US$ 7.87 billion in 2013 (Ithraa, 2016), technology and the internet in the sector contributed 4.9 per cent to processing operations and concluding Oman’s GDP in 2015 (Ithraa, 2016). transactions locally and internationally The logistics industry is expected to (Al Barwani, 2018). Furthermore, the grow at an annual growth rate of 7 per government established the Information cent between 2015 and 2020, Technology Authority (ITA) to ensure enhanced by government investments proper implementation of the in ports (Duqm and Sohar), free zones provisions of the Law. ITA indicated (Sohar, Duqm, Salalah and Al that the development of e-commerce Mazunah), industrial estates, roads, depends on policies and laws, as well airports (Sohar, Muscat, Salalah, as access to goods and services via Adam and Duqm) and the rail network. the internet and logistics services, These investments would facilitate among other factors (Times of Oman, trade with neighbouring Gulf 2019). Oman’s Ministry of Commerce Cooperation Council countries and and Industry announced new also open a window with Asia and regulations that will be issued to Sub-Saharan Africa as trade maintain the rights and the confidence destinations (Ithraa, 2016). of e-traders (Al Nasseri, 2020). The revenue in the e-commerce market in An empirical assessment was Oman will be expected to reach US$ conducted to look at the probable 800 million in 2023 (Statista, 2020c). economy-wide and sectoral impacts of improving efficiency in the logistic Hong Kong, China sector in Oman (Al Shammakhi, The Hong Kong Trade Development Akintola and Boughanmi, 2018). The Council (HKTDC) states that trading assessment considers a scenario of and logistics accounted for 22 per cent trade facilitation whereby Oman of the city’s GDP and provided improves its trade facilitation by 10 per 727,500 jobs in 2017 (2019). Also, cent. This scenario is built on the fact the logistics industry alone contributed CHAPTER 9 199

3.2 per cent to the GDP and 180,600 different forms of digital payment jobs in same year (HKTDC Research, (Ince, 2018). 2019). E-commerce revenue in Hong Kong, China, is estimated to be Comparative analysis US$ 5,511 million in 2020, and the number of e-commerce users will be In order to understand the e-commerce 5.7 million in 2020 (Statista, 2020a). environment and trade facilitation “Given the externally-oriented and implementation in each country, open nature of Hong Kong’s economy, international organizations have the development of international trade developed several indices. UNCTAD, policy in and through the WTO is of for example, developed the B2C vital importance to Hong Kong E-commerce Index to measure a because of the possible impact on country’s preparedness to support external trade, and its knock-on effect online business. The UNCTAD B2C on industry and employment” (GovHK, E-commerce Index includes various 2016). As a matter of fact, Hong Kong, indicators, such as share of individuals China, became the first member to using the internet, share of individuals ratify the TFA (WTO, 2015a). Hong with an account, secure internet Kong, China, offers customs servers and postal reliability. The 2019 procedures that are ranking of Jordan, among the easiest and Oman and Hong Kong, fastest worldwide, with China, were 87th, 59th virtually all customs “The emergence and 15th, respectively, declarations and related of e-commerce is among 152 economies documents processed driving important (Table 1). Jordan’s score electronically in its changes in on the B2C E-commerce entirely free port. the ways of Index shows that it conducting needs to improve in all Doing business in indicators, whereas Hong Kong, China, international Oman received relatively is beneficial to trade.” good scores except in e-commerce store the category of secure owners in particular internet servers. Hong because it has access to the planet’s Kong, China, received better scores leading manufacturing centre: for all indicators than did Jordan and mainland China (Yatprom, 2019). Oman. The percentages of internet The government of Hong Kong, users in Jordan, Oman and Hong China, first enacted the Electronic Kong, China, were reported as 85.3 Transactions Ordinance to provide per cent, 78.5 per cent, and 89.3 per a clear legal framework for the conduct cent in other sources (Internet World of e-business in 2001. The ordinance Stats, 2020). was mostly focused on the use of electronic records and electronic and On the ICT Development Index 2017, digital signatures. The Commerce and which reflects ICT access, ICT use Economic Development Bureau has and ICT skills, Jordan, Oman and taken responsibility for the operation Hong Kong, China, were ranked as of e-commerce, and the Hong Kong 70th, 62th and 6th, respectively, Monetary Authority has ensured among 176 economies (ITU, 2017) 200 CHAPTER 9

Table 1: UNCTAD B2C E-commerce Index, Jordan, Oman and Hong Kong, China

Universal Share of Share of 2019 B2C Secure Postal Union individuals individuals E-Commerce internet (UPU) postal using the with an rank servers reliability internet account score Hong Kong, 15 89 95 85 92 China Oman 59 80 74 47 72 Jordan 87 67 42 43 44

Source: UNCTAD (2019).

(Table 2). ICT access indicators the specific aspect related with trade, include the data of the available ICT the World Bank’s Logistic Performance infrastructure and individuals’ access Index (LPI) was used to compare to basic ICTs. ICT usage indicators the performance of the three reflect ICT intensity and usage. Also, economies. Jordan, Oman and Hong ICT skills were determined by years of Kong, China, ranked 84th, 43th and schooling and secondary and tertiary 12th, respectively, out of 160 enrolment ratios. In the 2017 ICT economies in the LPI Index (Table 3). Development Sub-Index, Hong Kong, Jordan’s ranking is in the middle range, China, was ranked higher than Jordan while Oman ranked 3rd in the MENA and Oman in all three subcategories. region in 2019 following the United However, although Oman had better Arab Emirates (UAE) and Qatar. As ranking than Jordan in the main index, per the LPI Index, Hong Kong, China, Jordan scored better than Oman in the stands as the world’s top performer in Sub-Index of ICT use and ICT skills. logistics, particularly in the categories of international shipments and Both the UNCTAD B2C E-commerce customs. The World Bank indicates Index and the ICT Development Index that global logistics have changed help us to understand the general level as a result of the development of of support for e-commerce, but they e-commerce, use of technology, new cannot indicate the nature of the risks (cybersecurity), etc. Six indicators relationship between e-commerce and in the LPI Index are closely related to trade in the three countries. To study ICT development, however, they have

Table 2: ICT Development Index, Jordan, Oman and Hong Kong, China

2017 ICT 2017 ICT 2017 ICT 2017 ICT use Development access skills sub-index Index ranking sub-index sub-index Hong Kong, 6th 3rd 10th 32th China Oman 62th 48th 55th 90th Jordan 70th 83th 54th 77th

Source: ITU (2017). CHAPTER 9 201

Table 3: World Bank LPI indicator ranking 2018 of the MENA Region, Jordan, Oman and Hong Kong, China

Hong Kong, MENA Jordan Oman China Indicators Score Rank Score Rank Score Rank Score Rank Overall LPI 2.78 - 2.69 84 3.20 43 3.92 12 Customs 2.54 - 2.49 88 2.87 44 3.81 9 Infrastructure 2.76 - 2.72 70 3.16 39 3.97 15 International 2.73 - 2.44 119 3.30 36 3.77 8 shipments Logistics 2.68 - 2.55 93 3.05 49 3.93 12 competence Tracking and 2.79 - 2.77 84 2.97 66 3.92 15 tracing Timeliness 3.18 - 3.18 76 3.80 29 4.14 15

Source: World Bank (https://lpi.worldbank.org/international/global). a limited ability to explain the effect of and time to import are declining in all e-commerce on logistics. three economies, but not as much as cost to export in Hong Kong, China. It According to the Doing Business can be inferred that the recent report Trading Across Borders, both reduction of cross-border trade cost the cost of and the time to export and and time was supported by electronic import are decreasing in Jordan, Oman infrastructure. and Hong Kong, China (Table 4). The report shows that Hong Kong, China, To understand the trade facilitation takes only 2 hours of procedures to efforts in Jordan, Oman and Hong export and 20 hours to import. Cost Kong, China, OECD Trade Facilitation

Table 4: Changes in cost and time to export and import in Jordan, Oman and Hong Kong, China (2013, 2016 and 2019)

Indicator Year Jordan Oman Hong Kong, China 2013 2016 2019 2013 2016 2019 2013 2016 2019 Cost to export 825 577 231 745 630 386 575 557 12 (US$ per container) Average time 312 38 59 240 91 59 120 22 2 to export (13 days) (10 days) (5 days) (hours) Cost to import 1,335 606 396 680 674 518 565 619 323 (US$ per container) Average time 360 141 134 216 101 77 120 22 20 to import (15 days) (9 days) (5 days) (hours)

Source: World Bank, Doing Business Report (2013, 2016, 2019). 202 CHAPTER 9

Figure 1: Trade facilitation performance by OECD indicators in Jordan, Oman, MENA and Hong Kong, China, 2019

ernane and imartiaity

redres

Source: OECD, 2019.

Indicators and the OECD “Compare and Oman in most subcategories your country: trade facilitation” tool related to e-commerce, with the was also used for the analysis. The exceptions of “Processing system- Average Trade Facilitation Performance electronic payment” and “ITC quality”. scores of Jordan and Oman are 0.93 Both Jordan and Oman got the best and 0.97, respectively out of 2, while score in “Customs website” , “Online Hong Kong, China’s score is 1.72 feedback” and “ITC quality”. Jordan is (Figure 1). Hong Kong, China, working better than Oman in received the highest score, 2, on “Electronic import declarations” and the “Advance rulings” indicator, and “Full-time automated processing”. it received high scores on “Fees and Oman performs better than Jordan charges” and “Documents”. By in “Information on fees”, “Electronic examining 11 OECD indicators, pre-arrival processing”, “Electronic we found that all subcategories payment”, “Processing system- of “Automation” and parts of Sub- electronic system”, “Automated risk categories of “Information availability”, management” and “External data “Fees and charges” and “External harmonisation”. The comparative border agency co-operation” have a analysis of subcategories of OECD close relationship with internet and ICT Trade Facilitation Indicators clearly technology. Hong Kong, China, shows shows the specific areas in which better performance than both Jordan Jordan, Oman and Hong Kong, China, CHAPTER 9 203 need to make improvements regarding Conclusion e-commerce infrastructure for trade. The emergence of e-commerce Recently, the governments of Jordan is driving important changes in the and Oman introduced a number of ways of conducting international trade reforms to address some of the trade. We can say that every single issues outlined above and to improve improvement of trade facilitation trade facilitation. For example, Jordan implementation should be supported also implemented the UNCTAD by an electronic system. In order Automated System for Customs to provide e-commerce-based Data (ASYCUDA) to administer services, other technologies, such customs’ clearance operations as telecommunications, internet, (WTO, 2015b). The WTO stated logistics, transportation and electronic that Jordan’s customs practices lead systems, should be implemented in the Middle East in the implementation advance. Fortunately, the statistics of a “single window” system (WTO, show that Jordan and Oman have 2015a). In addition, Jordan makes better infrastructures than surrounding trade-related information available countries. Jordan and Oman issued in a transparent manner. Jordan laws to oversee electronic transactions completed the implementation of early on, and trading activities through UNCTAD ASYCUDA (Automated e-commerce have been increasing in System for Customs Data), both countries. computerization of customs procedures in 2010, which has Through a comparative study in resulted in reduced declaration terms of e-commerce, logistics and processing time and increased trade facilitation, we have reviewed accuracy of verifying declarations the status and performance of Jordan, without additional manpower Oman, and Hong Kong, China. (UNCTAD, 2011). Likewise, in 2016, The study showed that Hong Kong, Oman transferred all cargo operations China, implemented modern trade from Sultan Qaboos port to the more facilitation measures compatible modern Sohar port. This will reduce with its reputation of being the time for border compliance for both world’s best open market. Hong exporters and importers. In 2017, Kong, China, provides the easiest Oman also introduced a new single and fastest customs procedures in window, a one-stop facility, to allow the world with virtually all customs for fast electronic clearance of goods. declarations and related documents The empirical assessment indicates processed electronically in its free that other countries in the region can port. Also, comparisons of data from be affected by trade facilitation the UNCTAD B2C E-commerce Index, improvement in Oman (Al Shammakhi, the ITU ICT Development Index, the Akintola and Boughanmi, 2018). Both World Bank LPI and the OECD Trade Jordan and Oman are making efforts Facilitation Indicators showed that to improve trade facilitation Jordan and Oman need to prepare a implementation with more advanced better e-commerce environment and to systems and ICT development in order work on several of the trade facilitation to meet the rapid changes of global indicators in order to catch up with the trade environment. performance of Hong Kong, China. 204 CHAPTER 9

It is important to understand the goal resources, such as water and oil (CIA, of Hong Kong, China, of free trade 2019). Jordan had a budget deficit of influences in all areas related to approximately US$ 9.78 billion in 2017, customs, transportation, logistics and the current account balance is and infrastructure. As the case of estimated to minus 8 per cent of GDP Hong Kong, China, shows, in 2020 (World Bank, 2019a). governmental willingness is influential in expediting each trade facilitation Since 2000, Jordan has been provision. Jordan and Oman need to expanding foreign trade in order to bridge the gap between policy and attract foreign investment (CIA, 2019). actual practice in all governmental Recently, Jordan revitalized trade with organizations in terms of trade its neighbours, especially Iraq, Syria facilitation and e-commerce. Oman’s and Iraq, where crises disrupted major ITA calls attention to improve citizens’ trade routes (World Bank, 2019b). The e-commerce skills through awareness percentages of exports and imports and training programs (Times of Oman, were 34.2 per cent and 58 per cent of 2019). It means that building citizens’ GDP, respectively, in 2017 (CIA, capacity is also an important factor of 2019). The simple average tariff rate e-commerce along with government was 9.9 per cent, and the final bound intervention. By improving the tariff rate went up to 16.3 per cent in implementation of trade facilitation 2017 (WTO, 2016a). Jordan’s main measures and increasing e-commerce exported products are garments, capacity, Jordan and Oman can better agricultural products, potassic prepare for trade prosperity driven by fertilisers, medications, natural calcium the global digital economy. phosphates and so on. Jordan’s top imports are agricultural products (22.3 Annex 1 per cent), fuels and mining products (15.8 per cent) and manufactures Brief background on the (57.9 per cent), according to WTO economies of Jordan, Oman statistics (WTO, 2018). and Hong Kong, China, and their trade patterns Jordan’s export percentages by destination are the United States (21.5 Jordan per cent), the Kingdom of Saudi Arabia Jordan was reclassified from an (11.3 per cent), Iraq (7.3 per cent), upper-middle-income to a lower-middle India (6.9 per cent) and the United income country by the World Bank in Arab Emirates (UAE) (4.7 per cent). 2017 (World Bank, 2017). Unlike other The most imports come from the countries in the Middle East, Jordan’s European Union (28) (21.9 per cent), economy is not oil-dependent. Hence, China (13.5 per cent), the Kingdom of Jordan mainly consumes the imported Saudi Arabia (13.5 per cent), the energy that accounts for 25-30 per United States (9.8 per cent) and the cent of its imports (CIA, 2019). UAE (4.9 per cent). The statistics Jordan’s economy is one of the inform that Europe and China supply in smallest among Middle Eastern total around 35.4 per cent of Jordan’s countries, and it heavily relies on total imports. Also, the Kingdom of foreign assistance due to the Saudi Arabia is Jordan’s biggest insufficient supplies of natural trading partner among Gulf countries. CHAPTER 9 205

Oman (45.1 per cent), the European Union As classified by the World Bank, Oman (28) (7.8 per cent), China (4.8 per is considered to be an upper-middle cent) and India (4.8 per cent). Within income country with a relatively small the GCC, the UAE is Oman’s biggest oil-exporting sector compared to its trading partner, supplying around GCC neighbours. However, the 45 per cent of Oman’s imports. hydrocarbon sector (oil and gas) The European Union and Central continues to be the main driver of the Asia supply around 11 per cent of economy, accounting for 30 per cent Oman’s total imports (WITS, 2015). of GDP, 73 per cent of government revenues and 53 per cent of Hong Kong, China merchandise exports in 2017 (CBO, The economy of Hong Kong, China, 2017). Despite the recovery of oil depends heavily on the service industry prices and fiscal consolidation, Oman and trade due to the lack of many still had a budget deficit amounting to natural resources. Hong Kong, China, US$ 9.1 billion, or approximately 13 is dedicated to providing the best per cent of GDP in 2017 (CBO, 2017). trade-related services to international The government invigorated its businesses and is a great example to economic diversification policy in study the trade facilitation experience. recent years by improving the Therefore, Hong Kong, China, has investment climate, promoting tourism earned the reputation of being the and enacting laws to encourage world’s freest economy (Heritage investment in the logistics sectors Foundation, 2019). The economy of and trade-related activities. Hong Kong, China, is classified as high-income by the World Bank (World Over the years, Oman has opened Bank, 2020). In addition, Hong Kong, up to international trade to boost its China, was the first member of the economy. In 2015, the value of exports WTO that decided to ratify the TFA. and imports taken together equalled 108.5 per cent of GDP (WITS, 2015). In 2017, the total value of trade The average applied tariff rate was exceeded the GDP in Hong Kong, 5.5 per cent while its bound tariff China, and the percentage of the value stood at 14.01 per cent (WTO, 2016a). of trade over GDP was 189.2 per cent Oman’s main exports are crude (WTO, 2018). Hong Kong, China, has petroleum, gas, refined petroleum, no tariff on imported goods and levies nitrogenous fertilizers and acyclic excise duties on only four products: alcohols. Its top imports are food hard alcohol, tobacco, oil and methyl and agricultural products (12.9 per alcohol. The major exported products cent), fuels and mining products are electronic integrated circuits, gold (13.4 per cent) and manufactures and radio-telephony electrical (73 per cent) (WTO, 2018). apparatus. Trade in commercial services also accounts for a huge The top export destinations of Oman portion of trade in Hong Kong, China. are China (43.6 per cent), the UAE Main imported goods are electronic (7.5 per cent), India (3.8 per cent), integrated circuits, radio-telephony Chinese Taipei (3.6 per cent) and transmission tools, line telephony the United States (3.3 per cent). The electrical apparatus, gold and main imports originate from the UAE automatic data-processing machines. 206 CHAPTER 9

The main export destinations of Hong (7.2 per cent), the European Union (28) Kong, China, are mainland China (54.1 (6.5 per cent), Singapore (6.4 per per cent), the European Union (28) cent), Japan (6.1 per cent) and Other (8.7 per cent), the United States (7.7 (29.3 per cent). Because Hong Kong, per cent), India (3.8 per cent), Japan China, is the world’s best trade hub, (3 per cent) and Other (22.6 per cent). many other countries engage in trade The high-ranked imports originate from with Hong Kong besides main trade China (44.6 per cent), Chinese Taipei partner countries. CHAPTER 9 207

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Al Shammakhi, A., Akintola, A. and Harake, W. (2019), Strategic Assessment: Boughanmi, H. (2018), “Assessing The 2019 Project Pipeline for Jordan the impact of WTO Trade Facilitation and Investment Opportunities, World Agreement on Oman’s economy”, Bank Group. International Journal of Trade, Economics and Finance 9(6): 243-250. Heritage Foundation (2019), 2019 Index of Economic Freedom. https://www.heritage. Anderson, J. and Marcouiller, D. (2002), org/index/book/chapter-3 “Insecurity and the pattern of trade: An empirical investigation”, Review of Hillberry, R. and Zhang, X. (2015), “Policy Economics and Statistics 84(2): 342-352. and Performance in Customs: Evaluating the Trade Facilitation Agreement”, Policy Central Bank of Oman (CBO) (2017), Central Research Working Paper No. 7211, Bank of Oman Annual Report, Oman. Washington, DC: World Bank.

Central Intelligence Agency (CIA) (2019), HKTDC Research (2019), Logistics Industry “Jordan”, The World Factbook. in Hong Kong, Hong Kong Industry Profiles. https://www.cia.gov/library/publications/ http://hong-kong-economy-research.hktdc. the-world-factbook/geos/jo.html com/business-news/article/Hong-Kong- Industry-Profiles/Logistics-Industry-in-Hong- De Rosbo, S. (2020), Jordan – Telecoms, Kong/hkip/en/1/1X000000/1X0018WG.htm Mobile and Broadband – Statistics and Analyses, BuddeComm Reports. https:// Hoekman, B. and Nicita, A. (2008), “Trade www.budde.com.au/Research/Jordan- Policy, Trade Costs, and Developing Country Telecoms-Mobile-and-Broadband-Statistics- Trade”, Policy Research Working Paper No. and-Analyses?r=51 4797, Washington, DC: World Bank.

Department of Statistics, Jordan (2017), Ince (2018), An Introduction to E-Commerce Jordan Statistical Yearbook 2018. in Hong Kong. https://www.incegd.com/en/ news-insights/introduction-e-commerce- Ferrantino, M., Kaushik, S., Lal Das, P. hong-kong and Fredriksson, T. (2017), “Measuring the environment for e-commerce: A new International Telecommunication Union (ITU) tool”, 28 March 2017, World Bank Blogs. (2017), ICT Development Index 2017. https:// https://blogs.worldbank.org/trade/ www.itu.int/net4/ITU-D/idi/2017/index.html 208 CHAPTER 9

Internet World Stats (2019), World Internet United Nations Conference on Trade and Usage and Population Statistics. https:// Development (UNCTAD) (2011), ASYCUDA www.internetworldstats.com/stats.htm World Report 2011, January 2011. https:// unctad.org/en/PublicationsLibrary/ Ithraa (2016), Briefings from Oman dtlasycuda2011d1_en.pdf Logistics, Muscat, Oman. https://ithraa.om/ portals/0/IthraaPDF/Brochures/PDF/ United Nations Conference on Trade and ithraa_briefings_logistics_eng_AW.pdf Development (UNCTAD) (2017), “Rapid e-Trade Readiness Assessments: A tool to Jordan Investment Commission (2018), Sector help the Least Developed Countries (LDCs) Profile: Transportation and Logistics. https:// drive economic growth, inclusive trade and www.jic.gov.jo/wp-content/uploads/2018/07/ job creation from e-commerce”, 12 Sector-Profile-Transportation-Logistics-Final- December 2017. https://unctad.org/en/ Mar-2018-JIC-1.pdf conferences/UNCTADatMC11/Pages/ MeetingDetails.aspx?meetingid=1615 Jordan Post (2019), E-commerce. https:// jordanpost.com.jo/en/e-commerce United Nations Conference on Trade and Development (UNCTAD) (2019), B2C Organisation for Economic Co-operation E-commerce Index 2019. https://unctad.org/ and Development (OECD) (2019), Compare en/PublicationsLibrary/tn_unctad_ict4d14_ Your Country, Trade Facilitation Indicators. en.pdf https://www1.compareyourcountry.org/ trade-facilitation World Bank website. https://lpi.worldbank. org/international/global Staples, B. (2002), “Trade facilitation: Improving the invisible infrastructure”, in World Bank (2012), Doing Business 2013: Hoekman, B., Mattoo, A. and English, P. Smarter Regulations for Small and Medium- (eds.), Development, Trade and the WTO: A Size Enterprises. https://www. Handbook, Washington, DC: World Bank, doingbusiness.org/content/dam/ 139-148. doingBusiness/media/Annual-Reports/ English/DB13-full-report.pdf Statista (2020a), eCommerce: Hong Kong. https://www.statista.com/outlook/243/118/ World Bank (2015), Doing Business 2016: ecommerce/hong-kong Measuring Regulatory Quality and Efficiency. https://www.doingbusiness.org/content/ Statista (2020b), eCommerce: Jordan. dam/doingBusiness/media/Annual-Reports/ https://www.statista.com/outlook/243/246/ English/DB16-Full-Report.pdf ecommerce/jordan World Bank (2017), Jordan Country Statista (2020c), eCommerce: Oman. Reclassification – Questions and Answers. https://www.statista.com/outlook/243/274/ https://www.worldbank.org/en/country/ ecommerce/oman jordan/brief/qa-jordan-country- reclassification Times of Oman (2019), “ITA lists conditions for e-commerce to thrive in Oman”, 8 World Bank (2018), Doing Business 2019: September 2019. https://timesofoman.com/ Training for Reform, International Bank for article/1890956/Business/ITA-lists-conditions- Reconstruction and Development / The for-e-commerce-to-thrive-in-Oman World Bank: Washington, DC. https://www. CHAPTER 9 209

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World Trade Organization (WTO) (2015a), Trade Policy Review: Report by Jordan, WT/ TPR/G/325. 210 CHAPTER 9: COMMENTS

Comments

ALEXANDROS SARRIS*

Electronic commerce and digital trade The efforts of countries to improve have transformed both the nature of trade facilitation is based on the trade as well as the nature of trade perceptions that trade facilitation facilitation in the last three decades. reduces trade costs (Moïsé, Orliac Digitalization has increased the scale, and Minot, 2011) and that lower trade scope and speed of trade (Lopez- costs increase trade (Hornok and Gonzalez and Ferencz, 2018). On Koren, 2015; Martincus, Carballo and scale, digitalization enables firms to Graziano, 2015). Moïsé, Orliac and reach larger numbers of digitally Minot (2011) estimate that the trade connected customers across the globe cost reduction potential of all trade and facilitates outsourcing. On scope, facilitation measures could reach digitalization allows many services 10 per cent of trade values. such as warehousing, logistics, e-payments, etc. to become more Trade facilitation via digitalization is tradable and be combined with goods affected by the degree of digital trade. Finally, trading has become economy maturity, which in turn faster, especially for services, but also depends on communications and enabling goods to move faster across digital infrastructure, such as internet borders by lowering the cost of coverage of the area of the country, customs clearance and processing speed of connections and the of relevant paperwork. The latter are proportion of the population who parts of what is commonly defined are knowledgeable users of digital as trade facilitation. platforms and the internet. Countries,

Table 1: Ratio of trade facilitation indicator value in 2019 to that of 2013 in the three economies analysed in Chapter 9

Jordan Oman Hong Kong, China

Cost to export 0.28 0.52 0.019 (US$ per container) Average time to export 0.189 0.246 0.034 (hours) Cost to import 0.297 0.762 0.572 (US$ per container) Average time to import 0.372 0.356 0.167 (hours)

Source: Computed from Chapter 9, Table 1.

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 9: COMMENTS 211

Table 2: Logistic Performance Index rankings of top 10 and bottom 10 economies in 2007 and 2018 and world competitiveness report rankings 2019

World Bank world LPI index ranking LPI index ranking Top 10 in 2007 competitiveness in 2007 in 2018 ranking 2019 Singapore 1 7 1 Netherlands 2 9 4 Germany 3 1 7 Sweden 4 2 8 Austria 5 4 21 Japan 6 5 6 Switzerland 7 13 5 Hong Kong, China 8 12 3 United Kingdom 9 9 9 Canada 10 20 14 World Bank world LPI index ranking LPI index ranking Bottom 10 in 2007 competitiveness in 2007 in 2018 ranking 2019 Guyana 141 132 * Chad 142 123 141 Niger 143 157 * Sierra Leone 144 156 * Djibouti 145 90 * Tajikistan 146 134 104 Myanmar 147 137 * Rwanda 148 57 100 Timor-Leste 149 * * Afghanistan 150 160 *

Source: Computed from World Bank Excel sheet on international LPI from 2007 to 2018; World Bank, Doing Business 2020. * Not reported. in turn, are uneven with respect to Warrad, Boughanmi and Hwang, who digital economy maturity, with examine the improvements in trade developed countries more advanced logistics performance, in the form of than developing countries. cost and time to export, between 2013 and 2019 in the three economies they The heterogeneity of countries’ study, two of which are high-income digital maturity suggests that efforts economies (Hong Kong, China; to improve digital infrastructure and Oman), while the other (Jordan) is digital connectivity will produce considered as upper middle income. uneven results, with advanced In Table 1, we use data from Chapter economies achieving faster and 9, Table 1, to indicate the ratio of the larger improvements in trade facilitation relevant indicator in 2019 to that of than developing countries. This is 2013. It is notable that all ratios are documented in Chapter 9 by Awad- smaller than 1, with some being much 212 CHAPTER 9: COMMENTS

lower than 1, suggesting large trade competitiveness rankings for both facilitation improvements in a developed and developing economies, short period. and this suggests that competitiveness and trade facilitation go together. The point of the above is to indicate that advanced economies are likely An aspect of the new international to achieve faster trade facilitation economy is the proliferation of value decline than less developed ones. chains, with products and services Hence trade costs are likely to decline that are intermediate inputs to a final faster in developed product going through economies. This is likely many countries or many to give these economies “Digitalization times through the a further competitive has increased borders of one country advantage compared before reaching the final to developing ones. the scale, scope assembly. This suggests and speed that the longer the To explore this idea, of trade.” product value chain the Table 2 indicates the higher the proportion of Logistics Performance final product value that Index (LPI) compiled by the World can be affected by border measures. Bank for the top 10 (in LPI score) and It follows that the reduction in trade bottom 10 economies in 2007, and costs, via increases in efficiency of their ranking in 2018. It appears that trade procedures, could expand the the top 10 in LPI 2007 largely kept length of a given value chain, by their relative position in 2018. Similarly reducing the costs of extra steps in the for the bottom 10 in 2007 (out of 150), chain. This in turn could reduce their rankings in 2018 (among 160 obstacles for many small and medium- economies) apart from two economies size enterprises to enter some (Rwanda and Djibouti) seem to segments of the value chain, and have stayed near the bottom. The hence enlarge the production and table also exhibits the 2019 world trade opportunities for such firms. competitiveness rankings for the Countries with large improvements economies as reported by the World in trade facilitation will thus have Bank. It appears that the LPI rankings more chances of entering long global are related to the world value chains. CHAPTER 9: COMMENTS 213

References Martincus, C. V., Carballo, J. and Graziano, A. (2015), “Customs”, Journal of Hornok, C. and Koren, M. (2015), International Economics 96: 119-137. “Administrative barriers to trade”, Journal of International Economics 96 (S1): S110-S122. Moïsé, E., Orliac, T. and Minot, P. (2011), “Trade Facilitation Indicators: The Impact on Lopez-Gonzalez, J. and Ferencz, J. (2018), Trade Costs”, OECD Trade Policy Papers, “Digital Trade and Market Openness”, No. 118, Paris: OECD Publishing. OECD Trade Policy Paper, No. 217, Paris: OECD Publishing. Chapter 10 The new rules on digital trade in Latin America: regional trade agreements

Dorotea López, Bradly Condon and Felipe Muñoz* Abstract

While recent technological advances have supported an increase in digital trade, this growth has occurred with a lack of clear and defined rules. This deficiency has become an issue for Latin American countries. With the multilateral trade regime impasse, more complex regional and bilateral agreements have emerged. The formulation of digital trade regulation raises many questions. In this chapter we deal with the new rules on digital trade in regional trade agreements (RTAs) recently negotiated by Latin American economies. In this work, special emphasis is given to comparing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the United States-Mexico-Canada Agreement (USMCA), the most advanced RTAs regarding these issues.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 216 CHAPTER 10

Introduction Teh, 2017). These policy and regulatory frictions limit the cross- The emergence of digital trade is a border flows of digital goods, services new phenomenon that governments and data, and the potential gains of are not sure how to confront. In this digitization for trade and growth are context, many Latin American countries not automatically translated to are dealing with international developing economies (Suominen, commitments where they do not have 2017a, 2017b). As such, there is a domestic regulation. The main concern need for clear digital trade provisions is how these regulations are created in in trade agreements to create certainty international agreements and what through new rules. challenges they represent for the countries. As Wolfe (2018) indicates, Currently, digital trade has been seen “the digital trade story is about how as of particular concern for developed states are learning to solve the and large economies, but developing problems of state responsibility for economies, like Chile and Mexico, are something that does not respect their increasingly affected and active in this borders while still allowing 21st century domain. The failure of the WTO to commerce to develop”. develop clear rules for digital trade has meant that the focus Given that digital trade has moved to the is a recent topic and bilateral and regional has appeared in an “There is a levels, where new open World Trade need for clear norms are being Organization (WTO) digital trade proposed and new era, direct trade provisions in experimented with. restrictions on digital trade agreements The most developed trade have not yet to create set of norms can evolved, so there is little be found in the need to liberalize it in certainty through Comprehensive and the traditional sense. new rules.” Progressive Agreement Rather, the focus is on for Trans-Pacific preventing countries Partnership (CPTPP) from adapting non-digital trade and the United States-Mexico-Canada protection measures in this new area Free Trade Agreement (USMCA). (Ciuriak & Ptashkina, 2018, p. 6), as well as facilitating the growth of In this chapter, we first examine digital trade. the WTO and global digital trade regulations. The second section Government policies can impede examines regional agreements, digital trade due to differences in Asia-Pacific Economic Cooperation regulatory frameworks, some for (APEC) and the CPTPP, and the legitimate or defensible reasons like effects on the Pacific Alliance. CPTPP privacy, consumer protection and has been considered as key due to its national security, and others for inclusion of a comprehensive set of reasons considered less legitimate, new digital trade rules and for its effect like protectionism or the promotion of on countries in the region. We also domestic businesses (Monteiro and include a legal analysis of the USMCA CHAPTER 10 217 provisions and compare the USMCA p. 54). Wu (2017) argues that the with the CPTPP, in order to understand limitations of existing WTO rules push the ways in which new regulations for members to establish additional legal digital trade are likely to be interpreted. obligations to govern digital trade. The Finally, some concluding remarks issues that need to be resolved include are presented. definitions of what constitutes digitally traded products and non-physical The WTO and global digital digital goods and services, how to trade regulations update WTO classifications challenged by technological advances, improving International digital trade presents a market access, securing and challenge due to the lack of clearly facilitating cross-border data flows, defined global rules, meaning that implementing consumer-related there is no coherent set of guidelines regulatory measures like protecting for countries to ensure the free flow of personal data, stopping unsolicited digital trade internationally (Suominen, electronic messages and safeguarding 2017a). The last major round of the right to be forgotten, as well as negotiations of the WTO to have been improving security, and finally, completed, the Uruguay Round, facilitating trade through digital means predated the rise of digital trade, and, like electronic documentation. Callo- since then, no real progress has been Müller (2019) specifically highlights made to update the rules. The need, the need for consumer protection however, has been present in the and data protection regulations. multilateral agenda since 1998, when the WTO Work Programme on Regional agreements: Electronic Commerce was created to APEC-CPTPP, Pacific examine all trade issues relating to Alliance and UMSCA digital trade. Although the group was not mandated to create a set of rules, Due to the failure of the WTO to there is a general perception that it has successfully work towards a set of made no substantive progress, and multilateral digital trade rules, RTAs have multilateral efforts have stalled become the focus of efforts to develop (Monteiro and Teh, 2017; Wu, 2017). digital trade rules (Meltzer, 2018). As Although the WTO held a ministerial a result, “RTAs are sometimes viewed meeting in Argentina in December as a laboratory enabling countries to 2017, which produced a Joint design new provisions and address Statement on Electronic Commerce, new issues and challenges” (Monteiro there is little indication that the idea will and Teh, 2017, p. 70). be successful (Meltzer, 2018). Ciuriak and Ptashkina (2018) indicate that the When combined with regional WTO has been largely on the sidelines integration schemes like the Pacific in shaping the framework for digital Alliance (PA) and the APEC forum, and digitally enabled trade. RTAs can facilitate intraregional trade and support the creation of large, The “multilateral regulatory framework integrated digital markets (and the on e-commerce is incomplete” creation of digital giants) that enable (Giordano, Ramos Martínez, local firms to reap economies of scale Michalczewsky and Ramos, 2017, and thus lower operating costs, as well 218 CHAPTER 10

as encourage investment and the (Giordano et al., 2017). The authors creation of start-ups. In order for find that the types and depth of economies to benefit from the changes commitments in RTAs in Latin America brought about by the digital economy, (16 intraregional and 19 extra-regional it is necessary to establish transparent agreements) vary widely, with greater rules, freedom of innovation, a level inclusion of digital trade facilitation, playing field and interoperability among some rules regarding market access economies (Suominen, 2017a, 2017b). and near exclusion of user protection commitments. Using CPTPP as Ciuriak and Ptashkina (2018, p. 15), benchmark, they conclude that only however, argue that the RTA-driven 13 per cent of the actual commitments development of new digital trade rules on digital trade-related provisions has probably reached its limits and will included in their agreement were to be probably come to an end with the replaced by those included in CPTPP. finalisation of the major agreements currently under negotiation. Moreover, Although all RTAs that include Latin RTAs do not always tackle the full American countries have worked on range of problems associated with the issues related to the digital economy, changes to global trade, and they tend Patiño, Rojas and Agudelo (2018, p. to avoid certain intractable and 36) highlight that the most recent ones, politically sensitive issues (Wu, 2017). in particular the CPTPP and the Pacific Alliance, put special emphasis on trade Wu (2017) dispels the myth that robust and development aspects related to digital trade regulations are only the internet and digital trade. demanded by large developed countries. Although countries in Latin APEC-CPTPP America and the Caribbean have The Trans-Pacific Partnership shown a commitment to expanding (TPP) was originally considered to digital trade opportunities, the lack of be the nucleus of a future Asia Pacific common regional rules for digital trade RTA that would cover the APEC zone limits the scope for expansion in trade (Stephenson and Robert in Callo- within the region (Meltzer, 2018). Müller, 2019). All the current members Specifically, the opportunities that are of the CPTPP are members of APEC, created by online cross-border data and the group represents just over flows depend on regulations to give half of all APEC members. As a consumers and companies the consensus-based space for dialogue, confidence to participate in these APEC’s commitment to the digital interactions, protection of the freedom trade economy is built on non-binding of data flows across borders and agreements and cooperation between cooperation between countries to its members, rather than on binding protect against and limit negative agreements like RTAs, as is the case externalities and possible protectionist of the Pacific Alliance Additional measures (Meltzer, 2016). Protocol (PAAP) and the CPTPP. However, despite this fact and that not The capacity of the region to capitalize all the topics present in the CPTPP are on developments in digital trade is addressed, the discussion panels and dependent on the modernization of the the work of the expert groups have region’s regulatory framework served as the basis for the creation of CHAPTER 10 219 public policies in APEC countries and across borders” (Patiño et al., 2018). the incorporation of key topics into Although it has been a useful reference trade agreements entered into by for policymakers of APEC members member states. As such, there is a when drafting domestic privacy convergence between the topics regulations, it is not legally binding looked at by APEC and the CPTPP (APEC Electronic Commerce Steering (Observatorio Estratégico de la Alianza Group, 2017). On an interesting side del Pacífico, 2017). note, Elms and Nguyen (2017) state that the TPP data privacy rules The group has a number of initiatives originated in the APEC Policy that focus on digital trade. These Framework, indicating a complex and include the Electronic Commerce at times reciprocal causal relationship Steering Group, based on the between APEC and the CPTPP. principles established in the 1998 APEC Blueprint for Action on However, despite the importance Electronic Commerce, which works afforded to the topic in APEC, there to promote digital trade through are as of yet no APEC-wide predictable, transparent and agreements that cover digital trade, consistent legal, regulatory and policy and the grouping has made little environments. Its work to strengthen progress in creating a new regulatory privacy protection and to promote framework (Asian Trade Centre, 2016). cross-border privacy rules via the voluntary Cross-Border Privacy Rules APEC is also relevant in the creation and System, and the Privacy of norms, especially digital privacy Recognition Processors System rules, which were the basis for the programme stands out (APEC provisions in the CPTPP regarding Electronic Commerce Steering Group, this topic. However, being a voluntary 2017). Also important is the Paperless organization, its norms are not binding. Trading Subgroup, which looks to As such, APEC depends wholly on the facilitate paperless trading and the use willingness of the parties to use the of electronic documents, and the Data work of the various organizations and Privacy Pathfinder, which looks to work groups as the foundation for secure cross-border flows of personal their own domestic public policies information (Suominen, 2017a). and regulations.

Wu (2017) argues that it is nations Meltzer (2018) identifies the CPTPP belonging to the APEC that most as key due to its inclusion of a frequently push for the inclusion of comprehensive set of new digital trade privacy-related provisions in RTAs. rules and for its effect on countries in The author highlights that the APEC the region, as Chile, Mexico and Peru ministers have already endorsed the are either signatories or have ratified APEC Privacy Framework, which looks the agreement. For these countries, it to protect the data of individual natural is the most robust set of rules for this persons, as part of its work to “deal type of trade and includes a binding with deficiencies in the policies and commitment to allow the free flow of regulatory frameworks on electronic data, prohibits data localization commerce and seek to promote the requirements that could function as an free flow of information and data impediment to entering the market, 220 CHAPTER 10

permits the use of all devices on the The provisions related to customs internet and requires all groups to duties, consumer protection, personal adopt privacy protection regulations data protection, paperless commerce, (Giordano et al., 2017). Meltzer (2018) spam and cooperation with SMEs are indicates that the agreement covers consistent between the PAAP and the 12 different digital trade-specific CPTPP (Observatorio Estratégico de provisions and groups them under the la Alianza del Pacífico, 2017). topic of market access, digital trade According to Michalczewsky and facilitation and the protection of users. Ramos (2017), this similarity could arise because the agreements were However, despite the progressiveness negotiated at the same time and Chile, of the agreement, Wolfe (2018) Mexico and Peru are members of both indicates that not all the provisions in the PA and the CPTPP. Also relevant is the CPTPP have the same language, that fact that Australia, Canada, New with some being aspirational and Zealand and Singapore are associate others obligatory. Applying the members of the PA, as well as States analytical scheme of Horn, that participated in the negotiations Mavroidis and Sapir (2010), WTO+, of the original TPP. Due to this which are areas where RTAs go participation in TPP negotiations, beyond WTO obligations, and and its high standards in digital trade, WTO-X, which are areas not currently this agreement’s text is used as covered by the WTO, Wolfe (2018) a benchmark for the PAAP indicates that the majority of the (Observatorio Estratégico de la digital trade provisions in the CPTPP Alianza del Pacífico, 2017). are WTO-X, with the exception of making the WTO moratorium on The PAAP prohibits the imposition of custom duties on digital trade customs duties on digital trade, but permanent. Another issue is the permits internal taxes and other legal enforceability of the provisions. charges, as well as mandating the Some are aspirational with vague adoption of measures to protect enforceability or look to promote against unsolicited electronic only dialogue and cooperation, so commercial messages and requiring not all provisions in the CPTPP are a simple commitment of the parties to legally enforceable. consider negotiating a cross-border flow of information provision (Wu, Pacific Alliance 2017). Interestingly, the PAAP is one Despite the shortcomings of the of the very few RTAs to incorporate CPTPP, it has become a model for specific provisions on the use and other agreements, including the PA location of computing facilities and the North American Free Trade (Monteiro and Teh, 2017). The Agreement (NAFTA) renegotiations agreement also promotes (Meltzer, 2018). According to interoperability among the regulatory Michalczewsky and Ramos (2017), the frameworks of the member countries, PA agreements regarding digital trade promotes the inclusion of small and found in the PAAP most closely match medium-size enterprises (SMEs) in the provisions found in the CPTPP digital trade, and is working with when compared to other Latin America the objective to generate a regional intraregional or extra-regional RTAs. digital market, cybersecurity and CHAPTER 10 221 common public-private dialogues USMCA (Suominen, 2017a). Chapter 19 of the USMCA regulates digital trade, but does not apply to The PAAP is not, however, a simple government procurement or to copy of the CTPP and has been measures related to information held called “a hybrid product that aims to or processed by or on behalf of balance the creation of a business- government (Article 19.2(3)). One friendly environment (US style) with exception to this exemption for the need to safeguard consumer and government-controlled information data protection (EU style)” (Callo- is for “open government data”, which Müller, 2019, p. 200). Despite the Article 19.18 defines as “government similarity and the fact that the PAAP information”, including data that a replicates two thirds of the standards Party chooses to make available of the CPTPP, “the PAAP does to the public. Article 19.18 requires not include core issues such as a Parties to “endeavour to ensure suitable domestic legal framework, that the information is in a machine- guaranteeing freedom of internet readable and open format and can access, and avoiding measures be searched, retrieved, used, reused, that could increase transaction costs and redistributed”. “Government (localization of data servers, source information” is defined as “non- codes). It also leaves out cooperation proprietary information, including around cyber security, a data, held by the key factor in building central government”. the confidence needed for consumers and “Regional Article 19.11(1) bans companies to get rules have restrictions on “the involved in online emerged to cross-border transfer transactions” fill the gap of information, including (Michalczewsky and left by the personal information, by Ramos, 2017). The electronic means if this PAAP has no absence of activity is for the intellectual property multilateral conduct of the business chapters, and it lacks solutions.” of a covered person”. norms on internet “Personal information” is service provider liability. defined as “information, Neither does it include TPP-style including data, about an identified or provisions for interoperability, meaning identifiable natural person”. that is does not go as far as the TPP and its successor, but further than the Article 19.11(2) provides an exception current RTA between the PA members to the obligation in Article 19.11(1), for and with the European Union and the measures that are: United States (Callo-Müller, 2019). Also missing is a dispute settlement [N]ecessary to achieve a legitimate mechanism. In general terms, the public policy objective, provided that PAAP develops the topics found in the the measure: TPP and CPTPP in less depth (Observatorio Estratégico de la Alianza (a) is not applied in a manner which del Pacífico, 2017). would constitute a means of arbitrary 222 CHAPTER 10

or unjustifiable discrimination or a CPTPP Article 14.11 is significantly disguised restriction on trade; and different from USMCA Article 19.11. First, CPTPP Article 14.11(1) provides (b) does not impose restrictions on that, “The Parties recognise that each transfers of information greater than Party may have its own regulatory are necessary to achieve the objective. requirements concerning the transfer of information by electronic means”. This exception uses language from USMCA Article 19.11 excludes this GATT Article XX, which has also provision, indicating less tolerance for been incorporated into the General different approaches to managing Agreement on Trade in Services cross-border data flows (Casalini & (GATS), and other WTO Agreements. González, 2019; Scassa, 2018). WTO jurisprudence on this language serves as a source of guidance on Second, CPTPP Article 14.11(2) how to interpret USMCA Article provides that, “each Party shall allow 19.11(2). The party invoking the the cross-border transfer of information exception in Article 19.11(2) would by electronic means, including have the burden of proof to show personal information, when this activity that the exception qualifies under is for the conduct of the business of a this language. covered person”. This contrasts with the USMCA Article 19.11 equivalent, The annex provides a more detailed which bans prohibitions and restrictions, analysis of how a dispute settlement which is arguably a stronger wording for panel is likely to interpret USMCA this obligation, particularly in light of the Article 19.11(2). The context indicates wording of the exception. that many public policy objectives are likely to qualify as “legitimate”. Articles Third, CPTPP Article 14.11(3) differs 19.11(2) (a) and (b) are likely to be from USMCA Article 19.11(3) in that interpreted in a manner that is similar the former does not use the term to interpretations of the same “necessary”, whereas that latter uses terminology in WTO jurisprudence. the term “necessary”, not once, but twice. CPTPP Article 14.11(3) provides: USMCA versus CPTPP It appears that the CPTPP is less Nothing in this Article shall prevent a restrictive towards measures taken Party from adopting or maintaining by national governments, based on measures inconsistent with the following differences: (1) CPTPP paragraph 2 to achieve a legitimate has an explicit recognition that public policy objective, provided that Parties may have their own regulatory the measure: requirements, whereas USMCA does not; (2) CPTPP requires Parties (a) is not applied in a manner which to allow cross-border information would constitute a means of arbitrary transfer, whereas USMCA bans or unjustifiable discrimination or a prohibitions and restrictions; and disguised restriction on trade; and (3) USMCA applies a necessity test to justify public policy restrictions, (b) does not impose restrictions on whereas there is no necessity test transfers of information greater than in CPTPP. are required to achieve the objective. CHAPTER 10 223

The CPTPP language makes the information protection (Article 19.8), relevance of WTO jurisprudence regulations for spam (Article 19.13), regarding the term “necessary” security in electronic communications doubtful. Moreover, the term “required” (Article 19.14), cybersecurity (Article sets a lower bar than the term 19.15), as well as intellectual property “necessary”. The result is that the rights, criminal laws and law USMCA provisions strengthen the enforcement (Article 19.17), so these obligation and weaken the exception, are likely to qualify as a legitimate thereby changing the balance between objective. USMCA Chapter 11 the rights of governments to regulate incorporates Article 2.2 of the TBT cross-border data flows in the public Agreement, so its list of legitimate interest and the rights of big data to objectives is also part of the engage in cross-border data mining interpretative context of Article that facilitates the development of new 19.11(2): national security technologies, particularly those based requirements; the prevention of on artificial intelligence. deceptive practices; and the protection of human health or safety, animal or Conclusion plant life or health, or the environment. For the purposes of, inter alia, Chapter This review has examined digital trade 19, paragraphs (a), (b) and (c) of GATS rules in key Latin American RTAs: the Article XIV are incorporated into and CTPP, PA and UMSCA. These made part of the USMCA, mutatis regional rules have emerged to fill the mutandis. GATS Article XIV(a) permits gap left by the absence of multilateral measures “necessary to protect public solutions. These RTAs are among the morals or to maintain public order”, most advanced in the regulation of GATS Article XIV(b) permits measures digital trade, particularly in the key “necessary to protect human, animal or areas of privacy, access to information plant life or health”, and GATS Article and data flows. However, the CPTPP XIV(c) permits measures “necessary to and USMCA have diverged in their secure compliance with laws and terminology, resulting in distinct regulations… including those relating approaches to managing cross-border to (i) the prevention of deceptive and data flows and divergence in the fraudulent practices…; (ii) the relevance of WTO jurisprudence to key protection of the privacy of individuals exceptions. The end result of the in relation to the processing and absence of multilateral rules is to set dissemination of personal data…; (iii) the stage for a “spaghetti bowl” of safety”. Given the incorporation and rules in the region on this topic. application of these provisions, these should all qualify as legitimate Annex objectives as well. However, in the context of Article 19.11(2), the USMCA Article 19.11(2) does not application of GATS Article XIV provide an illustrative list of legitimate provisions would have to be applied in objectives. However, USMCA Chapter a manner that is consistent with the 19 recognizes the importance of laws language used in Article 19.11(2), governing electronic transactions particularly the language regarding (Article 19.5), online consumer necessity and the incorporation of protection (Article 19.7), personal language from the GATS Article XIV 224 CHAPTER 10

chapeau, which omits the GATS the exception must make a prima facie language regarding discrimination case that the policy goal at issue in its “between countries where like measure qualifies as a “legitimate conditions prevail”. public policy objective”. Once it is established that the policy goal fits the The Appellate Body in US – Gambling1 exception, the party would then have to interpreted the term “necessary” in prove that the measure is “necessary” GATS Article XIV(a) to mean the same to achieve the policy goal. This analysis as the term “necessary” in GATT takes place in light of the level of risk Article XX. Thus, the term “necessary” that a WTO member has set for itself. has been given the same interpretation To demonstrate that the measure is in similarly worded exceptions in necessary involves weighing and covered agreements that apply to balancing a series of factors. First, the different sectors (goods and services). greater the importance of the interests While USMCA Article 19.11(2) or values that the challenged measure addresses a more specific sector, is intended to protect, the more likely it US – Gambling indicates that this is is that the measure is necessary. GATT not an obstacle to applying the same Article XX jurisprudence has interpretation to the term “necessary”. addressed the importance of human As the Appellate Body noted in life and health (EC – Asbestos3) and US – Stainless Steel (Mexico),2 WTO environmental protection (Brazil – members cite WTO jurisprudence in Retreaded Tyres4), and would be legal arguments in dispute settlement relevant at this stage of the analysis. proceedings and take the Second, the greater the extent to jurisprudence into account when which the measure contributes to the enacting or amending national end pursued, the more likely that the legislation. WTO members also take measure is necessary. In Brazil – the jurisprudence into account in trade Retreaded Tyres, the Appellate Body negotiations. Thus, the interpretation of noted that if a party is seeking to identical terms should be similar, given demonstrate that its measures are the similarities in the language that is “necessary”, it should seek to establish used in the GATT, GATS and USMCA that need through “evidence or data, provisions, the fact that all three are relevant to the past or present”, to exceptions and the similar contexts of establish that the contested measures these provisions. contribute to the attainment of the pursued objectives. However, this The context of USMCA Article 19.11(2) requirement can be met with qualitative is not identical to that of GATS Article evidence. Third, the less WTO- XIV and GATT Article XX. The term inconsistent the challenged measure “legitimate public policy objective” is is, the more likely it would be broader in USMCA Article 19.11(2) considered necessary. The final issue because it encompasses a wider range is whether a WTO-consistent of objectives, some of which are alternative measure, which the WTO specific to digital trade. Nevertheless, member concerned could reasonably given the similar wording and context, be expected to employ, is available, or GATT and GATS jurisprudence whether a less WTO-inconsistent suggests the following analysis would measure is reasonably available. The be appropriate. First, the party invoking analysis of the availability of less- CHAPTER 10 225 restrictive alternative measures would to the pursued objective. For a be relevant to the requirement in proposed alternative to be viable, it USMCA Article 19.11(2) that the must be less trade-restrictive and make measure’s restrictions on transfers of at least an equivalent contribution to information are not be greater than are the protection of human, animal or necessary to achieve the objective. plant life or health. Once a viable alternative has been proposed, it is for The party invoking the exception may the respondent to demonstrate why point out why alternative measures such a measure is not reasonably would not achieve the same objectives within his reach. In the USMCA as the challenged measure, but it is context, this could raise the issue under no obligation to do so in order to of whether the availability of establish, in the first instance, that its alternatives might be different for measure is “necessary”. If the other Mexico, given its level of economic party raises a WTO-consistent and technological development. alternative measure that, in its view, should have been taken, the party The requirement that the measure is invoking the exception would be not applied in a manner that would required to demonstrate why its constitute a means of arbitrary or challenged measure nevertheless unjustifiable discrimination or a remains “necessary” in light of that disguised restriction on trade should alternative or, in other words, why the be similar to that in the GATT Article proposed alternative is not, in fact, XX and GATS Article XIV chapeau, “reasonably available”. If the party minus the analysis of “countries where invoking the exception demonstrates like conditions prevail”. The GATT that the alternative is not “reasonably Article XX and GATS Article XIV available”, in light of the interests or chapeau prohibits both de jure and values being pursued and the party’s de facto discrimination. Footnote 5 in desired level of protection, it follows USMCA Article 19.11(2) would be that the challenged measure must be relevant to determining whether the “necessary” (US – Gambling). discrimination is arbitrary or unjustifiable: “A measure does not In Brazil – Retreaded Tyres, the meet the conditions of this paragraph Appellate Body decided that an if it accords different treatment to data alternative measure cannot be transfers solely on the basis that they considered to be “reasonably are cross-border in a manner that available” when it is simply of a modifies the conditions of competition theoretical nature, for example, when to the detriment of service suppliers of the respondent cannot adopt it or another Party”. In Brazil – Retreaded imposes an undue burden on that Tyres, the Appellate Body held that member, such as “prohibitive costs there is arbitrary or unjustifiable or major technical difficulties”. In this discrimination when the reasons given case, the alternative of collecting tyre for this discrimination bear no rational waste and incinerating it in special connection to the objective, or would facilities was rejected. In addition, go against that objective. In USMCA the alternative measure must maintain Article 19.11(2), the relevant objective the respondent’s right to achieve the would be the legitimate policy desired level of protection with respect objectives noted above. 226 CHAPTER 10

Endnotes Elms, D. and Nguyen, M. H. (2017), “Trans-Pacific Partnership Rules for 1 Appellate Body Report, United States – Digital Trade in Asia”, ADBI Working Measures Affecting the Cross-Border Paper Series. Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005. Giordano, P., Ramos Martínez, A., Michalczewsky, K. and Ramos, B. (2017), 2 Appellate Body Report, United States – Trade and Integration Monitor 2017: Beyond Final Anti-Dumping Measures on Stainless the Recovery: Competing for Market Share Steel from Mexico, WT/ DS344/AB/R, in the Digital Era, Inter-American adopted 20 May 2008. Development Bank.

3 Appellate Body Report, European Horn, H., Mavroidis, P. C. and Sapir, A. Communities – Measures Affecting (2010), “Beyond the WTO? An anatomy of Asbestos and Asbestos-Containing EU and US preferential trade agreements”, Products, WT/DS135/AB/R, adopted The World Economy 33(11): 1565-1588. 5 April 2001. Meltzer, J. P. (2016), “Maximizing the 4 Appellate Body Report, Brazil – Measures Opportunities of the Internet for International Affecting Imports of Retreaded Tyres, WT/ Trade”, Policy Options Paper, ICSTD and DS332/AB/R, adopted 17 December 2007. the World Economic Forum.

References Meltzer, J. P. (2018), A Digital Trade Policy for Latin America and the Caribbean, Asia-Pacific Economic Cooperation (APEC) Inter-American Development Bank. Electronic Commerce Steering Group (2017), Impact of TPP’s E-commerce Michalczewsky, K. and Ramos, A. (2017), Chapter on APEC’s E-commerce: Asia- “E-commerce in Latin America: The Pacific Economic Cooperation. regulatory gap”, Ideas de Integración 246. http://conexionintal.iadb.org/2017/03/08/ Asian Trade Centre (2016), Digital Trade and comercio-electronico-en-america-latina-la- the TPP: How Asia-Pacific Benefits. brecha-normativa-2/?lang=en

Callo-Müller, M. d. C. V. (2019), “Situating Monteiro, J.-A. and Teh, R. (2017), the Pacific Alliance in global electronic “Provisions on Electronic Commerce in commerce regulation”, in Sauvé, P., Lazo, R. Regional Trade Agreements”, WTO Staff P., Alvarez Zarate, J.-M. (eds.), The Pacific Working Paper, No. ERSD-2017-11. Alliance in a World of Preferential Trade Agreements, Springer, 177-201. Observatorio Estratégico de la Alianza del Pacífico (2017), Identificación de Casalini, F. and López González, J. (2019), oportunidades para el desarrollo y Trade and Cross-Border Data Flows, OECD fortalecimiento de la Agenda Digital en la Trade Policy Papers No. 220. Alianza del Pacífico, Santiago: Observatorio Estratégico de la Alienza del Pacífico. Ciuriak, D. and Ptashkina, M. (2018), “The Digital Transformation and the Patiño, J. A., Rojas, F. and Agudelo, M. Transformation of International Trade”, (2018), Regional Digital Market: Strategic RTA Exchange, Geneva: ICTSD and IDB. Aspects, Santiago: CEPAL. CHAPTER 10 227

Scassa, T. (2018), “The USMCA locks Wolfe, R. (2018), “Learning about digital Canada in on digital trade – and at a trade: Privacy and e-commerce in CETA and worrying time”, Macleans, 3 October 2018. TPP”, World Trade Review 18(S1), https://www.macleans.ca/opinion/the- S63-S84. usmca-locks-canada-in-on-digital-trade-and- at-a-worrying-time/ Wu, M. (2017), Digital Trade-Related Provisions in Regional Trade Agreements: Suominen, K. (2017a), Fuelling Trade in the Existing Models and Lessons for the Digital Era: Policy Roadmap for Developing Multilateral Trade System, RTA Exchange, Countries: ICTSD. Geneva: ICTSD and the IDB.

Suominen, K. (2017b), Fuelling Trade in the Digital Era: The Global Landscape and Implications for Southeast Asia: ICTSD. -

228 CHAPTER 10: COMMENTS

Comments

ROHINTON P. MEDHORA*

At a time when international trade is in its conclusion that the USMCA stagnating, e-commerce figures are indicates “less tolerance for different dazzling, registering double-digit approaches to managing cross border growth rates for the past few years data flows”. Worryingly, the chapter is globally and in every major country. also correct in surmising that in the Latin America is no exception to this absence of multilateral rules, RTAs trend. Yet, as this chapter and others in establish precedent and practice that this volume point out, policy and might eventually become the regulatory frameworks for e-commerce multilateral norm. vary across countries, reflecting local exigencies and governance capacities There are two areas in particular where to keep up with this very dynamic the seeming technocratic e-commerce- sector. Moreover, a focus on creating a related provisions of the USMCA mask harmonized regime for the governance deeper and more sensitive issues of of e-commerce quickly bleeds into power and national sovereignty. One more contentious “behind the border” is data localization; the other is the matters related to the policy space capacity of national authorities to hold national authorities require to balance multinational digital platforms imperatives such as unfettered accountable for the content they carry. commerce, the privacy and security of citizens and their data and indeed the The treatment of data localization in the ability of countries to safeguard the Trans-Pacific Partnership (TPP) and quality of their democracy. USMCA is instructive. Where the TPP equivocated on the location of In the absence of a meaningful computing facilities, the USMCA multilateral framework in this regard, provision on the matter (Article 19.12) regional trade agreements (RTAs) are is short and not so sweet, at least for forging ahead. In Latin America alone, those who read more into data as this chapter shows, the Asia-Pacific localization policies than simply the Economic Cooperation- enabling of trade: “No Party shall Comprehensive and Progressive require a covered person to use or Trans-Pacific Partnership (APEC locate computing facilities in that CPTPP), Pacific Alliance and the Party’s territory as a condition for United States-Mexico-Canada conducting business in that territory.” Agreement (USMCA) have provisions for e-commerce. The differences are Once data is seen only through a instructive, and the chapter is correct commercial lens and not as an aspect

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. -

CHAPTER 10: COMMENTS 229

of personal protection and privacy, the platforms from responsibility for the logic of ever more openness makes content they carry. Free speech sense. But examples abound of the advocates see this as desirable (Geist, non-economic dimensions of data, lost 2018). Others look at the when data is treated strictly through “weaponization” of platforms like the trade agreement medium. A Facebook, Twitter and YouTube during Canadian who legally purchases recent votes such as the 2016 cannabis online with his credit card presidential election in the United might be denied entry into the United States and the Brexit referendum and States for having bought a substance the livestreaming of the terror attacks banned in the United States, just in Christchurch, New Zealand, in because the “shadow” of the financial March 2019 as indications that the transaction was not localized. Or, if the unwillingness or inability of digital smart city partnership in Toronto with platforms or governments to regulate Sidewalk Labs, a subsidiary of content has important social and Alphabet, had proceeded (it was called political consequences. off in May 2020), Canadians may well have desired that the There is currently an detailed data about ongoing lively discussion their city and their lives “Policy and on how content on digital in it remain in the platforms might be best country (Hirsh, 2018; regulatory managed (Etlinger, 2019). Scassa, 2018). frameworks for Safety must be balanced e-commerce with freedom of speech. Ironically, the human vary across Models of content rights community is countries, regulation ranging concerned about from none to purely forced data localization reflecting local government-imposed in countries with exigencies and to self-regulating and authoritarian regimes governance public-private (Centre for Internet capacities to partnerships (such as and Society, 2019). keep up with Facebook’s Oversight But it is safe to say that Board (Klonick, 2019)) the categorical this very are currently being language on data dynamic sector.” evaluated. It is entirely localization in the likely that one size USMCA is not driven does not fit all in this by potential human rights violations in case, and that the political economic Canada, Mexico or the United States. process in different countries might arrive at different solutions. There are multiple dimensions to this issue. Reductionism to commerce Given that in the Western world the might be good for commerce and major platforms are based in the result in welfare gains to countries but United States, and that they command also misses potential welfare losses. attention in the political discourse in the country, the laissez-faire The USMCA also uses the “safe approach taken towards these harbour” provision to liberate digital companies in the United States is 230 CHAPTER 10: COMMENTS

understandable. The projection of this dropped or modified and moved into political economy, via RTAs, into other the multilateral sphere. It is equally countries removes their ability to view possible that RTAs act as a ratcheting this situation differently. In effect, the mechanism, locking-in norms and RTA entry point is used to manage practices negotiated by powerful policy space for areas that go well players (whose power is even beyond e-commerce. further enhanced in a regional setting) that stand to become a Traditionally, one of the arguments for multilateral standard. the “spaghetti bowl” of RTAs has been their potential to deal rapidly and Although the authors of the Latin creatively with new issues, serving as America chapter do not quite say “hot houses” in which policy as much, their analysis points to approaches are tried before they are precisely this risk. CHAPTER 10: COMMENTS 231

References Hirsh, J. (2018), “USMCA May Have Closed the Door on Data Localization Too Soon”, Centre for Internet and Society (2019), Center for International Governance “The Localisation Gambit: Unpacking Innovation, 26 October 2018. https://www. Policy Measures for Sovereign Control of cigionline.org/articles/usmca-may-have- Data in India”, March 2019. https://cis-india. closed-door-data-localization-too-soon org/internet-governance/resources/ the-localisation-gambit.pdf Klonick, K. (2019), “Does Facebook’s oversight board finally solve the problem of Etlinger, S. (2019), “What’s so difficult online speech?”, in Owen, T. (ed.), Models for about social media platform governance?”, Platform Governance, Centre for International in Owen, T. (ed.), Models for Platform Governance Innovation. https://www. Governance, Centre for International cigionline.org/sites/default/files/documents/ Governance Innovation. https://www. Platform-gov-WEB_VERSION.pdf cigionline.org/sites/default/files/documents/ Platform-gov-WEB_VERSION.pdf Scassa, T. (2018), “Considerations for Canada’s National Data Strategy” in Geist, M. (2018), “The USMCA ‘safe harbor’ Medhora, R. (ed.), Data Governance in provision reduces liability risks for business the Digital Age, Centre for International and provides Canadians with long overdue Governance Innovation. https://www. safeguards for Internet free speech”, Policy cigionline.org/sites/default/files/documents/ Options, October 2018. https:// Data%20Series%20Special%20 policyoptions.irpp.org/magazines/october Reportweb.pdf 2018/why-the-usmca-will-enhance-online- free-speech-in-canada/ Chapter 11 Convergence on e-commerce: the case of Argentina, Brazil and MERCOSUR Vera Thorstensen and Valentina Delich* Researchers: Fernanda Mascarenhas Marques, Giulia de Paola and Julian Rotenberg Abstract

E-commerce is growing rapidly in Argentina and Brazil, and in both countries the share of the population participating in e-commerce transactions exceeds the Latin American average. Both countries have established a legal framework for data protection, regulation of the internet, consumer protection, taxation of e-commerce, and contracts and e-signatures. Argentina and Brazil also have submitted proposals for negotiations over the treatment of e-commerce transactions in WTO Agreements, and included e-commerce provisions in free trade agreements (FTAs). However, different approaches to internal regulation of e-commerce and differences in positions in international negotiations indicate diverging regulatory approaches that will increase legal uncertainty and thus constrain investments and market expansion in the sector. An exception is the regulation of data protection, where both countries are following principles laid out in the European Union’s General Data Protection Regulation (GDPR). Further negotiations between the two countries over regulatory convergence for e-commerce could best be undertaken through the Southern Common Market (MERCOSUR).

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 234 CHAPTER 11

Introduction ones, such as MERCOSUR-European Union, and reinforcing the region by The World Trade Organization (WTO) converging with the Pacific Alliance. estimates that, in 2016, global e-commerce sales equalled around This chapter reviews the Argentinean US$ 27.7 billion a year (WTO, 2018a, and Brazilian e-commerce regulatory p. 21). Retail e-commerce is around frameworks both separately and as part 10 per cent of global retail and is of MERCOSUR. WTO initiatives on expected to continue growing at e-commerce negotiations are also double digit rates (SWS Consulting, discussed in order examine the 2018). Although there is already a set countries’ positions and contributions of agreed definitions of what at the multilateral level. However, the constitutes e-commerce, including main concern here is to introduce the its types, main characteristics and challenges to enhance policy regulatory problems, and prospects of its coherence between the two countries. measurement, many different approaches are being taken towards In order to address those issues, this its regulation. In fact, e-commerce chapter examines: (i) the B2C retail challenges both domestic and market for Argentina and Brazil; (ii) both international rules, and it touches countries’ main regulatory frameworks different legal dimensions such as data for e-commerce; (iii) both countries’ protection, taxation and intellectual proposals at the multilateral debate, property, among others. more specifically, internally in the WTO space; (iv) an overview of At the multilateral level, key issues MERCOSUR’s approach towards under negotiation include e-signatures, ongoing FTA negotiations; and, finally, (free) flow of data across borders, (v) the prospects and challenges source code disclosure and the destiny Argentina and Brazil share in improving of the moratorium on e-commerce the regulatory environment in order to customs duties. Different questions strengthen e-commerce. have emerged and challenged policymakers: should countries have Characterizing the retail the flexibility to restrict cross-border e-markets in Argentina and Brazil data flows? Should the protection of E-commerce transactions can occur national security and privacy justify either as business-to-business (B2B), exceptions to the free flow of data? business-to-consumer (B2C), To what extent could a country consumer-to-consumer (C2C) command or interfere in services or consumer-to-business (C2B). provided by local servers? Examples of B2C companies include Amazon, Dell, Intel and Mercado In Latin America, Argentina and Brazil Libre. Benefits of B2C e-commerce are in a process of intense transactions include better customer socioeconomic policy transformation service and pricing flexibility, the both at the domestic and international removal of intermediaries, the levels. Accordingly, MERCOSUR is enhancement of companies’ reputation being reconfigured so as to open itself and the broader reach of the products. to negotiate new FTAs, such as Moreover, among the several modes MERCOSUR-Canada, revitalizing old used for e-commerce transactions,1 CHAPTER 11 235 it is relevant to distinguish between 35.2 million, or almost 80 per cent electronic transactions that occur of the population (Statista, 2019). completely through digital means By now, 54 per cent of all Brazilian and those that only rely on internet users have at least once bought digital intermediation. goods via online B2C platforms, while in Argentina, due to a higher internet Although Argentina and dissemination among Brazil have shown its population, this investments in different “E-commerce rate is 90 per cent modes of e-commerce (ABCOMM, 2018). transactions, B2C is still challenges both the most representative domestic and Both countries also category in both international have firms that are major countries’ markets. rules, and it players in the B2C In 2017, Brazil’s touches different e-commerce market. e-commerce sales The Argentina-based reached US$ 17.4 billion legal dimensions digital marketplace with 10 per cent annual such as data Mercado Libre is Latin growth while Argentina protection, America’s most popular achieved US$ 7.3 billion taxation and platform – with 56.3 with 35 per cent annual intellectual million unique desktop growth, amounting to visitors during May a gross domestic property, 2018. Amazon sites product (GDP) share among others.” took a distant second of 0.92 per cent and 1.1 place with 22.4 million per cent, respectively. visitors, followed by sites owned by Brazil-based B2W Increases in internet penetration have Digital (16.1 million) and Alibaba supported the strong growth of (11.8 million). eBay rounded out the top e-commerce in the two countries. five retail sites in Latin America, with Argentina has the highest rate of 9.5 million visitors (Ceurvels, 2018). constant internet users in Latin America (around 71 per cent of its Many e-commerce experts argue that population) and Brazil’s internet Mercado Libre’s success in Latin penetration is around 61 per cent, America relates to its know-how of compared to 59 per cent on average regional culture in a wide sense – in the region. In addition, both including business culture. Among Argentina and Brazil lead the table of possible explanations, Mercado Libre active paying customers or accounts “offers technological and commercial (Argentina, 38 per cent; Brazil 37, per solutions that address the distinctive cent) (Ecommerce Foundation, 2018).2 cultural and geographic challenges of operating an online-commerce In addition, the number of digital platform in Latin America” (Mercado buyers of goods and services in Brazil Libre, 2018) and also that it “knows was estimated at around 80 million in the idiosyncrasies of the culture, 2019, which represents 74 per cent of for now at least, this offers it a the Brazilian population. For Argentina, clear advantage over Amazon” the number for 2019 will be around (Duberstein, 2018). 236 CHAPTER 11

In turn, the Brazilian giant B2W group segments by order in Brazil for 2017 is the largest online retailer in Brazil were fashion and accessories (14.2 per and the sixth largest retailer in the cent), followed by health and cosmetics country. Operating in several (12 per cent) and household appliances different fields of e-commerce, the (10.8 per cent). However, the top- companies under its umbrella include selling segments by financial volume Americanas.com, Submarino and were telephones (21.2 per cent), Shoptime. In 2016, B2W increased its followed by household appliances gross merchandise value (GMV) by (19.3 per cent) and electronic devices 10.6 per cent to US$ 4.04 billion, an (10 per cent) (SBVC, 2018). increase of almost US$ 386,000 in absolute terms. Alone, B2W accounts In Argentina, CACE estimates that in for 26.2 per cent (B2W, 2017) of the 2018 the leading segments were entire Brazilian e-commerce market tickets and tourism (28 per cent) and (UNIDO, 2017). electronics (18 per cent). Measured by billing, the top five leading products It is important to highlight that, due were international air tickets, hotels, to emerging e-commerce markets in domestic air tickets, TV and tourism countries where a significant share of packages (CACE, 2018). the population does not own a credit card or even a bank account, Regulatory framework companies have developed alternative Functioning infrastructure services payment types. In Argentina and and an appropriate regulatory structure Mexico, some online retailers offer are important for the development of cash on delivery (COD) as an option, e-commerce. Relevant infrastructure while in Brazil, the boleto bancário (a services would encompass a structure printable, bar-coded invoice that can guaranteeing access to internet, be paid online or offline) plays a similar broadband quality, logistics (including role (UNIDO, 2017). customs and postal services) and payment systems. The regulatory The main payment method chosen by structure should include a framework Brazilian consumers in 2018 was credit of rules on e-contracts, taxation, and card, because they can take advantage consumer and data protection, among of instalment payments (Ebit, 2019). In other areas. This section explores Argentina, 77 per cent of payments are those topics that are relevant to made through credit cards, 18 per cent regulatory concerns. in cash, 1 per cent by debit cards and 4 per cent by other methods such as Contracts and e-signatures bank transfers and digital wallets. Provisional Measure no. 2,200-2/2001 Payment in multiple instalments is also created the Brazilian Public Key common in Argentina: 70 per cent of Infrastructure (ICP-Brasil) with the shoppers used an instalment plan in plan of ensuring legal recognition their last e-commerce purchase, of the authenticity, integrity and according to a 2018 CACE Report validity of electronic documents, as (Worldline, 2019). well as the performance of secure electronic commercial transactions. As for consumer tastes and habits in This is known as digital signature, B2C e-commerce, the top-selling once the authentication procedure CHAPTER 11 237 is done under ICP-Brasil accreditation sufficient when handwritten signatures chain and is based on ICP-Brasil are required by law, as long as they are method of certification. accompanied by a digital certificate permitted by a state-approved The Management Committee of certifying authority. ICP-Brasil is responsible for setting out the rules on the offering of At the MERCOSUR level, Resolution electronic certification services. GMC no. 22/2004 created a digital Documents issued using certificates signature for certifying copies of approved by ICP-Brasil are presumed documents issued by MERCOSUR’s authentic and true, unless proved secretariat. MERCOSUR Resolution otherwise. However, documents GMC no. 34/2006 established certified by other means, or not guidelines for mutual recognition certified, are still valid, but they are agreements on digital signature among not presumed authentic. members. In addition, MERCOSUR Resolution GMC no. 37/2006 provides In Argentina, the Civil and Commercial that electronic documents, electronic Code (CCC) regulates contracts and signatures and advanced electronic acknowledges the possibility of using signatures in MERCOSUR documents digital means to create and sign them. are admitted with the same effect as Both electronic and digital signatures signed hard copies. Finally, according are regulated through the Digital to Decision 11/19, MERCOSUR Signature Law (DSL), Law no. members will have mutual recognition 25,506/2001. of digital certificates, including tax, customs and contract documents. The Law defines two forms of However, Decision 11/19 has not signatures. First, there are entered into force since it requires at e-signatures, understood as a set of least two National Parliaments to ratify data linked with other electronic data it, which has not happened yet. used by signatories to prove their identity. However, an e-signature Taxation does not have the enforceability of In Argentina, importers of goods and a signed document, as it lacks the services must pay the same local taxes requirements to be recognized as a that are levied on nationals. Such digital signature. Therefore, anyone payment is due at the time of the goods who is questioned about the validity and services’ “entry into the country for of an electronically signed document consumption”, where the value added bears the burden of proving its tax (VAT) must be paid, which does not authenticity. Second, the Law defines amount to a customs duty. digital signatures as the result of the application of a mathematical Accordingly, Argentinean Law procedure that requires information 27,430/2017 establishes the application known only to the signatory. A digital of VAT on digital services when they signature must be verified by a third are used or exploited in the territory party, including administrative of Argentina, which is proved by the authorities, and has a stricter legal existence of: (i) the IP address of the framework under the DSL. Unlike with device used by the customer or SIM e-signatures, digital signatures are card country code; (ii) the billing 238 CHAPTER 11

address of the customer; or (iii) the Services (ICMS)), while services are bank account used for the payment taxed at the municipal level (Tax on and the billing address of the customer Services (ISS)). provided by the bank or by the financial institution that issues the credit or debit There is also an Integrated System for card with which the payment is done. Payment of Taxes and Contributions of Micro and Small Companies (Simples It is noteworthy that, between 2004 Nacional), which is an optional tax and 2019, the software industry in system that collects simultaneously Argentina had a special tax regime for municipal, state and federal taxes. It is national direct taxes: it allowed a simpler and lower tax rate system companies to apply a percentage of calculated on gross revenues. the employers’ legal contributions to the payment of national taxes and also According to the United Nations to reduce the income tax due every Industrial Development Organization fiscal year up to 60 per cent (Law (UNIDO), taxes are among the most 25,922/2004). At a national level, complex and challenging issues to however, fiscal incentives for resolve in Brazil: they are high and e-commerce, which also include numerous, significantly increasing incentives for software but are not firms’ overall costs. Duties, taxes and limited to it, are modest; they equal fees can double the original price of a only 0.0021 per cent of Argentina’s product, and can vary considerably GDP and remain much smaller than depending on product category. other fiscal incentives, for instance, It is estimated that when opening those for small and medium-sized a company, entrepreneurs pay enterprises (SMEs) (0.026 per cent of 67 per cent of their profit in tax the GDP) (CESSI Argentina, 2018, p. (EOS Intelligence, 2013). 6). In respect to tax services’ exports, in January 2019 and for two years, a Consumer protection general tax at 12 per cent on services’ exports. As for SMEs, they are Argentina and Brazil have an exempted if their exports are less than extensive patchwork regulation system US$ 600,000 per year (and if they protecting consumers’ rights. Both export more than US$ 600,000 a year countries have a federal law they pay 12 per cent over only what addressing consumers’ rights: the exceeds US$ 600,000). The norm Code of Consumer Defense (BCCD) considers services exports any service in Brazil and the Law of Consumer done in Argentina and onerous that is Defense (LDC) in Argentina. These used and/or consumed abroad laws mainly regulate consumer (Decree 1201/18, article 3). protection, standards of conduct, fair practices of information disclosure, In Brazil, the tax on e-commerce goods penalties and liabilities. differs from the tax on e-commerce services. For goods, it is a state-level Under both Argentinean and tax (Tax on Operations related to the Brazilian laws, the relationship Circulation of Goods and Services between supplier and consumer of Interstate and Inter-Municipal is considered uneven due to the Transportation and Communication asymmetry of the product or service CHAPTER 11 239 provided, which places the consumer damage caused and the action or in a disadvantaged position in omission of the supplier. And if the comparison with the supplier. damage was caused by several suppliers, all of them are considered It is important to highlight that, although liable. A strict liability regime both countries have extensive laws rebalances the legal relationship protecting consumers, these laws do between consumers and suppliers. not have specific rules for e-commerce. Rather, the rules Finally, the regime of consumer governing e-commerce are framed in protection was harmonized through the same way as the rules governing MERCOSUR after its members door-to-door sales. In Brazil, this can adopted: (i) Resolution no. 21/04 cause insecurity for entrepreneurs, addressing consumers’ rights to since legal discomfort may arise from information in commercial transactions BCCD rules in case of made through the bad faith of consumers internet; (ii) Resolution and regarding the right “Functioning no. 104/05 providing of return within seven infrastructure that infringements days of receipt. In occurring in internet- Argentina, “in theory, services and derived transactions the same protections an appropriate will be addressed in apply to consumers on regulatory accordance with the the electronic market; structure are Consumer Protection however, in practice, important for Law; (iii) Resolution the protections can no. 45/06 addressing be difficult to enforce. the development consumer protection In e-commerce, of e-commerce.” and deceptive transactions are often advertising; and (iv) fast-paced, increasing Resolution no. 10/96 the possibility of deception. Issues on the international jurisdiction in also arise in regard to the formulation cases involving consumer relations. of contracts and what constitutes a legally enforceable agreement” (Stile Internet regulatory and Fernandez, 2016). framework

In terms of liability, Argentina and Both Argentina and Brazil have Brazil apply strict liability when the enacted regulations on civil rights on buyer is the end-user or consumer. the internet. The Brazilian Civil Rights Argentina’s LDC establishes that, Framework for the Internet (Marco when damages arise from a risk or a Civil da Internet, in Portuguese), defect of products or services, strict Federal Law no. 12,965/2016, sets and joint liability of the whole supply the main rules governing net neutrality, chain – including anyone using a privacy, freedom of expression and brand or trademark of the product or providers’ civil liability. service – shall apply. Similarly, Brazilian law establishes that the Argentina’s Digital Law, Federal Law consumer shall demonstrate only the no. 27,078/2014 (Ley Argentina Digital, cause-effect relation between the in Spanish), regulates mostly net 240 CHAPTER 11

neutrality and privacy. In Argentina, measures restricting net neutrality in freedom of expression is defined in the cases of emergency services can Constitution as “to publish ideas in the occur to guarantee communication press, without prior censorship” with among and with emergency service the status of a fundamental right. providers, and when necessary to However, Decree no. 1,279/1997 communicate to the population in case extended the meaning of “press” of a disaster, emergency or public to the internet as well. calamity. In these scenarios, communication must be free of charge. The Digital Law guarantees each user the right to access, use, send, Both in Argentina and Brazil a receive or offer any content, provider may be held responsible application, service or protocol through and may have to take down specific the web without any restriction, content if, after receiving a specific discrimination, blockage or court order, it does not remove the interference. Information and content (within its technical capabilities) communications technology (ICT) by a set deadline. In such cases, the service providers cannot block or provider will be liable for damages. restrict the use, sending or reception In Brazil, in the case of unauthorized of any content in the transmission of content containing nudity or sex of a information (traffic shaping), except in private nature, the content is subject the event of judicial order. Internet only to a notice and takedown service providers (ISPs) cannot set procedure, not necessarily requiring prices on internet access based on the judicial order. content or services to be used or restrict, by their own will, the user’s Data protection right to use any software or hardware Argentina and Brazil are taking steps to access the internet. Jurisprudence to adapt their regulations to a data has built case law with respect to protection framework inspired by the cases in which the intermediary service European Union’s GDPR. While Brazil providers must retire uploaded content has only recently created a framework without judiciary intervention, e.g. for data protection, Argentina launched removing child pornography. its first law for processing personal data in 2000 (Law no. 25,326/2000, In Brazil, there are only two legal Personal Data Protection Law (PDPL)). exceptions in which ISPs are authorized to treat data packets In Brazil, “Lei Geral de Proteção de differently over the internet: (i) where Dados” (LGPD), the country’s general technical requirements are essential to data protection law, establishes rules the adequate provision of services and on: (i) the legal bases for processing applications; and (ii) for emergency personal data, sensitive personal data services. Technical requirements are and children and teens’ personal data; understood as measures seeking to (ii) termination of data subjects; (iii) address internet security issues, such data subject rights; (iv) processing of as restricting sending massive amounts personal data by public authorities; (v) of messages (spam), stopping denial of accountability; (vi) international transfer service attacks and addressing of data; (vii) security and secrecy of network congestion. Possible data; (viii) good practice and CHAPTER 11 241 governance; (ix) administrative use of the data or for non-compliance sanctions; and (x) other more specific with the law. In this regard, the clear rules regulating these topics. The Law definition of the roles played by the has a multi-sectoral application for the controller and the processor under private and public sectors. contractual terms is paramount to set the limits of liability. In addition, when LGPD and PDPL reflect a broad no violations of LGPD are found, the concept of personal data, comprising liability of the processor may be limited the information related to an identified to its contractual and information or identifiable individual. Moreover, the security obligations. concept of sensitive personal data is defined in both countries as a specific The role of the Brazilian Data individual’s data about racial or ethnic Protection Authority (ANPD), created origin, religious belief, public opinion, by Provisional Measure no. 869/2018, union affiliation, philosophical or is to ensure the protection of personal political organizations, and health or data, by monitoring and applying sex life, as well as an individual’s sanctions when facing a violation of genetic or biometric data. LGPD, and requesting information, whenever necessary, from the Accordingly, both countries controllers and processors who carry established basic rights that provide: out personal data-processing (i) the right to access and rectify operations. To the same extent, personal data; (ii) the right to amend, Argentina’s Agency of Access to delete or cancel provided personal Public Information, created by Decree data; (iii) the right to oppose data no. 746/2017, functions with autonomy processing; and (iv) the right to under the President’s Chief of Staff information and explanation about Office. If data is obtained or a particular use of personal data. transferred inconsistently with PDPL, The LGPD, as well as the bill in database controllers and processors discussion in the Argentinean may face sanctions, including Congress, goes further by specifying warnings, suspensions, fines, or the right to data portability, which closure or cancellation of the file, allows not only the right to request a register or database, without prejudice copy of one’s data, but also to have to any applicable civil or criminal the data provided in an interoperable liability. Moreover, the bill in discussion format, which aims to facilitate the in the Argentinean Congress includes transfer of that data to other services, requirements for notification of even to competitors’ services. mandatory non-compliance.

With regard to the liability regime in Argentina’s Congress is considering Brazil, the “controller” (legal person legislation to: (i) limit the concept of responsible for the decisions on how “data subject” to natural persons only data should be processed) and the by excluding legal entities, and revise “processor” (legal or natural person and refine the concepts of “database”, responsible for processing data under “personal data” and “sensitive data”; the controller’s instructions) can be (ii) include accountability obligations jointly liable for information security and remove the database registration incidents, improper and unauthorized requirement; (iii) acknowledge the right 242 CHAPTER 11

to be forgotten and of data portability; transfer of data, e-signatures, (iv) develop rules for sensitive data, consumer protection, unsolicited background checks and minors’ commercial messages, ISPs and consent, which are more extensive platforms’ liabilities. The main areas than for other data; (v) establish a duty of disagreement concern market of notification of data breaches and access (Canada, the European Union, require an impact analysis in cases Japan and the United States would where the data processor intends to like to widen the extent of the WTO treat data differently from its original Information Technology Agreement purpose; and (vi) determine the duty to (ITA) and deepen commitments on appoint a data protection officer in the services, telecom and financial case of sensitive data being processed services) and the moratorium issue as a principal activity, for public (China, the European Union and the agencies or when big data activities United States would like to make it (such as data mining and data analytics permanent while India and South processes) are involved. Africa are concerned about the fiscal effect of such a moratorium). Argentina and Brazil at the multilateral debate Argentina and Brazil have engaged in the debate by submitting proposals to The discussions on e-commerce at the General Council and by participating the WTO started as early as 1998, in two collective proposals.6 with the creation of the Work Programme on Electronic Commerce In the Communication from Argentina, to examine all e-commerce-related Brazil and Paraguay (JOB/GC/115), issues. Although the Work Programme the three countries proposed rules on contributed to the consideration of e-signatures based on MERCOSUR e-commerce within the Organization, Resolution GMC 37/06. In a second discussions did not lead to the creation Joint Proposal, Argentina and Brazil of a WTO Agreement. As a result, (only) sought to enhance the e-commerce chapters were negotiated effectiveness of copyright rules in in some FTAs.3 the digital environment, focusing on: (i) transparency; (ii) jurisdiction; In 2017, at the 11th WTO Ministerial and (iii) the balance of rights and Conference, a group of WTO obligations. One main goal is to members agreed to initiate an improve transparency in order to exploratory work committee on reduce asymmetries of information negotiating an e-commerce between intermediaries and artists, agreement.4 In 2019, at the World bringing to light the rules used for Economic Forum, a Joint Statement calculation of royalties, notably as concluded by 76 members confirmed regards modes of exploitation, their intent to start negotiations with revenues generated and remuneration the participation of as many WTO due. To curb the practice of members as possible.5 international forum shopping to find the most favourable jurisdiction, the Most of the proposals are concerned countries proposed that jurisdiction be with custom duties, data protection determined based on the applicable and server localization, international legislation from where the content is CHAPTER 11 243 accessed. On the balance of rights Regarding electronic contracts, and obligations, it was proposed that electronic signatures and digital Article 13 (Limitations and Exceptions) certification, Brazil suggests that of the Agreement on Trade-Related these instruments should have their Aspects of Intellectual Property Rights legal effect founded on objective (TRIPS Agreement) should be methods of validation (which could extended to the digital environment. be done based on performance standards certified by authorities), Argentina was part of a collective thus preventing their legal effect from communication (with Colombia and being questioned solely due to their Costa Rica) that highlighted the electronic form. following topics: (i) regulatory issues, including the right to implement In terms of consumer protection, measures for the protection of the focus is on rules addressing individuals’ privacy and for the security the protection of consumers from and confidentiality of information; deceiving commercial practices, (ii) specific commitments in for which Brazil encourages the e-commerce-enabling use of alternative infrastructure sectors; dispute resolution and (iii) progress “The discussions mechanisms. In regarding the interests addition, consumers of developing countries on e-commerce should be able to avoid and LDCs in relation to at the WTO receiving unsolicited promoting connectivity started as early commercial messages, and bridging the digital as 1998, with the which means that divide (WTO, 2018b). creation of the electronic commercial messages should only Brazil, in turn, has Work Programme be sent upon consent. submitted four on Electronic documents covering Commerce.” Brazil also proposes more specific issues that relevant international related to digital trade.7 principles and First, Brazil proposed a definition guidelines should be the basis for of digital trade as “the production, a legal framework on data protection, distribution, marketing, sale or especially to guarantee that individuals delivery of goods and services are able to pursue remedies in case by electronic means”. On specific of violation of their personal data. issues, Brazil proposed the following topics: (i) electronic contracts, With respect to the cross-border electronic signatures and digital transfer of information through certification; (ii) unsolicited commercial electronic means, restrictions or communications; (iii) taxation; conditions on such transfer could be (iv) competition; (v) consumer adopted only when pursuing a protection; (vi) cross-border transfer legitimate policy objective. Although of information by electronic means; the definition of legitimate policy (vii) personal data protection; objective remains open, Brazil (viii) cybersecurity; (ix) copyrights; suggests a comprehensive list of and (x) jurisdiction. categories, such as measures 244 CHAPTER 11

involving: (i) protection of public morals e-signatures were adopted. Although or public order; (ii) prevention of the frequency of meetings has deceptive or fraudulent practices, or diminished over time, in 2017, SGT treatment regarding effects of a default 13 resumed proposing negotiations on online contracts; (iii) protection of for a future protocol, which would citizens’, consumers’ and medical encompass not only e-signatures patients’ privacy in relation to the and electronic authentication processing and dissemination of methods (previously regulated), but personal data and protection of also data localization, unsolicited confidentiality of individual records and electronic messages, data protection, accounts; (iv) ensuring safety; (v) transfer of data for commercial cybersecurity; and (vi) counteraction purposes and consumer protection. and prevention of terrorism and SGT 13 has not yet adopted such violations of criminal law. a Protocol.

Brazil also suggests that, in order to MERCOSUR has created the Group enforce national law, access to for the Digital Agenda to advance the information and data shall not be discussions on the digital economy denied based on the “lack of national and e-commerce that were initiated jurisdiction”. Finally, Brazil clarifies that by SGT 13. E-commerce needs to no customs duties shall be applied to be considered as a cross-cutting electronic transactions, but no issue, as it requires the constant limitations shall be adopted on the intervention and contribution of implementation of internal charges different ministries. The group also and fees by WTO members. recognizes the great interest of the private sector, setting an open MERCOSUR space for companies to contribute to the discussion. Although MERCOSUR does not have a common regulation on digital trade, In addition, in the dialogue between Resolution GMC no. 24/2001 created MERCOSUR and the Pacific Alliance, the Working Subgroup on Electronic a Joint Action Plan was signed. It Commerce (SGT 13). SGT 13 includes a Digital Agenda between determines priority issues to consider the two blocs, promoting the exchange for intraregional relations and for of information and good practices in external relations, particularly with, order to develop e-commerce within but not limited to, the European Union the region. and the WTO. Furthermore, MERCOSUR is SGT 13 met every year from its advocating an e-commerce chapter creation until 2010. It resumed in all its FTA negotiations, some meetings in 2017 and 2018. of which include clauses already Members achieved noteworthy included in the Pacific Alliance and results when they met three or four in the CPTPP. times a year. For instance, between 2004 and 2006, Resolutions on The MERCOSUR-EU Agreement, consumer access to information, which was concluded in 2019 but is efficacy of electronic contracts and not yet in force, includes a subsection CHAPTER 11 245 on e-commerce (Articles 42–51) with Finally, in terms of consumer definitions and some principles. protection, parties commit to adopt For instance, and taking into account or maintain measures that contribute that the moratorium is still being to consumer trust, including measures discussed at the multilateral level, that proscribe fraudulent and the Agreement establishes that neither deceptive commercial practices. party shall impose custom duties on Such measure shall, inter alia, electronic transmissions between a provide for: (i) the right of consumers person of one party and a person of to have clear and thorough information the other party (however, it does not regarding the service and its provider; preclude a party from imposing internal (ii) the obligation of traders to act taxes, fees or other charges on in good faith and abide by honest electronic transmissions, provided market practices, including in response that such taxes, fees or charges are to questions by consumers; (iii) a imposed in a manner consistent prohibition of charging consumers with this Agreement). for services not requested or for a period of time not authorized by the In addition, although it establishes consumer; and (iv) access to redress the principle of non-prior authorizations, for consumers to claim their rights, the Agreement provides that nothing including as regards their right to shall prevent a party from adopting or remedies for services paid and not maintaining measures inconsistent provided as agreed. with paragraph 1 to achieve a legitimate public policy objective in Conclusion accordance with: (i) its right to regulate (Article 1.4); (ii) general exception Argentina and Brazil have embarked (Article 48); (iii) security exceptions on a reform process of both domestic (Article 49); and (iv) prudential and international regulatory policies. carve-outs (Article 36). As already mentioned, e-commerce Furthermore the Agreement foresees has been subject of discussion in the obligation to ensure that contracts MERCOSUR SGT 13. However, the can be concluded by electronic results are disappointing in terms of means, that no party could deny regulatory practices or regulatory the legal effect and admissibility as convergence in this sector, confined evidence in legal proceedings of an to a few initiatives and documents electronic signature and electronic on e-signatures and consumer authentication service solely on the protection. In order to promote and basis that the service is in electronic enhance regulatory convergence form, that all parties shall endeavour among its MERCOSUR members, to protect end-users effectively parties initially should recognize against unsolicited direct marketing that MERCOSUR can offer the communications (but firms are allowed structure necessary to expand to send direct marketing communications digital trade regulations in the if they have consumer’s contact region to issues such as data details in the context of the sale protection, data transfer, ISP of a product or service for their liabilities, intellectual property own similar products or services). and domain name disputes. 246 CHAPTER 11

In addition, Argentina and Brazil have have made joint efforts to achieve this presented separated contributions to regulatory outcome. the debate at the WTO, which reveals a lack of regional coordination on The build-up of individual practices and e-commerce regulatory initiatives, regulations for e-commerce by the two hindering regional businesses countries reveals a lack of cooperation development and limiting foreign in this field, which will constrain and domestic investment in a sector investments and market expansion. that has kept growing. Companies (and small companies particularly) require legal certainty, Furthermore, Argentina and Brazil for example, on what happens with have adopted different approaches intellectual property on the internet, internally, which creates a gap in terms intermediaries’ responsibility, taxes of regulatory convergence between the and data protection. In the end, two. For example, Brazil has already however, convergence may occur included specific rules related to thanks to FTAs, such as the freedom of expression and the internet MERCOSUR-EU Agreement that service provider’s civil liability in its obligated MERCOSUR members to regulation, while Argentina is still determine their common legal “floor” moving towards that. On net neutrality, and take new regulatory commitments. Argentina and Brazil allow different types of exceptions: while in Brazil The voluntary and purposeful discrimination is possible when some integration of Brazilian and Argentinean condition previously predicted is regulatory norms would send a found, in Argentina it can only occur signal to investors across the globe. with a judicial order. E-commerce is not only about physical infrastructure (internet connection and On data protection, Brazil recently the like) but also about legal passed a data protection law similar infrastructure, which is critical for both to the European Union’s GDPR, while companies and consumers. Reaching Argentina passed a data protection law a cooperation agreement to regulate in 2000 and currently has a draft bill e-commerce activities and related submitted to Congress, also inspired services between the two countries by the EU law. It appears that steps would also reduce costs faced by towards convergence on this topic is companies and consumers. due to the influence of the GDPR, and MERCOSUR still seems to be the best not necessarily because both countries institutional option to put this forward. CHAPTER 11 247

Endnotes Electronic Commerce, Communication from Brazil, dated 30 October 2018, INF/ 1 The “5-Modes” classification is explored ECOM/17, first circulated as JOB/GC/203; in Ciurak and Ptashkina (2018). Work Programme on Electronic Commerce, Non-Paper from Brazil, dated 20 July 2016, 2 These percentages are about constant JOB/GC/98. internet users compared to the general population and the percentage of active References paying consumers. ABCOMM (2018), Interview for Ecommerce 3 These include bilateral agreements signed Foundation, CACE, “Estudio Anual de by the United States with other countries Comercio Electrónico”. and regional agreements such as TPP, CPTPP and USMCA. Cámara Argentina de Comercio Electrónico (CACE) (2018), “Durante el Primer semester 4 Document circulated as Work Programme el e-commerce en Argentina creció um 66% on Electronic Commerce, Draft Ministerial más que el mismo período del año anterior”. Decision of 13 December 2017, WT/ https://www.cace.org.ar/noticias-durante-el- MIN(17)/W/6. primer-semestre-el-ecommerce-en-argentina- crecio-un-66-mas-que-el-mismo-periodo-del- 5 Document circulated as Joint Statement on ano-anterior Electronic Commerce, dated 25 January 2019, WT/L/1056. Cessi Argentina (2018), La economía de la industria Argentina del Software. http:// 6 The Communication of Brazil and www.cessi.org.ar/comunicados/docs/ Argentina was first submitted by Brazil Reporte-ECONOMICO-Fundacion-FIEL- as JOB/IP/19. In the revision submission CESSI.pdf (namely, INF/ECOM/16/Rev.1, first circulated as Joint Statement on Electronic Ceurvels, M. (2018), Latin America Commerce: Electronic Commerce and Ecommerce 2018 Digital Buyer Trends for Copyright, Communication from Brazil Argentina, Brazil and Mexico. https://www. and Argentina, dated 24 September 2018, emarketer.com/content/latin-america- JOB/GC/200/Rev.1), Argentina joined as ecommerce-2018 co-sponsor. The Communication from Argentina, Brazil and Paraguay was Ciurak, D. and Ptashkina, M. (2018), The circulated as WTO Work Programme Digital Transformation and the Transformation on Electronic Commerce: Electronic of International Trade, RTA Exchange, Signatures, Communication from Geneva: ICTSD and IDB. Argentina, Brazil and Paraguay, dated 21 December 2016, JOB/GC/115. Duberstein, B. (2018), “Better e-commerce buy: JD.com or MercadoLibre?”, The Motley 7 Those documents include: Joint Statement Fool. https://www.fool.com/ on Electronic Commerce, Communication investing/2018/02/06/better-e-commerce- from Brazil, dated 30 April 2019, INF/ buy-jdcom-vs-mercadolibre.aspx ECOM/27; Exploratory Work on Electronic Commerce, Non-Paper from Brazil, dated Ebit (2019), Webshoppers Report, 37th 11 April 2018, INF/ECOM/3, first circulated Edition. http://abcasa.org.br/webshoppers/ as JOB/GC/176; Joint Statement on Webshoppers_37.pdf 248 CHAPTER 11

Ecommerce Foundation (2018), LATAM millions), March 2019. https://www.statista. E-commerce Report 2018. com/statistics/251660/ e-commerce-users- in-argentina/ EOS Intelligence (2013), E-commerce in Brazil – Marred by Political and Social Stile, E. and Fernandez, D. (2016), Influences. https://www.eos-intelligence. “Argentina”, in The Internet: Laws and com/perspectives/consumer-goods-retail/ Regulatory Regimes (2nd Edition). https:// e-commerce-in-brazil-marred-by-political- www.marval.com/archive/a_newsletters/ and-social influences/ doc/stile.pdf

Mercado Libre (2018), Sustainability Report. SWS Consulting (2018), E-commerce http://investor.mercadolibre.com/static-files/ Handbook 2018: LATAM Focus. https:// b4f4df6f-2daa-40a6-8502-ef37308b260b www.slideshare.net/AriDavidoff/ ecommerce-handbook-2018 Sociedade Brasileira de Varejo e Consumo (SBVC) (2018), Ranking E-Commerce United Nations Industrial Development 2018 Report. Organization (UNIDO) (2017), “Inclusive and Sustainable Industrial Development”, Working Statista (2019), Number of e-commerce Paper Series WP 14 | 2017, National Report users in Argentina from 2017 to 2023 (in on E-commerce Development in Brazil. CHAPTER 11 249

World Trade Organization (WTO) Joint Statement on Electronic Commerce, (2018a), Examen Estadístico del Comercio Communication from Argentina, Colombia Mundial, 2018. and Costa Rica, dated 5 April 2018, INF/ECOM/1. World Trade Organization (WTO) (2018b), WTO Negotiations on Trade-Related Aspects Worldline (2019), Argentina: Economy and of E-commerce: Elements of a Potential e-Commerce. https://onlinepayment Approach Under the Framework of the acceptance.worldline.com/market/argentina/

250 CHAPTER 11: COMMENTS

Comments

MARK WU*

In recent years, Latin America has calls to protect individual data, privacy become one of the fastest growing and human rights. Neither has markets in the world for e-commerce. engaged in crude forms of digital Argentina and Brazil, both members of protectionism to effectively close the Southern Common Market off their markets and build up national (MERCOSUR), are two of the region’s champions. Yet, while they have major engines driving the development championed openness, neither has of the regional digital economy. In fallen squarely in line with the liberal 2019, the two countries collectively digital trade initiatives advanced by accounted for more than half of the Australia, Japan, the United States region’s business-to-consumer and others. Nor have they ceded their (B2C) e-commerce.1 Even as their markets to American or Chinese governments change and their platforms. In short, both countries economies experience periodic have sought to engage digital trade slowdowns, both countries continue on their own terms. to march forward digitally. One recent ranking of the top global start-up At first glance, this gambit may hubs crowned São Paulo, Brazil, appear to be paying off. Mercado as the top city in Latin America, with Libre, based in Argentina, is the Buenos Aires, Argentina, featuring as region’s most popular e-commerce the only other Latin American city to site. In Brazil, homegrown B2W is rank among the top 50 worldwide.2 another leading e-commerce marketplace. Whereas e-commerce in But it is not just the remarkable much of the rest of the world is e-commerce revenue growth that dominated by the likes of Alibaba, has garnered the envy of other Amazon, eBay or one of their locally emerging economies. After all, as this backed companies, Argentina and volume highlights, e-commerce and Brazil have both proven that it is digital trade are expanding rapidly possible for governments to cultivate throughout the developing world. the right conditions for domestic Rather, it is the manner through which technology start-ups to acquire these two countries have managed to competitiveness in cross-border develop digital competitiveness that e-commerce and digital trade. has attracted the attention of others. Given their recent histories of In their chapter, Professors authoritarian rule, both countries have Thorstensen and Delich make three remained sensitive to civil society’s important contributions towards

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members.

CHAPTER 11: COMMENTS 251 helping us understand the development benefited from knowledge derived of e-commerce in Argentina and Brazil. through engagement with their They are worth highlighting, especially counterparts in advanced economies. for other developing countries. Third, although MERCOSUR First, they emphasize the importance constitutes a vital component of of robust regulatory reform. Both Argentina’s and Brazil’s trade and countries implemented a series of economic policies, neither turned to laws and regulatory frameworks to MERCOSUR as the key forum for facilitate online transactions. In so developing their policies. Instead, doing, they provided reassurances they pushed domestic regulatory to companies and consumers alike. reforms on their own terms, without What both sides of a transaction necessarily seeking regional require are certainty over rules harmonization. While this may have concerning nuts and bolts issues allowed government officials to operate such as taxation, digital signatures, more in accord with Silicon Valley’s use of personal data, mantra to “move fast returns, etc. Simply and break things”, investing in physical Professors Thorstensen infrastructure by laying “Argentina and and Delich express a cables and building Brazil have both valid concern that this cellular networks to proven that it lack of regional support e-commerce, is possible for coordination may hurt while a necessary both countries in the precondition, is governments longer run. In their insufficient. Governments to cultivate the closing paragraph, they must also invest in right conditions speculate that the lack adapting their laws and for domestic of a single digital market institutions to fit the technology start- in MERCOSUR will digital era. prevent regional firms ups to acquire from acquiring the Second, Professors competitiveness scale economies Thorstensen and Delich in cross-border necessary to become highlight the role of e-commerce and competitive globally. participation in external digital trade.” processes in influencing This raises the question internal developments. of whether Argentina Argentine and Brazilian and Brazil are bound policies are shaped through to continue as success stories. policymakers’ involvement in debates Certainly, unlike many other parts of in international organizations as Latin America, they have succeeded in well as through their negotiations creating e-commerce platforms and of free trade agreements (FTAs), technology ecosystems. Mercado most notably with the European Union. Libre and B2W are rightly celebrated As was true of their experiences in as examples of how homegrown firms other domains of global governance can beat out global giants by better (e.g. anti-corruption, WTO dispute catering to local needs. Despite settlement), Argentina and Brazil both these successes, however, are these 252 CHAPTER 11: COMMENTS

countries nevertheless teetering on Of course, the digital competition is the edge of the digital version of a just beginning. The vital lesson to be “middle income” trap? drawn from MERCOSUR, however, may well be the same one the region Indeed, there are worrying signs taught us in the late 20th century for that both countries may be losing industrial goods. In the end, investing in ground relative to other parts of the legal reform and active participation in developing world. Between 2014 and multilateral institutions can only get a 2019, Brazil dropped 26 spots in the developing country so far. In order to UNCTAD B2C E-commerce Index compete against advanced economies rankings to 74th place. Argentina and emerging Asian giants, developing declined even more, falling 36 spots countries elsewhere will need to invest to 85th place. Not only has China heavily in human capital, stabilize overtaken both countries, but so too macroeconomic conditions and achieve have India, Thailand and Viet Nam.3 regional scale economies. Whether Just as the industrial goods and Argentina, Brazil or MERCOSUR has electronics value chains eventually learned the lessons of its past remains gravitated towards Asia, the same to be seen. But the region must step up phenomenon may be also happening quickly if it is to remain competitive in a for digital. rapidly digitizing world. CHAPTER 11: COMMENTS 253

Endnotes 3 Compare UNCTAD, UNCTAD B2C E-commerce Index 2019, UNCTAD 1 The other major engine of e-commerce Technical Notes on ICT for Development growth is Mexico. For more details, see No. 14, pp. 7–10, available at: https:// Caroline Zepeda, The Thriving Brazilian unctad.org/en/PublicationsLibrary/tn_ E-Commerce Market, Contxto, available at: unctad_ict4d14_en.pdf with UNCTAD, https://www.contxto.com/en/technology/ Information Economy Report 2015, pp. the-thriving-brazilian-e-commerce-market/ 100-103, available at: https://unctad.org/ en/PublicationsLibrary/ier2015_en.pdf 2 See StartUp Blink Ecosystem Ranking Report 2019, available at: https://report. startupblink.com/ Chapter 12 The digital creative economy and trade: strategic options for developing countries

Keith Nurse*

* The contents of this chapter are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. Abstract

The creative sector is an important source of growth in the global economy, and digital creative trade has increased sharply in recent years and particularly in the context of COVID-19. Digital content is replacing physical goods in the sector, for example, in music, books and gaming. Digital aggregators like Amazon, Apple, Netflix, Spotify, TikTok and YouTube have fuelled rapid growth and diversified earnings towards streaming, ad-supported income and data monetization. Copyright revenues are also rising, and the share of digital collections is the fastest growth segment. Participation in the sector by developing countries appears to be increasing, although data availability is poor. To reap the potential benefits of the digital creative economy, developing countries should support a shift from the typical low value-added, stand-alone practitioner industry model to a strategic collaborative approach that facilitates higher levels of creative and digital entrepreneurship. This will require a stronger legal and institutional framework to improve leverage and monetize copyright, financial support for the commercialization of creative activities, government involvement in business support services (e.g. training, incubators, innovation labs, market incubators, cluster development and market development programmes), the creation of enabling institutions to represent the interests of creative workers and firms, and the harmonization of government policies towards the sector. 256 CHAPTER 12

Introduction income in sectors reliant on the movement or congregation of people This chapter is being (re)written during or artists (e.g. live events, festivals, the outbreak of the COVID-19 global cinemas, music tours). In this context, health pandemic, which has resulted in online cross-border activities (e.g. a significant loss of lives and music and film streaming) have grown livelihoods in addition to an rapidly with spectacular financial unprecedented impact on the global results for firms like Instagram, Netflix, economy with significant implications Spotify, TikTok and YouTube. The for developed and developing growth of digital platforms distributing countries from a trade and finance creative content has been on the rise perspective (Georgieva, 2020). To be for a decade at least (UNCTAD, clear, the global economy has been in 2018a). COVID-19 has accelerated the throes of a major transformation for this process to dramatic effect, thereby the last two decades or more, which highlighting the economic value of the can be explained as a Schumpeterian creative digital economy. process of creative destruction where declining sectors are disrupted by new The developmental effects of these and emerging business models and trends for content producers relative trade patterns (Nurse, 2012; Perez, to digital platforms, as well as between 2004). The impact of COVID-19 has developed and developing countries, been to accelerate the processes of are critical issues from a trade digital globalization and the growth of standpoint. In many respects, the online trade in services. A World Trade question is whether developing Organization (WTO) report on the countries and their creative impact of COVID-19 points out that: entrepreneurs have the capacity and the institutional support to tap The crisis is focusing greater into this growth and monetize trade attention on online supply in sectors in creative goods, services and such as retail, health, education, intellectual property (IP) in the telecommunications and audio-visual burgeoning digital arena. services, accelerating companies’ efforts to expand online operations, This chapter aims to examine the rise of and creating new consumer the digital creative economy in the behaviours that are likely to contribute contemporary context and provide an to a profound and long term shift assessment of the performance and towards online services. In the future, prospects for developing countries.1 the increased supply of services The chapter starts with a look of the key through digital networks can be digitalization trends and their expected to strongly impact trade, implications for the various subsectors. leading to increased supply through The chapter then utilizes data from the mode 1 (services supplied from one copyright arena as a basis to give some country to another). (WTO, 2020) insights into the unfolding regional patterns of production, consumption COVID-19 and the associated health and trade arising from the growth of the protocols and lockdowns have had a creative digital economy. The chapter tremendous impact on the creative concludes with a discussion of the economy with significant losses of requirements for industrial upgrading CHAPTER 12 257 and improving the participation of exports grew five-fold, experienced an developing countries in creative digital annual growth rate of 5 per cent over entrepreneurship and trade. the period with exports jumping from US$ 52.3 billion in 2002 to US$ 96.5 The rise of the digital billion in 2015. Data on creative creative economy services are only available for the developed economies, and the trends The creative sector encompasses indicate an average annual growth rate creative expressions, the arts and the of 4 per cent between 2011 and 2015 cultural or creative industries such as (UNCTAD, 2018b). design, fashion, music, publishing, audio-visual, animation, performing, It is estimated that outside of the visual and literary arts as well as top-producing economies, such as architecture, advertising, broadcasting China; Hong Kong, China; India; and gaming (UNDP and UNESCO, Malaysia; Mexico; the Philippines; 2013). From a trade perspective, the Singapore; Chinese Taipei; Thailand impact of the sector has widened over and Turkey, most developing countries time to generate what are net importers of can be best described cultural content as a transversal creative “Digital content (UNCTAD, 2018b). For economy (Howkins, instance, data on trade 2001) or an experience is replacing balances in cultural or economy (Pine and physical goods creative goods (the mode Gilmore, 1999), where in the sector, of trade for which the the role of the creative for example, most data are available) class (Florida, 2002) in music, books show that outside of the and the contribution of Asia region most other creative cities (Landry, and gaming.” developing-country 2000) have become regions have a negative critical for the global trade balance (see competitiveness of countries and Figure 1). This pattern is also evident in global cities as well as generating least-developed countries (LDCs), new sources of employment and landlocked developing countries entrepreneurship (Nurse and Ye, 2012). (LLDCs) and small island developing states (SIDS). This is a long-term Developing countries have contributed trend, and so the issue is whether to this process of growth through digitalization is a potential solution to increased capabilities in the production break through the traditional problems and export of creative content. This is of distribution, marketing and retail that in a context where global trade in have stymied growth in this sector. creative goods has been expanding with an average export growth rate of The digital creative economy and the more than 7 per cent. Estimates are trade associated with it is one of the that the value of the global market for fastest rising components of global trade creative goods doubled from US$ 208 and a key feature of competitiveness in billion in 2002 to US$ 509 billion in the era of digital globalization (McKinsey, 2015. Developing economies, 2016). Firms operating in the creative excluding China whose creative goods sector have been among the fastest 258 CHAPTER 12

Figure 1: Trade balance in cultural goods by region, 2017

US$ billion Source: UNCTAD, 2020.

adopters of online and digital will be their major beneficiaries” technologies, which have impacted (Maskus, 2018). their business models as well as the earnings from sales and exports (UIS, In the aftermath of the global 2016). In addition, digital creative economic depression of 2008, the content accounts for a significant creative sector outperformed most share of e-commerce as well as other sectors in part because of the content on mobile networks, the growth of the digital economy, where internet and blockchains. IP and trade in services expanded as a share of global value-added It is argued that “the economics (Masnick and Ho, 2012). This process behind digitally-delivered content is evident in the rise of the digital products, namely the high fixed costs creative economy, which has of initial production but negligible generated significant earnings for the marginal costs of duplicating and top media, entertainment and internet distributing digital copies on a global companies, as evidenced by the basis, make them ideal ‘tradeables’” fast-rising valuation of Facebook, (Wunsch-Vincent, 2006). Keith Maskus Amazon, Apple, Netflix, Google and also argues that “digital trade has Spotify (FAANGS) stocks. These the potential to be one of the most firms have helped to change the dynamic and innovative platforms for business models in the creative creative entrepreneurs and small economy towards an on-demand enterprises to develop international and online consumption framework. marketing networks and increase sales”. Maskus further argues that Digital transformations “countries and firms that are poised to build the electronic infrastructure One of the highest-earning and for such activities and facilitate fastest-growing sectors in the digital the development of e-commerce creative economy is the videogame markets and digital trade routes industry, which surpasses the CHAPTER 12 259 combined revenue of the film and Warner), TV networks (e.g. ABC music sectors. The gaming sector had and CBS), cable companies (e.g. a market value of US$ 134.9 billion in HBO and Viacom) and internet 2018, a 10.9 per cent increase over competitors (e.g. Amazon and Hulu). 2017. Approximately 47 per cent of revenue, or US$ 63.2 billion, came from The publishing industry has not been mobile, an increase of 12.8 per cent in spared either. Indeed, the growth of 2018. Smartphones accounted for Amazon as a titan in the contemporary US$ 50 billion of mobile videogaming global economy was ushered in by the (up 14.2 per cent in 2018), while tablets online sale and distribution of books. accounted for US$ 11.4 billion (up 7.8 Amazon also pioneered with the per cent). The other key elements of introduction of Kindle, an e-book reader the gaming market were consoles (not device, which helped to catapult the including the hardware by companies sale of digitalized or e-books. The like Xbox, Nintendo, PS4, etc.), with digitalization process also has seen 28 per cent of the market share, and the growth of audiobooks as a major PCs with 25 per cent. The data for the segment of the new digital publishing gaming sector illustrate that the creative market. Data from the United States sector is not just going digital, it is indicate that 2017 was the first year increasingly dominated by consumption that digital book income and physical on apps embedded in mobile devices book sales were approximately equal (Batchelor, 2019). at US$ 7.6 billion and US$ 7.5 billion, respectively (Anderson, 2018b). In Another key example of the shifts contrast, the publishing industry in taking place in the digital creative the United Kingdom had revenues economy is the growth of consumption equal to US$ 7.4 billion in 2017 (of of over-the-top (OTT) technologies, which exports accounted for 60 per where consumers are able to access cent) and has experienced a slower content via the internet without rate of digitalization as it is still subscribing to traditional cable or dominated by physical sales, with satellite pay-TV services. The prime digital accounting on average for example of this growth is Netflix, which 15 per cent of total exports in the in 2018 was estimated to have 118 last five years (Anderson, 2018a). million subscribers in 190 countries and produced content in 21 languages. What has happened to the audio-visual An associated trend with the rise of and publishing sectors is even more OTT content suppliers is the ways in rampant and advanced in the music which these firms are able to supplant industry, which was one of the first traditional content producers and flog sectors to experience digital disruption. their own branded original content and Spotify, for instance, along with key in turn link directly with independent players like Apple Music, Deezer, producers. For instance, Netflix is Pandora, Tencent, Vevo and YouTube, estimated to have spent US$ 8 billion has dramatically shifted the moorings in 2018 for the acquisition of original of the industry from the analogue content (700 projects including 80 world of bricks and mortar into the new original films) and thus would have dematerialized context of outspent all the major movie studios platformization with downloads, (e.g. Comcast, Disney and Time and increasingly streaming. 260 CHAPTER 12

Enter COVID-19! Another example is that of TikTok, the karaoke video app launched by the The creative economy has been heavily Chinese company ByteDance, which impacted by the health protocols of earned US$ 17 billion in 2019 and social distancing and travel restrictions surpassed YouTube earnings. In the but it has been a double-edge sword. first quarter of 2020, TikTok had 315 Live and events-oriented activities million downloads to achieve the such as theatre, concerts, music tours accolade of the highest number of and festivals that involve mode II installs of any app in a quarter consumption abroad and mode IV (Chapple, 2020). In the COVID movement of natural persons have lockdown context, app downloads have been brought to a screeching halt. ballooned even further to dominate the On the other hand, digital and online download charts for both iOS and trade in services (i.e. mode I – cross- Android devices. TikTok has recently border) has grown dramatically as been valued at somewhere between more and more consumers and US$ 100 billion and US$ 140 billion, content creators shift to digital making it the most valuable company in platforms. A good example is the the creative sector and the highest- Verzuz face-off battles among top valued start-up ever (Chen et al., 2020). US hip-hop and Jamaican dancehall musical artists on Instagram Live A counter example is LiveNation, the that have attracted large online parent of Ticketmaster, which has lost audiences. It has helped artists to an estimated 40 per cent of its value in boost their digital footprint, expand the COVID context. The company has online sales of merchandise and been forced to reschedule, cancel and generate increased music streams refund patrons for close to 20,000 (Billboard, 2020; Anderson, 2020). upcoming events for the period stretching from 1 March 2020 to the The impact of COVID-19 has also been end of the year (Bylund, 2020). felt in the film sector. Indian filmmakers from Bollywood have moved more of With live events being put on the their content online as earnings from backburner, artists have been forced theatrical releases and live audiences to conjure up alternatives. One such at the cinema have collapsed due to example is how the gaming industry the lockdown (Rashid, 2020). and the music industry are converging Estimates are that the industry has lost in the context of COVID-19. Take the over US$ 330 million in the first quarter example of Travis Scott, the UK rapper, of 2020 from the reduction in domestic who teamed up with Fortnite, the box office sales, overseas releases in videogame released by Epic Games in markets like the United Kingdom, the 2017, to put on a concert inside of the United States and the Gulf region videogame. Twelve million subscribers (which normally account for 30–40 tuned in to the live event. Analysts per cent of earnings) and from argue that embedding live events collections from television and music inside of a videogame has huge rights. The industry has also been growth prospects. impacted by the delays in filming due to social distancing requirements (Jha, It has become a digitised plane 2020; Rawal Kukreja, 2020). where the planet’s biggest brands, CHAPTER 12 261

bands and filmmakers can hold a recording industry revenues captive audience of millions – and plummeted in the early 2000s and right now that’s more attractive than continued a steady decline until 2014. ever. (White, 2020) Even with a significant rebound, the revenues in It is still early days to “Estimates are 2019, which are assess how online that the value of estimated at US$ 20.2 services or cross- the global market billion, still have not border trade would surpassed the earnings impact the prospects for creative in 2004 of US$ 20.5 for the industry going goods doubled billion. However, what forward especially in an from US$ 208 the data show is the environment where billion in 2002 to rapid rise of digital live events are affected US$ 509 billion revenue with music by COVID-19 health streaming being the key protocols. What is in 2015.” driver of growth. The clear is that there is year 2016 is considered going to be increased an inflection year innovation and disruption of the sector because it is the first time that digital in the coming years linked in part to revenue accounted for more than half the pandemic. of total revenue. By 2019 digital revenue accounted for 64 per cent of The digital total revenues, and music streaming music industry contributed 56 per cent on its own (IFPI, 2020). The music industry offers a good case study of the impact of the A closer examination of the data digital economy on the creative sector reveals that at the end of 2019 given the experience of the global streaming revenues accounted for recorded music sector. As Figure 2 56.1 per cent of the global recorded shows, the sector has lost significant music market with subscription audio revenue due to digitalization. Global streaming at 42 per cent of total

Figure 2: Global recorded music revenues, 2004-2019

Source: IFPI, 2020. 262 CHAPTER 12

Figure 3: Global music revenues industry published by the CITI segments, 2019 investment bankers in 2018, it was noted that spending by consumers was on the increase and diversifying with the growth of multiple avenues and platforms for consumption and that the earnings of creators had crept up from a low base. The report argues that the live events business is the main growth area for artists and not streaming or subscription-based income.

Artists’ share of music revenues is small. In 2017, artists captured just 12% of music revenue with most of 51.1% Streaming the value leakage driven by the costs 21.6% Physical format sales of running a myriad of distribution 12.6% Performing rights 7.2% Downloads & other platforms – AM/FM radio, satellite 2.4% Synchronization income radio, Internet distributors – augmented by the costs (and profits) Source: IFPI, 2020. of the record labels. The proportion captured by artists is, however, on the rise (it was just 7% of industry revenues in 2000). The bulk of the revenues and ad-supported streams improvement is not driven by the contributing 14.1 per cent (see growth in music subscription Figure 3). Downloads and other services. Rather, it’s driven by the digital revenues were 7.2 per cent, thus strength in the concert business. making overall digital revenue 63.3 per (CITI GPS, 2018) cent of total revenues in the sector. Physical format sales continue to This assessment of where the value- decline and contributes 21.6 per cent added is for creators is a critical one followed by performing rights income in the context of COVID where the (12.6 per cent) and synchronization concert business may take a long time revenue at 2.4 per cent (IFPI, 2020). to recover if at all. This means that creators will have to rely more on One of the key concerns that has earnings related to digitalization. Given emerged from the growth of the digital that the dominant position of online music context is the relative disparity in platforms in the distribution of digital remuneration for rights holders such as music has a major influence on the authors, composers, publishers and commercial use of creative content, artists generally. This is an issue that it is important to understand the goes beyond the digitalization issue in structural limitations affecting the that the conventional music industry distribution of income in the digital structure has a high level of value music sector. leakage to intermediaries resulting in low shares of the value-added for The operations of the digital music creators. In a report on the US music industry and the role of online CHAPTER 12 263 platforms are such that they are able to subscribers (e.g. Napster and Tidal) employ “safe harbours” exceptions, for have significantly higher payout rates, example, in the US Digital Millennium whereas middle-tier services like Copyright Act of 1998 (that implements Amazon, Apple Music, Deezer, Google two 1996 treaties of the World Play and Spotify require between Intellectual Property Organization), 200,000 to 360,000 streams to meet which limit the copyright-infringement the monthly minimum wage threshold liability of online service providers. of US$ 1,472. YouTube is at the other This problem is particularly evident end of the spectrum with over 2 million on online content-sharing service streams to earn the monthly minimum providers that distribute mostly wage, which is out of the reach of most user-generated and user-uploaded artists or creators. The payout rates in content and videos. For instance, the emerging markets are also at the lower YouTube business model is based end (e.g. Jiosaavn in India), and in upon user uploads, which are some instances even lower than distributed via curated playlists and YouTube (e.g. Tencent QQ in China).2 recommended tracks to its users who access the content for free. It then The streaming service business is very monetizes the content through complex in that it is diversified by advertising placements and the sale service provider and market with of users’ data. several factors, such as where the content originates and what payout Table 1 provides data on the payout pool it is monetized under. For rates of the top streaming services, and instance, Spotify has a premium it estimates how many streams would subscriber rate and a freemium be required to achieve the monthly ad-supported rate. These rates are minimum wage in the United States. differentiated by market. The premium What it shows is that the streaming subscription rate for customers in services with the lowest number of the United States was US$ 9.99 per

Table 1: Top streaming services and payout rates

Average payout # of streams # of streams to earn Streaming service per stream to earn $US 1 minimum wage* Napster $0.019 53 77,474 Tidal $0.0125 80 117,760 Apple Music $0.00735 136 200,272 Google Play Music $0.00676 147 217,751 Deezer $0.0064 156 230,000 Spotify $0.00437 229 336,842 Amazon $0.00402 249 366,169 Pandora** $0.00133 752 1,106,767 YouTube $0.00069 1,449 2,133,333

Source: Routley (2019). * Monthly minimum wage of US $1,472 **Premium tier 264 CHAPTER 12

month, whereas in India it was are not liable for the music they make US$ 1.70 to compete with local rivals. available to the public. Today, The payout is also shared among services such as YouTube, which labels, the copyright owners or have developed sophisticated publishers, and the authors or on-demand music platforms, use songwriters.3 this as a shield to avoid licensing music on fair terms like other As such, simplistic conclusions are digital services, claiming they difficult to make about the earnings are not legally responsible for the and profits structure in the industry. music they distribute on their site. For example, Spotify’s 2019 earnings (IFPI, 2017, p. 25) were EUR 6.8 billion, a robust growth rate of 28.6 per cent, matching the The EU Copyright Directive is aimed 2018 rate, which had been the at addressing these concerns and has company’s slowest over the past the objective of creating an orderly four years. Spotify made a relatively marketplace for copyright in the digital small net loss of EUR 186 million arena. In particular, Article 17 focusses (Johnston, 2020). on the “use of protected content by online content-sharing service The key observation is that the share of providers” and seeks to redress the income going to content creators is imbalance between rightsholders and relatively small when compared with the digital platforms. Article 18 goes the revenue earnings of music further to call for authors and platforms like Apple Music and Spotify. performers to receive appropriate The issue is defined as the “value gap”, and proportionate remuneration.4 and it is viewed as “a mismatch The EU press release argues that between the value that online user the goals of the directive are to upload services, such as YouTube, “strike the right balance between extract from music and the revenue the remuneration received by authors returned to the music community” and performers and the profits made (IFPI, 2017, p. 25). More broadly, it is by internet platforms when they make defined by Music Canada as “the gulf their works accessible”. It also between the revenues derived by “encourages collaboration between online platforms, broadcasters and online content sharing service other third parties from the commercial providers and rightsholders” by use of creative content (such as music, requiring internet service providers books, news, TV shows and movies), to obtain authorization from and the revenues returned to the rightsholders, particularly “upon artists, journalists and businesses notification by rightsholders of an who create it” (Music Canada, 2019). unauthorised protected work” thereby IFPI, the recording industry requiring online service providers to organization, argues that the source take “urgent steps to remove the work of the problem is structural and based and prevent it from becoming available in copyright regulations: in future” (Council of the European Union, 2018). Inconsistent applications of online liability laws have emboldened It is still early days to assess the certain services to claim that they impact of the EU Copyright Directive CHAPTER 12 265 and whether the core principles provides that most appropriate case will proliferate in other jurisdictions. study. A significant and rising share What is evident though is that the of this growth comes from the pivot digital music industry and the towards the digital economy with wider digital creative economy are collections from digital sources rising evolving and contested. How do over 50 per cent in 2016, which is an we determine the prospects for inflection year for the music industry developing economies? as digital revenue surpassed all other sources combined. Digital income, Digital music and copyright which was estimated at EUR 1.6 billion in 2018, is one of the key drivers of Copyrights sustain incentives to global music collection, accounting for invest in creativity and build markets, 17 per cent of total collections up from particularly important in digital 15 per cent the year before (CISAC content. They facilitate contracts 2019). It is also noteworthy that digital in which various music revenues have contributors to creative increased by 185 per digital products and “One of the cent in the last five services can share years with the growth income and ownership. highest-earning coming largely from They also facilitate and fastest- subscription streaming licensing and growing sectors and video services. distribution across in the digital international markets. creative economy One of the specific (Maskus, 2018) benefits of looking at is the videogame music and copyrights is Copyright is a critical industry, which that it is the area in the feature of the underlying surpasses creative industries for conditions for the digital the combined which there is some creative economy and revenue of consistent and the trade-related comparative global data aspects of copyright the film and and thus provides a are now generally music sectors.” basis for researching recognized as a key the digital and creative component of the economy. Data capture burgeoning service and knowledge- for developing countries and regions is intensive world economy (OECD, relatively robust when compared with 2015). The key observation is that the data from trade in services, which is rapidly growing digital economy relies weak or non-existent for most heavily on creative content, which developing countries. generates copyrights. Developing countries’ share of Copyright is on a growth trajectory as copyright or royalty income or global collections of royalties rose by collections is relatively small. Europe 25.4 per cent from 2014 (EUR 7.69 (56.4 per cent) and North America billion) to 2018 to reach 9.65 billion. (22.6 per cent) together account for The music industry accounts for 79 per cent of total global royalties 88 per cent of the collections and so collections (Figure 4). The Asia/Pacific 266 CHAPTER 12

region is next with 14.8 per cent, Figure 4: Global collections of royalties, however, the performance is dominated share by regions, 2018 by Japan, China, South Korea and Australiasia. Latin America and Africa trail far behind with 5.4 per cent and 0.8 per cent, respectively (CISAC, 2019). This suggests that the combined copyright collections from the developing world is less than 10 per cent of total global collections.

The dominance of North America and Europe in royalties collection is underscored when the regions are compared in terms of collections per capita. For instance, collections in 56% Europe 23% North America Europe are six times that of the Latin 15% Asia Pacific America and Caribbean region, 15 5% Latin America & Caribbean times that of Asia/Pacific and over 1% Africa 60 times that of Africa. In effect, what Source: CISAC, 2019. these data show is that the creative sector and copyright collections are

Table 2: Breakdown of regional collections, 2018

Collections Regions Type of use Growth (%) 5-year growth (%) (EUR, millions)

Live & background 306 +3.1 +22.4

Asia Pacific TV & radio 393 -3.7 +5.6

Digital 376 +22.4 +120

Live & background 194 -9.5 +14.2 Latin America TV & radio 180 -29.2 -32.3 and the Caribbean Digital 75 +49.3 +978

Live & background 17 -0.9 +13.3

TV & radio 31 +5,5 +23.8 Africa Digital 11 -9.7 +32.5

Private copying 12 +10.6 +69.0

Source: CISAC (2019). CHAPTER 12 267 relatively underdeveloped in the participate in digital distribution developing world (CISAC 2019). platforms and build the required copyright collections infrastructure The question that emerges is whether (Nurse, 2000). For example, it is argued digitalization can redress these that “if a platform holder manages to imbalances. The data on the growth launch at the right time, adopt an of digital collections are somewhat optimal pricing structure, and provide promising. The data in Table 2 show an accessible infrastructure, strong that in several developing regions winner-take-all effects can come into collections are shifting rapidly to the play, ultimately allowing a platform to digital arena. This is clearly evident in aggregate a disproportionate amount Latin America and the Caribbean, of users, revenue, and/or profit” (Poell where digital collections rose almost and Nieborg, 2018). ten-fold in the last five years. In the Asia Pacific region, it grew by 120 Additionally, it is becoming ever more per cent. In Africa, where digital evident that wider issues related to technology access is less developed, e-commerce and data localization are the fastest growth is taking place in becoming critical trade and industrial private copying (69 per cent) followed policy considerations for the new by digital (32.5 per cent). business models associated with the digital creative economy. Given that Creative and digital data monetization is an expanding entrepreneurship revenue stream, it means that who owns and controls the data generated The above analysis illustrates how by users or consumers has a strategic digital, mobile and internet and increasingly profitable asset. technologies are transforming Several Asian countries have pursued structures in the global economy and data localization to ensure that generating new business models and domestic firms can participate in the markets that make the creative data economy in more proactive ways. industries a critical resource for economic development in multiple The overarching argument is that spheres. From the perspective of the the enhanced integration of developing creative industries, digitalization is one countries’ creative industries in global of the key means by which creative value chains requires a shift in the content can be made more visible and industrial paradigm and business accessible to regional and global practice from the low value-added, audiences. In effect, digitalization stand-alone creative firm, cultural offers great potential for tapping into practitioner or artist operating in traditional and non-traditional markets isolation to a strategic collaborative for creative goods, services and IP. approach that facilitates higher levels of creative and digital entrepreneurship The literature suggests that tapping into through higher levels of collaboration, these emerging opportunities requires coordination and organization. For developing countries to not only example, there is a clear opportunity improve the quality and marketability of for greater aggregation of content their content, but they have to also find through platformization and the ways to aggregate content, proactively adoption of blockchain technologies 268 CHAPTER 12

in order to take advantage of the that is becoming increasingly accepted expanding digital trade in online, in the creative industries. streaming and subscription services (Nurse et al., 2020). Similar recommendations have emerged from a study of the cultural The challenge being highlighted here flows between the Caribbean countries relates to the absence of a clear and the European Union (Burri and strategy to build capacity within the Nurse 2019). The CARIFORUM-EU creative sector in the developing world. Economic Partnership Agreement This problem is illustrated by the case (EPA) is the first international trade of Brazil, which benefits from a creative agreement that incorporates trade in sector that accounts for 2.64 per cent culture and aims to implement Article of gross domestic product (GDP) and 16 (preferential treatment) of the one million jobs in 200,000 UNESCO Convention. These enterprises. A recently published objectives are embedded in provisions report highlights that: under the List of Commitments on “Investment and Trade in Services” In Brazil, there has been little as well as “Protocol III on Cultural strategic focus on creative Cooperation” (Cultural Protocol). entrepreneurship as a strand for Despite the far-reaching commitments culture-led development. Most undertaken by the EU in granting federal public programmes focus on facilitated market access and the protection and promotion of preferential conditions to Caribbean culture without real connections to cultural goods, services and the role of culture in the economy. practitioners, the agreement has not Thus, cultural policy, despite a improved market entry and export growing focus on the Creative earnings or redressed the imbalance in Economy, has not yet adequately trade in goods and services between explored how to build the capacity of the two parties after being in force for cultural producers so they can more than a decade. operate as creative entrepreneurs. This includes few activities that seek The experience of the CARIFORUM- to build the digital capacity of the EU EPA suggests that rebalancing cultural sector and to generate trade flows requires an agenda that scalable business and distribution goes beyond “market access” towards models. (Fleming, 2018, p. 16) “market penetration”. This involves interventions outside of passive trade Improving the export capabilities of the policy tools (e.g. implementation of creative industries sector and tapping trade agreements) to involve the into the rise of the digital economy establishment of proactive trade and require the development of a complex industrial upgrading mechanisms such of trade, financing and business as funding for start-ups, innovation support services along with tax labs, market incubators, cluster incentives, access to training, development and market development knowledge and IP protection and programmes. These mechanisms can exploitation (HKU, 2010). In short, play an important role in the what is being recommended is the development of entrepreneurial skills integration of policy arenas, a practice among industry participants; encourage CHAPTER 12 269 experimentation with new ideas, access to different sources of finance techniques and media; and facilitate (seed financing, cluster financing, capacity development particularly export financing, debt, private equity among young entrepreneurs who can or venture capital) (Nurse, 2016; overcome their creative or intellectual Cunningham et al., 2008). isolation through networking, mentorship and peer-to-peer coaching.5 In conclusion, the key strategic opportunity for developing countries A key element of the intervention is to adopt a sector-wide approach framework relates to the creation to the creative sector and facilitate of enabling institutions to facilitate the creation of end-to-end business the growth and industrial upgrading solutions and trade support of the sector. This could include the mechanisms. This suggests that the creation of umbrella organizations, solution is more than simply gaining business support organizations, access to markets. From this export consortia or industry coalitions. perspective, stakeholders can play On the government side, this could a critical role in coordination and involve the harmonization of upscaling the creative industries governmental policies, agencies and once integrated support mechanisms ministries that interface with the sector, are employed. What is needed is for example, in the fields of cultural a trade and financing governance policy, trade facilitation, IP rights, framework that is demand-driven and enterprise development, and education entrepreneurial in focus. It allows for and skills training. start-ups, clusters, incubators and accelerators linked to market entry It is also important to promote cross- programmes that are supported sectoral linkages, as the creative by innovative financing mechanisms industries have multiple markets and (e.g. crowdfunding, angel investing, sources of income, many of which debt and equity financing, trade intersect with ICTs, manufacturing financing and IP value capture). There and tourism. In short, the objective is also a critical need for a wide array is to make creative entrepreneurs of policy support measures such as and their works more visible and diaspora engagement, destination accessible to the wider markets; branding, trade and export facilitation, potential clients, sponsors and investment policy and human resource investors; and policymakers.6 development. The objective is to reduce the risk of upscaling and to Another key area is trade financing, make creative entrepreneurs and their such as market development grants works more visible and accessible to and financing for participation in wider markets; potential clients, trade fairs, outbound and inbound sponsors and investors; and trade missions, business-to-business policymakers (Nurse and Ye, 2012). meetings and other forms of market entry programmes. Additionally, Endnotes new mechanisms for financing intangible assets, such as IP, would 1 For an introduction to the concept enable creative businesses to grow of the digital creative economy, sustainably and benefit from increased see Towse and Handke (2013). 270 CHAPTER 12

2 See https://soundcharts.com/blog/ revenue at $26.2 billion”, Publishing music-streaming-rates-payouts#local- Perspectives. https://publishingperspectives. services-of-jiosaavn-yandex-and-tencent- com/2018/07/us-statshot-publisher-survey- take-the-lower-end. 2017-estimates-revenue/

3 What Music Streaming Services Pay Per Anderson, T. (2020), “Beenie Man and Bounty Stream (And Why It Actually Doesn’t Killer Earn Best Streaming Days of 2020 After Matter), available at: https://soundcharts. ‘Verzuz’ Battle”. https://www.billboard.com/ com/blog/music-streaming-rates-payouts. articles/business/chart-beat/9393575/ beenie-man-bounty-killer-verzuz-best- 4 See the Directive (EU) 2019/790 of the streaming-days-2020 European Parliament and of The Council of 17 April 2019 on copyright and related Batchelor, J. (2019), “Global games market value rights in the Digital Single Market and rising to $134.9bn in 2018”, Gamesindustry.biz. amending Directives 96/9/EC and https://www.gamesindustry.biz/articles/2018-12- 2001/29/EC, available at: https://eur-lex. 18-global-games-market-value-rose-to-usd134- europa.eu/legal-content/EN/TXT/ 9bn-in-2018

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Comments

WOLF R. MEIER-EWERT*

The success of digital technologies content produced by creative has dramatically transformed the industries, provide much of the interaction between the intellectual legal framework in which their property (IP) system and international digital products are traded trade. While traditionally, the – already domestically and internationally significant – role of IP to channel and today. It is difficult to underestimate frame commercial information and the significance of this realization – proprietorship in offline trade in goods particularly in the context of developing and services was seen as an countries’ creative sectors, which embedded component of added value, are eager to access and integrate in the digital context – particularly in into global value chains, exploiting the digital creative industries – traded digital content. products rarely exist in physical form. Transactions regarding eBooks, apps Developing and strengthening the or music files, the streaming of movies legal and institutional infrastructure or the upload of user-generated of IP systems – particularly in areas content – today the dominant form of relevant to creative industries such consumption of digital content – are as copyright and geographical no longer accurately captured by a indications – have long been transfer of ownership in the traditional recognized as tools to help realize sense. Online purchasing of any digital untapped potential in developing product is typically conducted by countries. Nurse’s reliance on contractual terms including a limited collection data – although cited to IP licence that defines the “use-rights” show lack in volume – also highlights a customer obtains with respect to the the gaps that still persist since the days digital content in question. Exchanging when Bob Marley relied on collecting digital products of this type is thus societies in the United States for lack essentially “trade in IP”.1 of faith in equivalent institutions at home. The development of effective Keith Nurse’s chapter on the digital collective copyright management creative economy and developing organizations (CMOs) is an important countries aptly identifies “trade-related contribution to a functioning IP system – aspects of copyright” as a key although lessons from developing component of the burgeoning service countries caution against disregarding and knowledge-intensive world competition considerations in this economy. Indeed, IP systems, by area – and are needed particularly in determining the scope and extent of developing countries to ensure viability use-rights (i.e. licences) to intangible and financing of a creative sector.

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 12: COMMENTS 275

However, at least as significant as the To craft a copyright system fit for effective application of the current IP the aspirations of nascent digital system to the realities of an individual creative industries, developing and country is the development of the developed countries alike should copyright system and its adaptation to actively pursue policy formulation in the challenges of the modern digital such areas and engage with partners world. Digital communication and participate in international forums technologies have enabled the that favour developing appropriate development of truly global, potentially common approaches. seamless markets for digital products, with enormous potential for benefits of Examples of these areas include the consumers and content providers. degree of liability of internet service Licences to use IP-protected content, providers (ISPs) for IP infringements in contrast, are granted on a territorial by their users, which directly impacts basis, the licensed IP rights existing the viability of operating digital only at the level of domestic law. platforms in a global market. The Ensuring interoperability pervasive view that their of national IP important role in systems through “The success facilitating access the implementation justifies a certain privilege of the Agreement on of digital for ISPs, requiring their Trade-Related Aspects technologies action and collaboration of Intellectual Property has dramatically only when they are Rights (TRIPS transformed notified of infringing Agreement) and other the interaction content by rights holders, multilateral instruments was developed through would thus seem between the years of jurisprudence. essential to enable IP system and Successive legislative content industries to international developments have access open markets trade.” enshrined this approach for digital products. of providing such “safe harbour” under certain – In a global market for digital products albeit still varying – conditions in the that are essentially defined by IP, laws of a wide range of jurisdictions, national IP policies can have a direct some of which even considered impact on the flow of revenue and adopting this standard in a regional business in this field. Solutions to trade agreement.2 Yet, despite the questions of IP protection in the seeming unanimity in this area, context of digital trade that an recent legislative developments in individual jurisdiction might adopt – the European Union adopt a more or leave unclear – have a defining critical view of large digital platforms influence on the viability of online and propose to establish a general business models that Nurse cites obligation of ISPs to screen for rightly as the predominant infringing content, thus rolling back modes of exploitation of the modern the safe harbour principle. This content industry, and which are in shows that policy solutions in the turn critical for realizing the growth fast-moving digital sphere continue potential of creative industries. to evolve – with direct impact on 276 CHAPTER 12: COMMENTS

digital content business models – market for “second-hand” digital and national IP policymakers are products could exist. Similarly, the well advised to consider their conditions under which creators domestic systems in light of can license and use so-called these developments. “orphan works” whose legitimate owners are too difficult to determine – While a particular national regime of a growing problem particularly in the ISP liability may mostly affect the software and videogame area – availability of platform services in that determine whether publishers or jurisdiction and thus the “supply of IP creators will take the commercial content” to a national economy through risk to use these, or whether they ISPs, other salient aspects of an IP will disappear from the market. regime directly impact the availability of content for subsequent sale or use The above shows that the paradigm by creators in producing new creative shift in the significance of IP systems works. The question whether for the global digital marketplace exhaustion – the principle that once creates a particular urgency in the an IP-protected good has legitimately area of copyright. However, a entered distribution channels, its concentration of efforts in the further sale (e.g. of a second-hand development of an internationally book) no longer requires the compatible, modern and responsive agreement from the original right- system of law and institutions in the owner – could also apply to area of IP is likely to be an excellent downloaded digital products (e.g. investment in the future opportunities eBooks or software) is determinative of creative industries in developed for whether a potentially significant and developing countries alike. CHAPTER 12: COMMENTS 277

Endnotes 2 See the US – Korea Agreement, the EU – Korea Agreement and the text of 1 See WTO, World Trade Report 2018: the original Trans-Pacific Partnership The Future of World Trade: How (12) Agreement. Digital Technologies Are Transforming Global Commerce. SECTION 3 Making the most of the digital trade era – inclusiveness, gender and development Chapter 13 Are digital advances and inclusive growth compatible goals? Implications for trade policy in developing countries Ali Parry, Adelia Jansen van Rensburg, Wilma Viviers and Emmanuel Orkoh* Abstract

Recent years have seen policymakers give increasing attention to two significant, widespread phenomena: rising inequality (the result of uneven access to productive employment) and the quickening pace of the Fourth Industrial Revolution (4IR) or “digital era”. This chapter explores the concept of inequality and why it is important to promote more inclusive growth, especially in developing countries. It also offers insights into how digital advances can serve to accelerate inclusive growth, provided countries have well-informed policies, regulations and institutions to drive the necessary changes. It is evident from a cross- section of the literature and the initial results from a study on the effects of digital advances on inclusive growth in Africa that digitalization and inclusive growth are ideologically compatible. The areas requiring special attention by policymakers in developing countries include: (i) the problem of data inadequacy; (ii) uneven and costly digital connectivity; and (iii) education systems that are not preparing entrepreneurs for in-demand jobs or for the workplace of the future. Two of the prerequisites for leveraging digital technologies in order to drive more inclusive growth are an effective regulatory framework and a commercial environment that is both trade- and investment-friendly.

* The contents of this chapter are the sole responsibility of the authors and are not meant to represent the position or opinions of the WTO or its members. 282 CHAPTER 13

Inequality in inequality (most people are equally the digital age poor) (Draper, Dorffel and Freytag, 2019). Generally, though, these terms In recent decades, the technological are used interchangeably. changes sweeping the world have merged into what many people today This chapter examines the inequality call the Fourth Industrial Revolution phenomenon against the backdrop of (4IR) – a “digital era” in which data advancing digital technologies and have become an extremely valuable what developing-country policymakers commodity and a source of competitive should be doing to promote a more advantage to countries, industry inclusive approach to their growth and sectors and businesses alike. development efforts.

In a highly interconnected world, The inequality phenomenon ongoing digital advances and their numerous applications are changing According to the World Bank, the the way people work, learn and number of people living in extreme socialize. Many would agree that the poverty has been declining. However, digital era has the potential to unlock the rate of this decline has slowed in economic opportunities, particularly recent years, which does not auger in developing countries whose well for the eradication of poverty and industrialization efforts have often been the closing of the inequality gap in hampered by resource (including many parts of the world (World Bank, financial) constraints and a difficult 2018). Countries in which income business environment. In many inequality decreased noticeably countries, digitalization – which (measured in terms of the Gini facilitates e-commerce, mobile money coefficient1) in the period 2000–2015 and other online services – is proving include Ethiopia, Indonesia and to be the catalyst for new forms of Lithuania, while countries in which it commercial and trade advantage. It is has increased noticeably during that also helping to bring more informal period include Ecuador, Kenya and workers into the economic mainstream. Ukraine (Brookings, 2019). As in Brazil and the Middle East, income inequality While the 4IR gains momentum, in Sub-Saharan Africa has remained another phenomenon is arguably relatively stable, but it is still at receiving just as much attention: extremely high levels compared to the growing inequality in the world. The rest of the world (Alvaredo et al., 2018). problem of inequality, which is mainly associated with employment and social The growing evidence of and status and mobility, is not new, but in preoccupation with inequality are not recent years it appears to have limited to developing countries. Some become more acute. Some people developed countries, facing changing prefer to talk about a lack of demographics and stagnating labour inclusiveness rather than inequality, as markets, are seeing a growing number a country can simultaneously display a of people experiencing economic lack of inclusiveness (most people are hardship. A spike in international excluded from the economic migration has added another layer of mainstream) and a low level of complexity to the situation. In some CHAPTER 13 283 countries, growing unhappiness with rural areas. Poverty is one of the the status quo has triggered populist inevitable consequences of economic uprisings and calls for governments to marginalization. introduce measures to level the economic playing fields between the Because youth constitute the bulk of so-called “haves” and the “have nots”. the population in developing countries, they should be heavily represented in What has led to high levels of the labour market. However, their inequality in many countries is the inexperience and other constraints subject of much debate. One (including poor education and the contributing factor is that people – lack of strong support systems at for historical, political or cultural home) often dim their prospects of reasons – do not enjoy equal finding work. opportunities to develop their human capital because of varying educational The marginalization of many women in backgrounds, experience and general developing countries can be attributed mobility in the labour market. Human to several factors. For example, capital suggests more than knowledge women are often sidelined in the and expertise; it also workplace because embodies new they have additional knowledge, which “Two of the responsibilities in the should be paired with prerequisites for home that demand their strong institutions as attention and render well as sound economic leveraging digital them “less reliable” than planning and reforms technologies in men. In the absence of that prioritize order to drive domestic help that modernization and more inclusive could free them up to industrialization. growth are concentrate on paid work and professional In the developing world an effective development, their (particularly in least- regulatory economic contribution developed countries framework and and remuneration often (LDCs)), various factors a commercial remain limited. Cultural have conspired to environment that norms or entrenched create a socioeconomic bias might also deprive climate in which large is both trade- women of the numbers of people are and investment- opportunity to obtain a denied the employment friendly.” good education, which opportunities more could put them on a readily available to those sustainable career path with a sound educational background, and afford them easier access to in-demand skills, access to business finance, land or other resources to tools (including the internet) and the engage in entrepreneurial ventures. finance to turn fledgling ideas into businesses with commercial merit. In In Sub-Saharan Africa, a key factor this regard, the most marginalized contributing to inequality is the unequal individuals as far as work is concerned distribution of natural resources, which are women, youth and those living in in turn has impacted the quantity and 284 CHAPTER 13

quality of available jobs (Odusola et al., economic activities to a whole new 2017). Education is crucial for social level – but it must be accessible and mobility. However, it cannot on its own affordable. According to the United prepare people for the multitude of Nations Conference on Trade and jobs needed to absorb the high Development (UNCTAD, 2019a) and numbers of people, particularly the International Telecommunication young people, looking for work Union (ITU, 2018), the proportion of on the continent. What is also the world’s population using the needed is a foundation of sound internet rose above 50 per cent for institutions and economic reforms the first time in 2018. In developed that prioritize agricultural modernization countries, about 80 per cent of the and industrialization, supported by population are currently connected national and regional value chains to the internet, a proportion that is (Odusola et al., 2017). unlikely to change very much in the foreseeable future. Almost all the Rising inequality in the world has also future growth in online connectivity been attributed to international trade will be in developing countries. and technological advances. Trade is Internet users in developing countries widely acknowledged, both in the make up roughly 40 per cent of the literature and in policy circles, to be population – signalling much room an important driver of economic for growth (ITU, 2018). growth and development. Yet it is sometimes viewed as an obstacle to Given the speed of internet adoption in local economic development if foreign recent years, helped by the fact that competition is not effectively managed. the mobile phone is fast becoming an Similar sentiments have been indispensable accessory for daily expressed about technology. The basis living, it is predicted that much of the of these views is that where people second half of the world’s population lack skills and capacity, they will fall will all go online – but probably at a behind on the income scale because more moderate pace than that which their ability to engage in market-driven, has been witnessed to date. As the value-added activity is limited. next few billion people get connected, However, the counterargument is the dynamics in internet usage will that attempting to slow the pace of change. For example, video is surging innovation or to curtail imports ahead as the most popular internet- would slow economic performance in driven medium today, particularly general, particularly as technology and among young people who are growing trade are strongly linked to investment. up in a very visual world and who, at least in the poor countries, may Internet connectivity: lack the linguistic skills to navigate a divided world passages of text. This has implications for strategic planning in both When it comes to digital technologies, government and business circles the internet is at the heart of it all. (ITU, 2018). Internet connectivity is widely regarded as a critical lever for development. Despite these positive predictions, It has the power to connect people the fact that billions of people remain globally, fuel new ideas and elevate disconnected from the online world CHAPTER 13 285 greatly complicates the affected Trade in the digital age countries’ economic and trade policies and performance. An area Besides the internet serving as the of concern for policymakers is how hub for e-commerce and myriad other to plan and work towards a digitally online exchanges and transactions, powered future, together with regional the acquisition and development of and global trade and investment digital technologies has important partners, while also tackling fundamental implications for trade. In recent years, economic shortcomings at home. global exports of ICT and digitally transmitted services have grown more Many developing countries find rapidly than services exports overall. it difficult to deliver reliable and Interestingly, from 2005 to 2018, the affordable internet access because growth in digitally delivered services of inadequate infrastructure, high-cost was higher in developing countries information and communications (including Sub-Saharan Africa) than in technology (ICT) services and skills the rest of the world. Digitally delivered deficiencies, among other factors. services exports had an estimated Another developmental shortcoming value of US$ 2.9 trillion in 2018, which is the lack of adequate data (especially equated to 50 per cent of global at a disaggregated level), which means services exports that year (UNCTAD, that businesses and policymakers are 2019b). Digitally delivered services largely out of touch with local demand exports from LDCs constituted 16 per patterns. Adding to the problem of cent of global services exports in inadequate data is the fact that many 2018, which signalled a substantial small businesses operate informally, increase compared to previous periods without a legal identity, and therefore (UNCTAD, 2019b; WTO, 2018). escape attention because they remain “under the radar”. Not only Interestingly, ICT goods exports were do challenges such as these create valued at US$ 1.9 trillion in 2017, a digital divide between developed which was higher than ICT services and many developing countries, exports that year (valued at US$ 536 but they also exacerbate divisions billion). Today, the leading exporters within countries, which can have of ICT goods are largely found in serious economic and social East and South-East Asian countries consequences. (UN, 2019).

Internet access, though, is only part 1. Digital advances and inclusive of the story. Countries need to adopt growth: exploring the relationship a holistic digital economy mind-set In the face of growing inequality, many if they wish to see their growth and people are talking about the need for development efforts deliver sustainable “inclusive growth”. Can a country results, which are in harmony with achieve its goal of closing the 21st century realities. In the developing inequality gap and creating a more world, governments have a vital role inclusive society, while at the same to play in creating the type of time systematically embracing digital environment that allows countries to technologies? The answer lies in an both catch up and keep up in terms analysis of the synergies and possible of digital adoption and development. tensions between inclusive growth, 286 CHAPTER 13

on the one hand, and digital advances, not focus only on the poor. It should on the other. be broad-based across sectors and inclusive of the country’s existing and What is inclusive growth? potential labour force. The poor, as an The term “inclusive growth” has grown underserved or vulnerable group, in popularity in recent years, appearing naturally deserve special attention, but in policy documents, economic not at the expense of other deserving analyses, academic articles and economic segments, such as women business commentaries. It lacks a (who are not necessarily poor) and universally accepted definition, though. aspiring entrepreneurs (whose economic contribution could be One interpretation is that inclusive significant but whose specific growth refers to a combination of needs often escape the attention increased participation of poor and of policymakers). marginalized people in economic activity (via Ianchovichina and employment) and “Digitalization – Lundstrom (2009) also increased sharing in the stress that inclusive benefits of growth which facilitates growth is not simply (Fourie, 2014). Some e-commerce, about redistribution. authors see inclusive mobile money It is about growing the growth as having and other online economy or enlarging components relating services – is the “economic pie” to income, poverty, (which would create employment or proving to be new jobs) and making distribution (equity) the catalyst for the economy more (Anand et al., 2013; new forms of productive (which would Klasen, 2010; Ramos commercial and boost incomes). They et al., 2013). Another trade advantage.” stress that government- interpretation is that driven industrial policies inclusive growth refers – which are an integral to the opening up of part of many countries’ economic opportunities and benefits, development efforts – should be especially to underserved or vulnerable implemented in a prudent manner so groups, so that a country’s economic as not to disrupt natural market forces performance becomes more balanced or introduce a heavy regulatory burden. and sustainable (Ianchovichina and In other words, inclusive growth Lundstrom, 2009). policies should be geared towards removing constraints to growth. This Ianchovichina and Lunstrom (2009) would make government an enabler assert that the pace of growth can of growth, not the main driver of it, be hastened if ways can be found to which is largely a private sector utilize labour more productively, which responsibility. This does not mean would include those who are trapped that there is no room for regulation. in low-productivity activities or are Economic activity needs to be completely excluded from the regulated in effective ways and economic system. However, they unfettered competition should be emphasize that inclusive growth should discouraged. However, the priority CHAPTER 13 287 should be given to efficiency- growth. For example, Anyanwu (2013) enhancing structural transformation points out that the high growth rates and economic (including export) realized by a number of developing diversification. countries in recent years have not translated into inclusiveness, either More inclusive growth has fiscal during the development process or advantages. This is because more in its outcomes. economically active and productive people mean higher tax revenues and How are digital advances changing less dependence on artificial support the world of work? measures, such as government grants In policymaking circles, one of the and other forms of social welfare. main concerns about digital advances Inclusive growth also gives way to is their impact on employment. greater social stability as more people Opinions vary on whether, the extent are engaged in occupations that make to which or how quickly digital use of their time and their skills. advances in the form of automation/ Finding satisfying occupations that robotics, artificial intelligence (AI), the allow people to support themselves Internet of Things (IoT) or 3D printing and their families is an important step will affect traditional jobs. Yet no on their journey towards personal country can afford to ignore the fulfilment and dignity. encroaching reality of the world of work undergoing significant change There is general agreement that – especially as the availability and economic growth (or gross domestic quality of jobs are at the heart of the product (GDP)) is a prerequisite for inclusive growth debate and form the inclusive growth. Whereas economic bedrock of orderly, sustainable growth is a clearly defined measure societies (Wisskirchen et al., 2017). of the value of goods and services produced by a country, inclusive E-commerce, which, simply put, refers growth is a broader concept, implying to digitally ordered, digitally delivered the equitable share of economic or digital platform-enabled transactions opportunities and benefits in society (BEA, 2018), is one of the central (Draper et al., 2019). Inclusive growth pillars of the digital economy. The builds on economic growth by also ability to buy and sell online enables focusing on specific segments, people to engage in business including the underserved groups transactions that would be much whose contribution is not captured more expensive or even logistically in the formal economic growth impossible if more traditional methods equation. In this context, inclusive were used. E-commerce is not new, growth is one of the cornerstones of although the technologies that drive it sustainable development and its (more rapid broadband, increasingly various components feature strongly sophisticated mobile devices, more in the United Nations (UN) Sustainable user-friendly and cost-effective Development Goals (SDGs) (Draper payment platforms, and so on) are et al., 2019). developing all the time.

However, inclusive growth is not a E-commerce is particularly liberating natural consequence of economic for those who are looking for cost- 288 CHAPTER 13

effective inroads into local and high-level decisions requiring careful international markets, for those who deliberation on matters of ethics and are looking for flexibility and anonymity fairness can be left to machines. in their working environment, and for consumers who enjoy the freedom The advent of 3D printing, in turn, is to transact at the times that suit them, changing traditional manufacturing using no-fuss payment arrangements. patterns and cost structures, with Of course, buying and selling physical the quest for high-volume economies goods online still require traditional of scale and inexpensive production logistics and distribution services, locations giving way in some cases but the digital components of the to reshoring, on-demand production transactions can greatly streamline runs that cater to more specialized the engagement between buyers requirements and shorter global and sellers. value chains (GVCs).

AI and advanced robotics/automation One of the defining features of the often go hand in hand. Not so long digital era is the immense quantity ago, robots were mainly seen as of data that are stored and processed replacements for humans performing in the cloud. Data are the pulse of the routine, repetitive work. Human-less digital economy, originating in sensors factory production lines and storage and tracking systems, security facilities are typical examples of cameras, point-of-sale transactions robotics at work. However, the science and innumerable other sources – even behind robotics is becoming more and social media activity, such as app more sophisticated, with some robots purchases, status updates and “likes”. now able to engage in intelligent Access to data is becoming a crucial reasoning and decision-making. competitive advantage, particularly when working across disciplines AI, in turn, is a collection of (such as marketing, finance, production technologies, including computer and logistics), and has become vision, language processing, robotic increasingly affordable. applications and virtual agents, that are able to mimic humans’ cognitive However, concerns about ownership functions. Drones, autonomous of information (which has trade policy vehicles, and facial and voice implications) and privacy and security recognition applications all rely on AI. are growing. Regarding the latter, the AI allows the processing and distinction between friendly online interpretation of huge quantities of overtures from marketers and data, which can speed up and enhance unscrupulous data mining is often the quality of organizational decision- far from clear. Cybercrime, in turn, making. Also intriguing is AI’s capacity is infiltrating more and more online for self-learning. There are plenty of applications and becoming more stories of machines teaching sophisticated. Often, countries’ themselves how to perform certain laws and regulations – conceived tasks after a short period of self-tuition, in an earlier era – are ill equipped simply by studying the rules or to detect, pass judgment on or procedures. However, concerns have curtail errant or illegal behaviour in been expressed about whether the digital space. CHAPTER 13 289

Digital advances: An economic emerging-market economies. For driver or divider? example, eight of the 10 largest While some believe that the 4IR technology companies in the world – provides disadvantaged or excluded Apple (#1), Alphabet (the parent of communities with the opportunity to Google) (#2), Microsoft (#3), Intel (#5), improve their economic circumstances, Facebook (#6), IBM (#8), Cisco (#9) others see the potentially corrosive and Oracle (#10) – are American. The effects of digital advances on societies other two – Samsung (#4) and Tencent that are at a relatively low level of (#7) – are South Korean and Chinese, development. The question should be respectively. Furthermore, it is mainly asked: are digital advances an the Organisation for Economic economic driver or divider? Co-operation and Development (OECD) countries and the members It has been suggested that access of the European Union and BRICS to digital technologies could be a (Brazil, Russia, India, China and South significant enabler for women and Africa) that have AI policies in place young people who are unemployed (Ndzendze and Marwala, 2020). or operating on the economic fringes. For example, keeping in touch and Many poorer countries talk about engaging in marketing and financial embracing the 4IR in order to enhance transactions via cell phone could productivity and competitiveness, and make a significant difference to to avoid being left behind in terms of their economic circumstances. economic development and trade. The fact that such activities can be However, such aspirations might be performed relatively inexpensively is tempered by the “Matthew effect”. an important enabler. This concept (originated by sociologist Robert K. Merton in the 1960s) relates In addition, more women tend to work to the tendency of those with an in the services sector than men advantage to gain a further advantage, (OECD, 2012). The fact that many while the disadvantaged tend to slip services have become more accessible further behind. In other words, the due to digital developments augers “rich get richer and the poor get well for women’s greater inclusion in poorer” (Rigney, 2010). Where the the economy. For youth, the internet is Matthew effect is in evidence, an endless source of information about inequality supposedly becomes entrepreneurial possibilities and online self-perpetuating and self-amplifying courses. Because many young people unless there are specific interventions have grown up with the internet, they to arrest its momentum (Ndzendze could be good candidates for digitally and Marwala, 2020). supported work. With the world already characterized Notwithstanding the above, today the by high levels of inequality and stark ability to manage and commercialize differences in wealth and well-being, large quantities of data is becoming a there is the danger that the unfolding key factor in the creation of competitive digital era will simply exacerbate advantage, employment and wealth. existing divisions. In his book The Such technological prowess tends to Bottom Billion, Paul Collier notes that be concentrated in advanced and the poorest people in the world tend 290 CHAPTER 13

to live in countries that have a weak benefits. In contrast, the developing- industrial and technological base country argument stresses that digital (Collier, 2007). He notes that while it is liberalisation, as envisaged by possible for poor and technologically technology giants like Amazon, deprived countries to catch up (China, Facebook and Google, would make Singapore and South Korea are it extremely difficult to build digital examples of countries that made the capacity and traction (particularly transition), it requires significant foreign among start-ups) at the domestic direct investment to enhance their level (Third World Network, 2019). technological readiness, along with sound macroeconomic policies and A preferred option among many heavy investment in skills development. developing countries is to grow their All this points to the critical importance own digital content and capabilities of formulating and implementing across various industry sectors, while well-informed and forward-looking exercising some control over data economic and trade policies. flows through data localization (ownership) rules and possibly even Despite its potential to bring about tariffs on cross-border digital trade. positive change, the 4IR and all that This is more indicative of a digital it embodies – from large, physical industrialization strategy which infrastructure to hardware, software South Africa, for example, advocates and ICT support services – are at times (Roberts et al., 2019). viewed with circumspection by developing-country policymakers. This Measuring digital advances and is because they see 4IR as a threat to inclusive growth local industry and employment, Growth should by definition be especially when some traditional jobs measurable. However, the different are likely to be replaced by machines or meanings attached to inclusive growth more scarce skills are called for (which and the scarcity of data delineating may not be available locally). As digital the various elements of inclusivity advances often have an international make the measurement of inclusive origin – which can be associated with growth challenging. uncomfortable levels of competition – countries’ trade policies might even A number of international organizations discourage foreign investment in certain (including the OECD, the World Bank industry sectors. and the World Economic Forum (WEF)) have arrived at measures of Such concerns about foreign inclusive growth or development. For competition and the potential impact example, the WEF developed an on local industries should not be Inclusive Development Index (IDI), the disregarded. There is growing tension rankings for which are determined by between developed and developing the number of national performance countries over the extent to which data indicators, with four pertaining flows should be regulated across specifically to “inclusion”: median borders. The developed-country household income, poverty rate, and argument centres on the importance of income and wealth Gini indices. digital liberalisation in the interests of According to the 2018 IDI, which market expansion and its associated ranked a total of 74 countries, the most CHAPTER 13 291 inclusive countries included Australia, correlation between internet usage and Denmark, Iceland, the Netherlands, digital trade in goods and services, Norway and Switzerland. The least- on the one hand, and a reduction in inclusive countries included Chad, vulnerable employment, on the other. In Egypt, Malawi, Mozambique, South addition, there is a positive correlation Africa and Zimbabwe. Among the between greater internet usage and life G20 countries, Argentina, Australia, expectancy. A possible reason for this China, Germany and the Russian is that the integration of digital Federation were at the upper end of technologies in healthcare in recent the inclusiveness scale, while India years has helped to map and monitor and South Africa were at the bottom general illnesses and the spread of (WEF, 2018). infectious diseases, track drug supplies and vaccines, and gauge the Measuring digital advances, in turn, quality of care provided (WHO, 2018). is far from simple or straightforward The study has so far also shown that because of the speed with which digital developments impact inclusive things change. However, it is possible growth indicators differently, to track variables such as internet depending on factors such as connections and mobile subscriptions employment sector, age and gender in different countries and regions. Not of the population (Viviers, Parry and surprisingly, the more advanced Jansen van Rensburg, 2019). countries are far more connected and digitally active than most developing There is much scope for individual and countries – with Africa in general groups of developing countries to trailing behind the rest of the world determine positive or negative (World Bank, 2016). correlations between digital and inclusive growth indicators so that In a study on the compatibility of the policies are formulated from a well- goals of digital advances and inclusive informed base. This is important since growth in Africa using data from the the opportunities and challenges faced World Bank, UNCTAD and the OECD, by vulnerable groups are often given three indicators were selected as inadequate attention at the policy level. proxies for digital advances (international trade in digitally delivered 2. Digital advances and inclusive services; ICT goods as a percentage growth: policy implications of the total population and the number Regarding the influence of digital of people using the internet as a advances on inclusive growth, Gillwald percentage of the total population). (2019) is of the following view: Six indicators were selected for inclusive growth (employment, There is nothing inherent in so-called youth employment, vulnerable 4IR technologies of artificial employment, employment–population intelligence, blockchain or drones ratio, GDP per capita and life that will result in economic growth, expectancy at birth) (Viviers, Parry job creation or empowerment of the and Jansen van Rensburg, 2019). marginalised. Evidence from the so-called third industrial revolution Among the early findings from the tells us we should not take for study are that there is a positive granted that technology will translate 292 CHAPTER 13

into wage or productivity growth – among vulnerable and excluded groups unless we develop a good set of and one that encourages and rewards complementary policies both as innovation and technological excellence. business and government. In working towards a comfortable In light of the above, and bearing in convergence between digital advances mind the “Matthew effect”, one can and inclusive growth, developing conclude that economic marginalization, countries should note the following key the digital divide and other manifestations policy implications: of an unequal society will not diminish unless they are specifically addressed Policymakers and their social at a high level. In the same way, partners need to arrive at a common inclusive growth will remain a distant, understanding of inclusive growth and largely unattainable goal – despite all realistic goals for achieving a more the new opportunities that the 4IR has inclusive society. Giving these aspects brought in its wake – unless there is a definition will pave the way for specific supportive policy environment to drive targets and timelines to be set and the process. accountability areas to be determined. It is also important that inclusive The literature and the empirical analysis growth initiatives focus on expanding (see, for example, Parry, Viviers and the economy in sustainable ways and Jansen van Rensburg, 2019) suggest making it more productive, rather than that digital advances and inclusive relying on redistribution. growth have compatible ideals. However, a complicating factor is that • The problem of data inadequacy many developing countries (including needs to be addressed. An important China, India and South Africa) have strategy in this regard is to ensure very uneven development profiles. For that the research community is example, while some segments of adequately funded and capacitated society have successfully transitioned and that it engages frequently with to high levels of digital awareness and economic policymakers, regulators application, which adds lustre to an and other government stakeholders. established industrial base, other This would, among other things, segments remain trapped at the very reveal the positive or negative lowest levels of development, unable correlations between different to escape from simple economic elements in the digital-inclusive pursuits, like subsistence farming. growth mix and help to steer policy. Many of those who live in the cities have no work at all. Closing the gap • The problem of inadequate (including between those that have been left geographically uneven) digital behind and those that are keeping connectivity needs to be resolved. the country on the map in terms of Sometimes connectivity problems are innovation is one of the most urgent a sign of a much deeper malaise – challenges of governments today. such as an erratic power supply, low skills levels or a trade policy that It seems inevitable that a two-pronged restricts foreign investment and approach is needed at the policy imports of digital goods and services. level – one that facilitates “catch-up” Structural transformation is therefore CHAPTER 13 293

required in priority areas to open the and development or a fast pass into door to more economic (and particularly the future. The necessary foundations entrepreneurial) opportunities. need to be in place before a digital policy framework can be formulated • An effective regulatory framework and successfully implemented. It is like is required to manage digital building a house – without solid developments and data flows. Such foundations and a sturdy, supporting a framework should provide legal structure, the house will be inherently and regulatory certainty and allow a weak and it will be difficult for it to prudent level of control, particularly withstand external pressures. in respect of cross-border data flows and ownership, and the Endnotes protection of privacy and intellectual property rights. 1 Luebker (2010) describes the Gini coefficient (or Gini Index) as a summary of • Current approaches to education and the extent of inequality in a single figure. skills development need to be According to the author, the Gini coefficient overhauled to address current can theoretically take any value between 0 weaknesses and to prepare people (perfect equality where everyone has the for the future. The aim should be to same income) and 1 (perfect inequality put young people onto a surer path where all income goes to a single person). professionally while also re-skilling older people whose traditional References occupations may be threatened by advancing technologies. As Alvaredo, F., Chancel, L., Piketty, T., Saez, E. digitalization will continue to encroach and Zucman, G. (2017), World Inequality on traditional jobs in the formal sector, Report 2018, World Inequality Lab. opportunities for entrepreneurship (from training to financial assistance) Anand, R., Mishra, S. and Peiries, S. J. need to be unleashed to absorb new (2013), “Inclusive Growth: Measurement and entrants in the labour market as well Determinants”, IMF Working Paper 13/135. as more experienced workers displaced by new technologies. Anyanwu, J. C. (2013), “Determining the Correlates of Poverty for Inclusive Growth • A digital trade policy is needed in Africa”, African Development Bank Working that caters to a country’s level of Paper Series, No. 181, September 2013. development and relative inclusivity. While a country may aspire towards Brookings Institution (2019), “Is inequality building local capacity and expertise, really on the rise?” 28 May 2019. https:// a lack of inclusivity and an www.brookings.edu/blog/future- accompanying digital divide would development/2019/05/28/is-inequality-really- necessitate high levels of foreign on-the-rise/ investment, supported by suitably liberal policies to allow inflows of ICT Bureau of Economic Analysis (BEA) (2018), products, services and expertise. “Defining and Measuring the Digital Economy”. https://www.bea.gov/research/ Digital advances cannot, on their own, papers/2018/defining-and-measuring-digital- provide a shortcut to inclusive growth economy 294 CHAPTER 13

Collier, P. (2007), The Bottom Billion: Why Fourth Industrial Revolution”, Daily Maverick, the Poorest Countries Are Failing and What 5 March 2019. Can Be Done About It, New York: Oxford University Press. Odusola, A. F., Cornia, G. A., Bhorat, H. and Conceição, P. (eds.) (2017), Income Inequality Draper, P., Dorffel, C. and Freytag, A. Trends in Sub-Saharan Africa: Divergence, (2019), “Trade, Inclusive Development, and Determinants and Consequences, UNDP, the Global Order”. https://www. Regional Bureau for Africa. researchgate.net/publication/332402593_ Trade_Inclusive_Development_and_the_ Organisation for Economic Co-operation and Global_Order Development (OECD) (2012), Closing the Gender Gap: Act Now. https://www.oecd. Fourie, F. (2014), “How inclusive is economic org/gender/closingthegap.htm growth in South Africa?”, 9 September 2014. http://www.econ3x3.org/article/how- Ramos, R.A., Ranieri, R. and Lammes, J. inclusive-economic-growth-south-africa (2013), “Mapping Inclusive Growth”, International Policy Centre for Inclusive Gillwald, A. (2019), “4IR in South Growth, Working Paper No. 105. Africa Is Too Important to Remain the Domain of the Elite”, Research ICT Africa, 5 Rigney, D. (2010), The Matthew Effect: September 2019. https://researchictafrica. How Advantage Begets Further Advantage, net/2019/07/08/4ir-in-sa-is-too-important-to- New York: Columbia University Press. remain-the-domain-of-the-elite/ Roberts, S., Black, A. and Barnes, J. (2019), Ianchovichina, E. and Lundstrom, S. (2009), “Towards a Digital Industrial Policy for South “What is inclusive growth?” in Arezki, R., Africa: A Review of the Issues,” Industrial Pattillo, C., Quintyn, M. and Zhu, M. (eds.), Think Tank 1. https://www.researchgate.net/ Commodity Prices and Inclusive Growth in publication/336459776_Towards_a_Digital_ Low-Income Countries, Washington, DC: Industrial_Policy_for_South_Africa_A_ IMF, 147-160. Review_of_the_Issues_Industrial_ Development_Think_Tank_1 International Telecommunication Union (ITU) (2018), Measuring the Information Third World Network (2019), “South needs Society Report, Vol. 1, 2018, Geneva: ITU. data digitalization policies, say CSO experts”, 16 April 2019. http://www.twn.my/title2/wto. Luebker, M. (2010), Inequality, Income info/2019/ti190412.htm Shares and Poverty: The Practical Meaning of Gini Coefficients, Geneva: ILO. United Nations (UN) (2019), The Age of Digital Interdependence: Report of the UN Secretary- Klasen, S. (2010), “Measuring and General’s High-Level Panel on Digital Monitoring Inclusive Growth: Multiple Cooperation. https://www.un.org/en/pdfs/ Definitions, Open Questions, and Some DigitalCooperation-report-for%20web.pdf Constructive Proposals”, Asian Development Bank Sustainable Development Working United Nations Conference on Trade Paper Series, No. 12, June 2010. and Development (UNCTAD) (2019a), “Digital development: Opportunities and Ndzendze, B. and Marwala, T. (2019), challenges”, Note by the UNCTAD “Global inequality and opportunity in the Secretariat, Geneva: UNCTAD. CHAPTER 13 295

United Nations Conference on Trade and World Bank (2018), Decline of Global Development (UNCTAD) (2019b), Digital Extreme Poverty Continues But Has Slowed. Economy Report 2019, Value Creation and https://www.worldbank.org/en/news/ Capture: Implications for Developing press-release/2018/09/19/decline-of-global- Countries, Geneva: UN. extreme-poverty-continues-but-has-slowed- world-bank Viviers, W., Parry, A. and Jansen van Rensburg, A. (2019), “Are Digital Advances World Economic Forum (WEF) (2018), and Inclusive Growth Compatible Goals? Inclusive Development Index (IDI). http:// Implications for Trade Policy in Developing www3.weforum.org/docs/WEF_Forum_ Countries”, Paper presented at the WTO IncGrwth_2018.pdf Chairs Programme Annual Conference, 2 July 2019, Geneva. World Health Organization (WHO) (2018), “Digital technologies: Shaping the future of Wisskirchen, G., Biacabe, B. T., Bormann, primary health care”, Technical Series on U., Muntz, A., Niehaus, G., Soler, G. J. and Primary Health Care, Geneva: WHO. von Brauchitsch, B. (2017), “Artificial intelligence and robotics and their impact on World Trade Organization (WTO) (2018), the workplace”, IBA Global Employment World Trade Statistical Review 2018, Institute, 2012–2017. Geneva: WTO.

World Bank (2016), World Development Report 2016: Digital Dividends, Washington, DC: World Bank Group. 296 CHAPTER 13: COMMENTS

Comments

ROBERTA PIERMARTINI*

Digital technologies are changing the banking and blockchains technologies, way we consume, produce and trade. with their tracking systems, may help Thanks to the use of the internet, reduce problems related to the lack of consumers and firms have direct institutional credibility for borrowing and access to online markets. Companies lending or of product certifications of increasingly use artificial intelligence origin, even for agricultural products. (AI) and big data to analyse consumers’ online shopping habits and adapt The potential force of inclusiveness of products to their preferences. digital technologies goes beyond Businesses use the Internet of fostering development in poorer Things (IoT) to increase efficiency by countries. It is also a force of inclusion improving maintenance of machinery for the poorer within a country – these and products, and also by selling new are typically small business and women. digital products and services. By significantly reducing the cost to As the authors of this chapter stress, access international markets, digital digital technologies create new technologies provide new opportunities opportunities of development, as for small businesses to benefit from they may help overcome some of the trade. Firms trading on the internet tend financial constraints and difficulties to be on average smaller than those that of the business environment that trade offline (Lendle et al., 2016). The hampered industrial development. system of verification possible through By creating new ways of trading goods digitally enabled services helps solve and services, digital technologies may the problem of trust that hampers modify comparative advantage. For small businesses. The development instance, digital technologies make it of a plethora of bed-and-breakfast possible for firms in remote, least- facilities and holiday homes is one developed countries (LDCs) to sell example of the type, as the rating products around the world. Digital provided by users of digital platform technologies such as 3D printing signal the quality of the service. In the make it possible for countries with case of women, digital technology not appropriate resources of raw materials only improves women entrepreneurs’ to localize production and supply access to external finance, but it also customized goods without the need eases the time burden of women to set up a whole industry, for example, workers or women entrepreneurs who for small firms to develop a software have to handle both domestic duties component for printers. Mobile and work.

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 13: COMMENTS 297

Despite these benefits, digital • Addressing current weaknesses technologies present a number of in education and skill developments challenges. The authors highlight to meet those required by the two major issues: the digital divide digitalization process. Note that this between richer and poorer economies is important not only for workers and the risk of loss of privacy. There (who need to be retrained), but also are also large inequalities in access for consumers (older people can and the ability to use digital technologies reap the benefits of new technology, within countries: between old and but they need digital training) and young, women and men, and small self-employed individuals who can and large firms. Small and medium- now access the global market. sized enterprises (SMEs) have less access to digital technologies than • Creating the business environment do large firms, and women have less to attract foreign investment, access to digital technologies than supported by suitably liberal policies do men (World Bank Group and to allow inflows of information and WTO, 2020). The adoption of a communications technology (ICT) development framework based on products, services and expertise. these new technologies may create important distributional It is worth stressing further the role consequences if these differences that trade policy can play to create the are not tackled. appropriate environment for a country to take The chapter highlights “One policy advantage of the some of the policies that can help to opportunities that digital that governments in bridge the digital technologies provide and developing countries to attract investments. can put in place to divide is by First, some digital trade prepare for the changes making further policies can help reduce that new technologies commitments trade costs. For example, will bring about: under the by enhancing data General exchanges and allowing • Improving inadequate for the harmonization and geographically Agreement of e-certificates, uneven digital on Trade in governments can boost connectivity. Services.” the impact of digital technologies to facilitate • Developing an trade operations and effective regulatory framework customs cooperation. Second, trade to manage digital developments policies related to services sectors, and data flows. In this context, such as finance, distribution, logistics governments need to balance the and transport, are also key determinants legitimate objective of digital of the extent to which a country can reap development with those the benefits of digital technologies. such as consumer protection, Digital platforms can only partially help cybersecurity and data privacy to reduce trade costs if uncompetitive in ways that are not more trade- transport services result in exorbitant distorting than necessary. transport costs. Third, goods-related 298 CHAPTER 13: COMMENTS

trade policy measures matter too. These innovation and increase persistence include, for example, import tariffs on of geographical inequalities. The issue informatics and telecommunications of the power of digital platforms is equipment or a de minimis threshold to particularly relevant for a large number allow more shipments and parcels, of developing countries. Large digital typically shipped by individuals and providers, firms and platforms small businesses engaging in cross- predominantly originate from border e-commerce, to trade duty-free. a few countries. National competition In all of these cases, policies need to be authorities are likely to play a prominent carefully designed to take into account role. But, since digital firms tend to potential import-competition disruptions be international, there is a rationale that may be caused by technology and for international cooperation. policy changes. Second, international cooperation Beyond the diverse unilateral measures may address the issue of data that governments can put in place to availability. In a digital world, data reap the benefits of digital technologies availability is key for innovation in and minimize risks, there is also an business models and for process important role for international optimization in the supply chain. cooperation to play to make digital Increasingly, data are essential technologies more inclusive. to determine firms’ competitiveness and a country’s First, international comparative advantage. cooperation may “By significantly Data therefore are kept help to tackle the internal to firms. This potential negative impact reducing the raises an important of digitalization on cost to access challenge of structural competition. One international inequality within and characteristic of digital markets, digital across countries. technologies is that they technologies are characterized by Third, international network externalities, provide new cooperation may help that is, the value of the opportunities for to resolve some of the network increases with small businesses tensions generated by its size. When choosing to benefit uncoordinated unilateral between two products, from trade.” approaches to consumers prefer the digitalization. Over product with more users. the last decades, In these circumstances, governments have winner-takes-all dynamics prevail and introduced several policies related deter further market entry. Market to digital technologies. Some of dominance issues emerge. Product these policies have created tensions. competition becomes fiercer, and some Other policies may simply have been platforms create monopoly positions unnecessarily divergent. This led some with big rents. They will tend to be countries to look for a more coordinated geographically concentrated, since approach. This need is reflected in talented people and successful firms some recent regional trade agreements are concentrated. This may hinder (RTAs) that include digital technology- CHAPTER 13: COMMENTS 299 related provisions, such as on the cross- in the chapter and in this commentary, border transfer of information, data it is key to tackle the specific obstacles localization requirements, e-signatures that MSMEs and unskilled workers and e-authentication, protection of (many of whom are women) face to take personal information of e-commerce advantage of the opportunities that these users, and so on. new technologies present, as well as their costs of adjustments. Discussions Finally, ongoing World Trade at the WTO can work to this purpose. Organization (WTO) negotiations and joint initiatives related to services, References electronic commerce and micro, small and medium-sized enterprises (MSMEs) Lendle, A., Olarreaga, M., Schropp, S. and can help deliver more inclusive digital Vezina, P.-L. (2016), “There goes gravity: development. One policy that can help e-Bay and the death of distance”, The to bridge the digital divide is by making Economic Journal 126(591): 406-441. further commitments under the General Agreement on Trade in Services (GATS). World Bank Group and the World Trade This could be a way to enhance policy Organization (WTO) (2020), Women and credibility and thereby help attract Trade: The Role of Trade in Promoting Gender foreign direct investment. As discussed Equality, Geneva: World Bank and WTO. Chapter 14 Blockchaining international trade: a way forward for women’s economic empowerment?

Amrita Bahri* Abstract

Blockchain technology holds considerable promise to boost women’s participation in international trade. Blockchain’s anonymity and efficiency could enable many women, who otherwise would be constrained by law, custom or high costs, to engage in financial and business transactions. Blockchain can be used to enable women who lack identification documents to undertake transactions that otherwise would require official identification, and to prove their ownership of assets without interventions from male family members. Blockchain can help micro, small and medium-sized enterprises (MSMEs), more than 30 per cent of which are owned by women, to overcome costs associated with exporting and importing, and interact easily with consumers, other businesses engaged in the supply chain, customs officers and regulatory bodies. Blockchain also can increase women farmers’ access to information on crops and market conditions, thus improving their bargaining position. However, if not regulated properly, the expanded use of blockchain also could increase the relative return to sophisticated technology skills that men are more likely to have, and increase the digital divide between men and women. The World Trade Organization (WTO) could play a key role in developing guidelines for the use of blockchain in international trade to support the efficient and inclusive adoption of blockchain technology.

* The contents of this chapter are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. 302 CHAPTER 14

Introduction country indicators, such as women-friendly laws and procedures The 2017 Joint Declaration on Trade relating to mobility, employment, and Women’s Economic Empowerment remuneration, marriage, motherhood, (2017 Declaration) has underscored entrepreneurship and access the interdependence of gender justice to finance. and sustainable economic development. The 2017 Declaration Critiques have called the 2017 reaffirms that “international trade and Declaration a Trojan Horse, which may investment are engines of economic bring in more contentious issues to the growth for both developing and already stalled multilateral trade developed countries, and that negotiations (Bissio, 2017), as it can improving women’s access to “allow developed countries to use the opportunities and removing barriers to advantage of more forward gender their participation in national and policies to obstruct exports from international economies contributes to underdeveloped nations” (Singh, sustainable economic development”.1 2017). In addition, Indian officials have It seeks to build a framework that will observed that “gender does not relate guide members to adopt or adapt to trade and hence WTO should refrain gender-responsive trade policies that from bringing in non-trade issues” will eliminate barriers to trade for (Prabhu, 2017). There is strong women and hence increase their evidence to contradict these concerns. participation in trade. This multilateral Neoliberal economists have regarded initiative aligns with and complements trade liberalization as the most the Convention on the Elimination of all effective mechanism to empower Forms of Discrimination against women (Bhagwati, 2004; Seguino, Women 1979 and Goal 5 of the 2000).3 McKinsey Global Institute has Sustainable Development Goals in shown that advancing gender equality the United Nations 2030 Agenda for could add nearly US$ 28 trillion to Sustainable Development. global annual GDP (2015). Moreover, the Trojan Horse argument is This is a promising development for unfounded and misplaced, as the very the multilateral trading system. Even nature of this initiative is non-binding in though it is a non-binding declaration, nature. Neither does it impose any it marks a concrete starting point for obligation on signing members to future deliberations and discussions on undertake actions, nor does it confer how trade can accommodate gender any right on any member to justify an justice concerns. However, it is otherwise WTO-inconsistent measure. surprising to see that almost one third The only plausible way for developed of the WTO members have refused to countries with advanced gender- join this endeavour. Most of these responsive trade policies to obstruct non-signatory members, as compared exports from developing countries to the signatory members, have a much could be through the invocation of the lower combined average score on the public morality exception under Article Women, Business and the Law (WBL) XX(a) of General Agreement on Tariffs global index (World Bank Group, and Trade 1994 (GATT 1994); 2019).2 The WBL as calculated by the however, this option remains available World Bank is based on several to WTO members with or without CHAPTER 14 303 being a party to the 2017 Declaration examined. This chapter uses a typology (Bahri, 2020). of “blockchaining” to refer to the conduct of international trade through The 2017 Declaration should therefore blockchain technology. The first not be seen as a Trojan Horse. On the section briefly explains the concept of contrary, it is a much awaited blockchain technology. The following multilateral response that can usher in section outlines how blockchaining a new era of trade inclusiveness. This trade can enable women to overcome development coincides with an era of the barriers that impede their trade digitalization that is witnessing participation in trade. The final section the creation of new products, new examines whether blockchaining markets, new services and different international trade requires multilateral ways of production and transportation. regulation and the possible role the This wave of digitalization comes with WTO can play in this respect. a promise to make international trade more inclusive in the future as it will Blockchain explained allow new players to participate and reap the benefits of trade across Blockchain is the new buzzword in the borders. In particular, trade international trade community. Different digitalization can contribute to the public and private stakeholders around economic empowerment of women the world are talking about this by allowing them to technology, which may overcome multiple shape and change the barriers that impede “Blockchain – way international trade their participation in takes place in the future. trade. Paragraph 4 of a new trend Yet, only a few of us the 2017 Declaration in trade really understand what affirms that the digitalization this technology stands regulation of trade that promises for and what it entails. digitalization (including to transform Simply put, blockchain trends such as enables a list of e-commerce and international transactions (known blockchain technology) trade – can as a ledger) to be can remove barriers for help women stored in a decentralized “women’s economic in overcoming manner. It is a kind of empowerment and barriers to trade.” electronic bookkeeping increase their that structures data, participation in trade”.4 encrypts it and stores it on a network. Unlike This chapter focuses on how traditional databases that are blockchain – a new trend in trade administered and controlled by a digitalization that promises to transform centralized entity, blockchain technology international trade – can help women in is based on a peer-to-peer network overcoming barriers to trade. The role and is administered in a decentralized multilateral regulation in general, and manner (Ganne, 2018, p. vii). The the WTO in particular, can play in concept is simple, yet experts argue fostering gender justice through that its potential to revamp international blockchain technology is also trade is quite significant. 304 CHAPTER 14

Studies show that this distributed- wage rates; insufficient protection of ledger technology could lower the cost maternity needs; customary norms on of cross-border payments, security gender and patriarchal social set-ups; trading and compliance by US$ 15-20 discriminatory legislation and policy billion per year by 2022 (McKinsey, frameworks; lack of ownership of 2018, p. 5). Recent developments also property and other assets such as show that blockchain has the potential copyrights and patents; and limited of making foreign trade more inclusive access to banking services and by removing the barriers women face in financing opportunities. These wide- trade and commerce. This can be done ranging barriers work together to by including unbanked women in the hinder women’s access to economic formal financial system, closing or opportunities by impeding their control reducing the small business credit gap, over or ownership of economic enhancing transparency and the resources. Addressing most of these decentralized creation of records, and barriers is outside the scope of this reducing transaction costs and time chapter due to space constraints. involved in doing business. Blockchain This academic intervention outlines and can promote financial inclusion, as its addresses only those barriers that can key benefits include instant settlement, be possibly reduced or removed with no third-party intermediary such as a the help of blockchaining international bank, digital payments, low costs and trade. These barriers, and the ways in fees, and secure, decentralized and which blockchain technology can risk-free transactions. These benefits address them, are categorized in the help us understand why blockchain following three sub-sections. can change the way we trade and make this process more inclusive 1. Access to finance and markets in nature. The employment of In several countries, various barriers blockchain technology for the conduct impede women’s access to owning a of foreign trade can be termed simple bank account (World Bank “blockchaining trade”. Group and WTO, 2020, p. 96). In the rural areas of low income countries, Barriers to trade for women: only about 20 per cent of bank account How blockchain can help holders are women (UN Women, 2019, p. 5). Until 2017, the Democratic Lacking a universally accepted Republic of Congo had laws that definition for economic empowerment forbade women from opening a bank of women, this chapter views it as a account, registering a business or even process that provides women with signing simple contracts (World Bank equal economic opportunities by Group, 2019, p. 11). Certain other eliminating or reducing the barriers countries, including Bolivia, Malawi, women face in accessing and owning Maldives and Mauritius, have recently economic resources. Multiple barriers repealed similar discriminatory laws. impede the economic empowerment of Yet, it is still possible to find such laws, women, including: lack of education including in Bahrain and Uzbekistan. and skills development; restrictive In Bahrain, for instance, the law access to employment; excessive designates the husband as the head of household responsibilities; poor family and requires the wife to obtain working conditions and discriminatory permission from him for any task CHAPTER 14 305 such as opening a bank account or do not require an internet-backed registering a business (World Bank smartphone.5 These innovations allow Group, 2019, p. 13). women living in villages, hundreds or thousands miles away from bank Blockchain cannot change such laws branches, to engage in national and and societal norms, but its peer-to- international transactions, apply for peer technology can allow women to loans and have purchasing power in carry out payment transactions without their hands. Statistics demonstrate that an intervention from a third-party women-owned businesses receive 23 intermediary such as a bank. This per cent less funding compared to enables women to have access to male-owned businesses (OECD, 2018, finance, receive and send money, pp. 5 and 22). Platforms such as save money in a secured manner and EtherLoan and WeiFund can enable create a financial history that will allow women entrepreneurs to build up them to build creditworthiness and creditworthiness with the help of hence secure credit in a cost-effective monetary transactions recorded in their manner. Lower costs associated with individual blockchain-based identity.6 access to finance, secured In this manner, women in developing transactions and the mobile nature of countries can secure a loan without this technology empower women who having to go through cumbersome may not have an identity document to banking procedures. open a bank account. This also helps women who may not be able to afford 2. Creation and storage of identity the associated banking costs, or and ownership documents who may be deterred from going in According to the World Bank, women person to a bank branch due to familial in developing countries are less likely constraints and patriarchal cultural than men to hold an official norms. In this manner, blockchain identification document such as a birth technology embodies the notion certificate, a passport or any other kind of women’s financial autonomy of national identity card (Hanmer and and independence. Dahan, 2015). The World Bank’s Women, Business and the Law report UN Women and the World Food shows that, in certain countries Programme have launched a including Afghanistan, Benin and blockchain-backed initiative that allows Pakistan, a married woman cannot Syrian refugee women in Jordan to apply for a national identity card in the have an online account without going same way as a married man (World through any third-party financial Bank, 2018, p. 2). This restricts intermediary (UN Women, 2018). women’s ability to work, do business This enables these women to access or travel. Without an official identity their funds through a simple eye-scan document, women cannot enter into at selected supermarkets and receive contracts, register businesses, open cash in a secure and cost-effective bank accounts, secure credit or manner. Among many other finance- develop a credit history. Acknowledging oriented initiatives, a blockchain this barrier, the UN Sustainable start-up – Spenn – is exploring ways Development Goal 16.9 has set of making instant financial transfers the target of providing everyone through simple SMS services that (regardless of gender) with a legal 306 CHAPTER 14

identity by 2030. Blockchain can help MSMEs’ engagement in foreign trade achieve this target as it can liberate are various factors including tariff and women living without an official non-tariff barriers, cumbersome and identification through creation and expensive customs procedures, storage of their personal identification financial transactions with associated documents in an immutable manner. costs and difficulty in accessing A digital identity can help women who finance. Removal of these barriers may do not have a passport or any kind of not just empower these enterprises, personal identification document to but also those women owning almost apply for bank accounts, secure one third of all formal MSMEs in the employment and register businesses. world. Blockchain can help in this However, the legal validity of respect. A report by the European blockchain-generated identification Parliament observes that blockchain documents is an issue that, absent a can help MSMEs internationalize, universally accepted framework, would overcome costs associated with depend heavily on each country’s laws exporting and importing, and interact and regulations. easily with consumers, other businesses engaged in the supply Blockchain can also store records chain, customs officers and regulatory such as financial transactions, proofs bodies (European Parliament, 2018). of ownership and employment history in a secure and cost-effective manner. Recent studies have shown that Storing land titles on blockchain can blockchain can possibly save 20 per allow women to prove their land cent of total transportation expenses, ownership without any possible and it can reduce barriers within global interference from a male family supply chains and increase global member or any possibility of tampering trade by approximately 15 per cent or fraud. An ongoing project in (Ganne, 2018, pp. xi and xii). It can Viet Nam is exploring how blockchain also lower the cost of doing business can enable businesswomen to prove by cutting paperwork requirements their ownership of assets, establish and administrative hurdles posed by ownership of intellectual property, customs authorities and financial secure a digital identity and boost their institutions. Blockchain can automate overall access to finance (Hammond the credit checks and verification and Young, 2018). measures throughout the supply chain, as it can automatically register 3. Engagement in global value documents and store new data in a chains and enhanced market decentralized fashion. All of this can access for MSMEs enable the financial sector and the More than 30 per cent of MSMEs shipping industry, for example, to in the world are owned by women reduce total costs by 15 to 30 per cent entrepreneurs (International Finance (Ganne, 2018, p. xii). This is a Cooperation, 2011, p. 5). Yet, women significant cost reduction for MSMEs, have not been able to participate which would indirectly facilitate and actively in international trade. Only encourage women to access global one in five of these MSMEs engage markets. Hence, lower costs for in international trade (Abney and financial, customs, transportation and Gonzalez Laya, 2018). What impedes legal requirements can help MSMEs CHAPTER 14 307 gain competitiveness in foreign of the barriers they face in accessing markets at higher profitability. This in trade and commerce. At the same turn can increase their overall market time, it must also not be forgotten that access and make it easier for them to technologies can further exacerbate participate in international trade. gender inequality due to the special nature of skills required to operate the A UN blockchain-based technology. Blockchain initiative – Buy from in particular is an Women – aims to equip “Blockchain operative system that female farmers in technology needs a highly developing countries embodies specialized skill and with crucial information the notion of understanding from its on the overall size of users. Lack of these their cultivable land, women’s financial skills and understanding production and weather autonomy and of how to operate a forecasts, and market independence.” blockchain-based prices of their products mobile application, or through simple text how to initiate a smart messages.7 This innovation can contract, or how to create, save or connect female farmers to global value access documents, might erect chains (GVCs), thereby increasing their even higher and formidable barriers market access and awareness to be to trade for women. able to negotiate better deals. It could enable them to understand and track Most of the blockchain processes the journey their produce undertakes need access to the internet. An OECD before it reaches the final consumer, study has shown that some 327 million and hence be better informed about fewer women than men in the world prices and the sources of demand. have a smartphone device with mobile Enhanced traceability of products internet access. Women are heavily could enable female farmers and under-represented in information and entrepreneurs in developing countries communications technology (ICT) to identify new market opportunities related jobs, and men are four times and expand existing market access. more likely than women to gain skills and understanding of ICT (OECD, Blockchain is certainly not a magic p. 5). Intel and Dalberg (2012) find wand that simply needs to be waved that 25 per cent of the women who in order to achieve economic do not engage online are generally empowerment of women. It cannot not interested in using the internet, lead to the amendment of gender- and almost all of them believe that discriminatory laws. It cannot change accessing the internet would not bring the ways in which gender-neutral laws them “any benefit”. These findings are enforced in some countries. provide a strong signal that, just like It cannot reconstruct the societal free trade, use of blockchain in trade set-ups entrenched in patriarchal and commerce can create more norms and beliefs. However, this study barriers for women to trade if not demonstrates that blockchain can regulated properly. It could further serve as a technological intervention exacerbate the digital divide between that can help women overcome some men and women. A robust regulatory 308 CHAPTER 14

environment is therefore needed to International Trade has issued a report make this technology work in parallel that seeks to develop a regulatory for trade as well as for the economic ecosystem in the European Union empowerment of women. for blockchain and its businesses (European Parliament, 2018). The Building regulatory report acknowledges the potential role environments: why the blockchain can play in conducting WTO’s role is indispensable international trade in a cost-effective manner and making it gender- Blockchain is regulated differently in responsive in nature. However, data different parts of the world. The United privacy concerns and the General Data States has taken the lead in proposing Protection Regulation (GDPR)11 seem regulations on blockchain at the to make this a distant reality in the national level, yet multi-layered European Union unless future regulations at federal and state levels blockchain applications can include and different state laws that regulate mechanisms that protect personal data blockchain make its operation and the privacy of users who want to somewhat complicated and uncertain.8 remain anonymous or be forgotten by With Blockchain and Cryptocurrency the database. As per GDPR, all Regulation 2019, Mexico has individuals have a right to decide how developed a legal framework to their personal information and personal regulate the financial technology data are treated. This includes the right industry that extends to the regulation to be forgotten, right to data portability, of cryptocurrency, crowdfunding right to access information related to and e-money.9 Belarus has recently you and right to edit or delete your enacted a specialized law known information or data. On the other as the Digital Economy Development hand, blockchain is an immutable Ordinance, which designates ledger, which ensures that the available blockchain as a specific sector with data are visible to everyone in a a specialized legal regime to regulate decentralized manner and that the blockchain-based businesses in the data cannot be deleted or be forgotten. country.10 These and many other This conflicting relationship between countries have gone ahead and blockchain-run applications and GDPR embraced this growing technology and brings to light two clashing interests, these evolving business models. Yet, i.e. the promotion of business and multiple countries still remain sceptical innovation, and the protection of and remain far from either regulating privacy and data. this area or even legalizing it. These examples show that many China, once considered as a champion regulatory agencies are either trying of cryptocurrency, has banned the use to catch up with this rapidly evolving of initial coin offerings since 2017 technology, or are in a major state (Wildau, 2017). On the other hand, of disagreement about the value China’s Supreme Court has recently blockchain adds to the ecosystem issued a landmark ruling that treats of international trade. This lack of blockchain-authenticated evidence regulation or the existence of different as binding in legal disputes (Dotson, country regulations paves an uncertain 2018). The European Committee on road ahead for blockchain-supported CHAPTER 14 309 businesses. This in itself poses a blockchain-enabled documents. barrier to the use of blockchain for Alternatively, they can by reference economic empowerment of women. incorporate the Model Law on The discussion shows that the nature Electronic Transferable Records of blockchain and its employment in adopted by United Nations cross-border trade cannot solely be Commission on International Trade regulated by country-specific Law (UNCITRAL) in 2017, which legislation. A harmonized regulatory established the benchmarks and ecosystem is needed to counter the conditions that need to be fulfilled challenges that this technology can before an electronic record can be face in the spheres of data protection, treated as a transferable document.12 privacy, transparency and financial crime as the data fed into the system WTO members could establish a are immutable. If not regulated properly Blockchain Advisory Committee to and in a unified manner, it can become study the applications of blockchain the “Achilles’ heel” of the trade that can have an impact on international digitalization era by widening the digital trade and make recommendations on divide between women and men and how such applications can be between technologically advanced and regulated in a coherent and unified not-so-advanced countries. Small firms manner in the future. This Committee and marginalized players in trade, such should also engage with and gather the as women in developing countries, opinions of different members on the could be marginalized even further future of blockchain, the impact it is (Ganne, 2018, p. 88). Internationally having in their country and their vision accepted global standards or a on its regulation. This will enable the multilateral regulatory framework is Committee to closely follow country- required to ensure that this does not specific developments in blockchain happen. The WTO can play a pivotal technology impacting international role in this respect. trade. The Committee can identify the regulatory hurdles that possibly need Blockchain is not ripe for a to be addressed by individual multilaterally negotiated regulation as members. This committee should have of yet, as this field is rapidly evolving multidisciplinary experts, with expertise and new applications and businesses in the fields of anti-money laundering, are changing the ways cross-border tax evasion, business development, trade is carried out in different parts of information technology, gender justice, the world. At this early stage, the WTO environment protection, data protection can develop a set of guidelines for the and organized crime. This Committee use of blockchain in international trade. can also include representatives from These guidelines can provide guidance the private sector, as industries can to the national regulatory authorities absorb the high cost the adoption and policymakers on how they can of this technology entails. The create a business-conducive regulatory interdisciplinary nature of this work will environment for these innovative allow for the creation of dialogues and technologies in the future. The deliberations among different public guidelines can establish global and private stakeholders, which is benchmarks for recognizing the legal essential to preparing a conducive validity of blockchain transactions and regulatory environment that can 310 CHAPTER 14

balance different conflicting interests. Economic empowerment of women This will enable the proposed has been a focal point for the WTO’s committee to employ a concerted Aid for Trade Programme since 2011. and cooperative approach for making Following the 2017 Declaration, the recommendations on developing a Aid for Trade Work Programme framework for international 2018-2019 is the first attempt by the standardization of digitalized WTO to analyse how international transactions and applications. trade can contribute to the design of a gender-responsive trade In this manner, the WTO can play an agenda (WTO, 2018). Focusing on instrumental role in the development economic diversification and women of international standards and best empowerment, the Programme crafts practices that can underpin the a multi-pillared role for Aid for Trade. regulation of blockchain-based This role is focused on providing youth businesses in the future. It can also and women with training on required recommend guidelines for the skills, access to finance, bridging the formation and conduct of public-private digital divide between men and women partnerships that may be needed to and developed and developing employ blockchain technology for countries, increasing competitiveness cross-border trade. In doing so, the of MSMEs and connecting them to WTO can apply a gender-responsive GVCs, and organizing thematic approach, i.e. the WTO can workshops on digital connectivity, recommend gender-responsive best e-commerce and access to finance practices that members can employ for issues. Its focus on enhancing digitalization of trade and employment digital connectivity and bridging the of blockchain technologies to conduct digital divide opens up a window cross-border transactions. Employment for discussions on regulating of these international standards can blockchain technology under the ensure that blockchaining trade Aid for Trade agenda. provides equal economic opportunities to both women and men and that it Paragraph 5 of the 2017 Declaration helps women overcome the barriers mentions the agreement of WTO to trade they face at the moment. members to ensure that “Aid for Trade To establish a more predictable and supports tools and know-how for conducive business environment, analysing, designing and implementing WTO members can consider and more gender-responsive trade adapt these recommendations, and policies”.13 The future Aid for Trade if possible, transpose them into their Work Programmes should showcase national legislation. These the 2017 Declaration as a major recommendations, to begin with, may achievement and clarify the role Aid for not have any legal bearing, but they Trade can play in its implementation. can provide a blueprint for countries Moreover, paragraph 5 together with to develop their own legislation, paragraph 4 (affirming the need to regulations and procedures. Pending regulate trade digitalization for the establishment of the proposed women’s economic empowerment) Advisory Committee, the ongoing Aid mandates some discussion on the for Trade Programme can play an recent technological trends that are important role in this respect. shaping trade and can contribute CHAPTER 14 311 to women’s empowerment. The analysis of trade policy; enhancing upcoming Aid for Trade Work women entrepreneurs’ participation Programmes can offer a suitable in public procurement; connecting venue for these discussions. women entrepreneurs to international value chains; promoting financial Conclusion inclusion for women; women and trade in trade agreements; and women in Gender inequality is no longer digital trade. WTO members have to viewed simply as a purely ethical identify and describe the law, policy or or moral challenge; it is now recognized any other instrument they are using to as a significant challenge to economic achieve the mentioned good practices. development. The world economy They are also required to address the suffers when women – who account problem or barrier the mentioned best for one half of the world’s working-age practices are seeking to overcome. population – are not included in the Countries are also to identify the economy and are impeded from targeted beneficiaries, organizations contributing to economic growth and that are involved in this initiative, development. Recent studies show activities that are planned, and the how achieving the economic technological requirements for the empowerment of women has become planned activities. The questionnaire a compelling business case. Multiple also requires the members to describe interventions are required to achieve the results and outcomes they expect to women’s economic empowerment, achieve or have already achieved in the and international trade arguably is above-mentioned areas. This is an one of the required and effective appreciable initiative, which will allow interventions in this respect. Women’s the signatory members of the 2017 empowerment and international Declaration to reflect on whether they trade share an intricate and complex have made any progress in ensuring relationship, as the former can be that their trade policies and practices achieved through effective regulation are gender-responsive in nature. This of the latter. The 2017 Declaration can also lead to the sharing of ideas is a milestone development that and plans on how existing impediments acknowledges this relation and calls can be removed and gender equality for the creation of a gender-responsive can be achieved through trade laws, trade environment at national and policies and practices. This initiative international levels. can foster exchange on the adoption of technology (such as blockchain) and In line with the 2017 Declaration, the the creation of a conducive regulatory Trade Impact Group of International environment for the conduct of trade. It Gender Champions (IGC) has can provoke discussions in and among designed a questionnaire that calls on countries on how to create a gender- WTO members and observers to share positive trade environment with various best practices on various topics at best practices, including regulation of the upcoming Ministerial Conference blockchain-enabled trade transactions (MC 12) to build an evidence base for and applications. inclusive trade.14 These topics are wide-ranging in nature and cover Other steps also have been taken to the following aspects: gender-based implement the actions and non-binding 312 CHAPTER 14

commitments under the 2017 applications to create and store Declaration. For example, the WTO identification documents, create has nominated a Trade and Gender accounts to receive and send money Focal Point with a dedicated e-mail without banking services, create and address, which is responsible for use financial transactions to prove coordinating work among divisions, creditworthiness, apply for micro- taking account of what the WTO is finance, credits and trade financing, doing and identifying further actions and apply for and store intellectual and initiatives that the WTO can property rights (IPR)-related ownership undertake in this respect. Gender, documents. Such an initiative can trade and technology have formed the help reduce the digital divide between centre stage of discussions at the last men and women by enabling women few WTO Public Forums. These to reap the benefits of blockchaining Forums have brought companies, civil trade. Inclusion of these modules can society organizations, academics, breathe life into the 2017 Declaration, policymakers and intergovernmental which explicitly acknowledges the organizations together to discuss the role of technology in women’s issues of connecting women to global empowerment. This initiative, along trade and digitalization of trade. with other proposed actions, will Moreover, the WTO is planning to fan the flame even further. With the implement a women’s entrepreneurship ongoing discussions and scholarly programme that will provide women works on trade, technology and with training on specific tools and gender, half the battle against gender information on how they can achieve inequality is already won. We need to economic empowerment through trade. keep these discussions going in order This training programme could include to win the other half of this battle for modules on using simple blockchain gender justice. CHAPTER 14 313

Endnotes 9 Ley Para Regular las Instituciones de Tecnología Financiera (Diario Oficial I thank Professor Laura Carlson de la Federación el 9 de marzo de 2018). (Stockholm University) for her comments and feedback. I also thank my brilliant 10 Digital Economy Development Ordinance research assistant, Ana Alfaro Pizana, (Ordinance 8, 21 December 2017). for her initial idea of using blockchain for trade and gender, and encouraging me 11 Regulation (EU) 2016/679 of the European to write this piece and subsequent help Parliament and of the Council of 27 April with research and editing. I also thank 2016 on the protection of natural persons Gemma Parra and Guillermo Moad for with regard to the processing of personal their inputs. All errors and omissions are data and on the free movement of such author’s own. data, and repealing Directive 95/46/EC.

1 Joint Declaration on Trade and Women’s 12 Model Law on Electronic Transferable Economic Empowerment, signed at Records of the United Nations WTO Ministerial Conference (Buenos Commission on International Trade Law Aires, December 2017). (7 December 2017, A/72/458).

2 The members that have not signed the 13 2017 Declaration, para. 5. 2017 Declaration have a combined average score of 65.6 per cent, and the 14 Trade Impact Group: Call for Good members that have signed it have a Practices, https://s3.eu-west-2. combined average score of 80.7. amazonaws.com/igc-production/files/

3 Keynesian economists have countered References this point of view. Abney, D. and Gonzalez Laya, A. (2018), 4 2017 Declaration, para. 4. “This is why women must play a greater role in the global economy”, World Economic 5 Spenn Mobile Banking website, https:// Forum, 24 January 2018. https://www. www.spenn.com/. weforum.org/agenda/2018/01/this-is-why- women-must-play-a-greater-role-in-the- 6 Etherloan website, http://www.etherloan.io/; global-economy/ WeiFund website, http://weifund.io/?utm_ source=StateOfTheDApps. Bahri, A. (2020), “Women at the frontline of COVID-19: Can international trade law help?” 7 For more information, see the UN Women Journal of International Economic Law 23(3). webpage, http://www.unwomen.org/en/ digital-library/publications/2017/3/ Bhagwati, J. (2004), In Defense of buy-from-women-platform-brochure. Globalization, Oxford: Oxford University Press.

8 Several bills are pending approval: Bissio, R. (2017), “Is ‘gender’ a Trojan Horse Virtual Currency Consumer Protection to introduce new issues at WTO?”, Third Act of 2018; Virtual Currency Market World Network, 11 December 2017. and Regulatory Competitiveness Act of 2018; Blockchain Regulatory Certainty Dotson, K. (2018), “Supreme Court of Act 2019. China rules blockchain evidence admissible 314 CHAPTER 14

in legal disputes”, SiliconAngle, McKinsey & Co. (2018), “A Vision for the 7 September 2018. https://siliconangle. Future of Cross-Border Payments”, October com/2018/09/07/supreme-court-china-rules- 2018. https://www.mckinsey.com/~/media/ blockchain-evidence-admissible-legal- McKinsey/Industries/Financial%20Services/ disputes/ Our%20Insights/A%20vision%20for%20 the%20future%20of%20cross%20 European Parliament (2018), Blockchain: A border%20payments%20final/A-vision-for- Forward-looking Trade Policy, Committee on the-future-of-cross-border-payments-web- International Trade Report 2018/2085(INI), final.ashx 27 November 2018. McKinsey Global Institute (2015), “The Fallows, D. (2005), “How Women and Power of Parity: How Advancing Women’s Men Use the Internet”, Pew Internet and Equality Can Add $12 Trillion to Global American Life Project. www.pewinternet. Growth”. https://www.mckinsey.com/ org/2005/12/28/how-women-and-men-use- featured-insights/employment-and-growth/ the-internet/ how-advancing-womens-equality-can-add- 12-trillion-to-global-growth Ganne, E. (2018), Can Blockchain Revolutionize International Trade?, Geneva: WTO. Organisation for Economic Co-operation and Development (OECD) (2018), “Bridging Hammond, A. and Young, D. (2018), “Can the Digital Divide: Include, Upskill, Innovate”. blockchain disrupt gender inequality?”, World http://www.oecd.org/internet/bridging-the- Bank Blogs, 7 March 2018. https://blogs. digital-gender-divide.pdf worldbank.org/psd/can-blockchain-disrupt- gender-inequality Prabhu, S. (2017), Indian Press Conference, WTO Ministerial Conference, Buenos Aires, Hanmer, L. and Dahan, M. (2015), 11 December 2017. “Identification for development: Its potential for empowering women and girls”, World Seguino, S. (2000), “Gender Inequality and Bank Blogs, 9 November 2015. https://blogs. Economic Growth: A Cross/country worldbank.org/voices/identification- Analysis”, World Development 28(7): development-its-potential-empowering- 1211-1230. women-and-girls Singh, A. (2017), “Explained: India’s refusal International Finance Cooperation (2011), to back WTO declaration on gender equality “Assessing and Mapping the Global Finance in trade”, QRIUS, 15 December 2017. Gap for Women-owned MSMEs”, 20 June https://qrius.com/explained-india-refusal- 2011. https://cdn.ymaws.com/www. gender-equality-trade/ andeglobal.org/resource/dynamic/ blogs/20111212_151426_19862.pdf UN Women (2018), “UN Women and World Food Programme harness innovation for Intel Corporation and Dalberg (2012), women’s economic empowerment in crisis “Women and the Web: Bridging the Internet situation”, 18 September 2018. http://jordan. and Creating New Global Opportunities unwomen.org/en/news/stories/2018/ in Low and Middle-Income Countries”. september/un-women-and-wfp-blockchain https://www.intel.com/content/dam/www/ public/us/en/documents/pdf/women-and-the- UN Women (2019), “Innovation web.pdf for Gender Equality”. http://www.unwomen. CHAPTER 14 315

org/-/media/headquarters/attachments/ worldbank.org/en/702301554216687135/ sections/library/publications/2019/ WBL-DECADE-OF-REFORM-2019- innovation-for-gender-equality-en. WEB-04-01.pdf pdf?la=en&vs=733 World Bank Group and World Trade Wildau, G. (2017), “China central bank Organization (WTO) (2020), Women and declares initial coin offerings illegal”, Trade: The Role of Trade in Promoting Financial Times, 4 September 2017. https:// Gender Equality. https://www.worldbank. www.ft.com/content/3fa8f60a-9156-11e7- org/en/topic/trade/publication/women-and- a9e6-11d2f0ebb7f0 trade-the-role-of-trade-in-promoting- womens-equality World Bank (2018), “Global ID Coverage by the Numbers: Insights from the ID4D-Findex World Trade Organization (WTO) (2018), Survey”. http://pubdocs.worldbank.org/ Aid for Trade Work Programme 2018-2019, en/953621531854471275/ID4D-FINDEX- “Supporting Economic Diversification and Note-Release2018.pdf Empowerment for Inclusive, Sustainable Development through Aid for Trade”, WTO World Bank Group (2019), “Women, Committee on Trade and Development, Business and the Law 2019: A Decade of Aid for Trade, WT/COMTD/AFT/W/75, Reform”, 27 February 2019. http://pubdocs. 7 May 2018. 316 CHAPTER 14: COMMENTS

Comments

EMMANUELLE GANNE*

Since the launch of the 2017 reap the economic benefits of Declaration on Trade and Women’s international trade. Economic Empowerment, growing attention has been paid to the role The author argues that “blockchaining that trade can play in helping women international trade”, i.e. using realize their full potential in the world blockchain to process trade economy. In a joint publication titled transactions, can boost women’s Women and Trade: The Role of Trade in participation in international trade in Promoting Gender Equality, the World three ways. First, it can help women Bank and the World Trade Organization access finance by allowing unbanked (WTO) show that trade is largely women to carry out payment beneficial to women. Firms that engage transactions on a peer-to-peer basis in international trade employ more without a third-party intermediary and women than non-exporting firms in full independence. The use of (33 per cent on average compared blockchain to “bank the unbanked” and to 24 per cent for non-exporting firms) to facilitate the transfer of money has (World Bank and WTO, 2020), and been widely explored both in the trade increases women’s wages and literature and in the business world and economic equality, and creates better could have a major impact on women. jobs for women. Beyond the examples mentioned by the author, another interesting initiative is However, women face many more Vipicash, a FinTech start-up that uses constraints than men in participating blockchain technology to enable in international trade both in terms of secure money transfer among women, “at the border barriers” – e.g. so that they can have access and control discrimination faced at border over their own money, independent of crossings – and “behind the border” the male members of their family. constraints like difficulty to obtain Another interesting potential of finance, including trade finance. While blockchain noted by the author is the much has been said on the role that opportunity that the technology offers e-commerce plays in empowering to traders to create their own financial women, few studies have so far history. This is particularly important discussed how blockchain technology for micro, small and medium-sized can help empower women to trade. enterprises (MSMEs) and women, The chapter written by Amrita Bahri who often struggle to access finance, provides useful insights into how including trade finance, because of this technology can help women lack of credit history.

* The contents of this commentary are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. CHAPTER 14: COMMENTS 317

The second channel though which initiatives could prove particularly blockchain can empower women, the beneficial for small traders. author argues, is through the creation and storage of identity and ownership However, as the author rightly notes, documents. The question of identity blockchain is not a magic wand. lies at the heart of international trade. Beyond the regulatory aspects that the It determines in many ways the ability author discusses – e.g. blockchain to trade. Trade requires knowing who cannot change the way in which laws you deal with and being able to verify are enforced, blockchain poses a risk and trust the identity of your trading of regulatory fragmentation – a partner. Blockchain opens new ground particularly important issue is that of in that respect because it allows interoperability. Blockchain can be a people without an official identity powerful tool to remove frictions from to create their own digital identity. international trade, but only if the It enables the emergence of what multiple platforms that are emerging is called the self-sovereign identity in the financial, transportation and (SSI) model according to which logistics, and customs fields talk to individuals and organizations have sole each other. Unfortunately, we are ownership of their digital identity and currently facing a digital island control it. The rise of SSI, combined problem. Making blockchain trade- with the possibility that blockchain related platforms interoperate will offers to build one’s own financial not only require finding ways to build history, could potentially be one technical bridges between platforms of the most powerful levers to built on different distributed-ledger empower women. technologies, but also aligning the semantics (what means When it comes to trade, what), data models and a third critical channel, “Growing processes. This is the author notes, is the where multilateral potential that blockchain attention has organizations can play opens to facilitate been paid to the an instrumental role. engagement in global role that trade value chains (GVCs) can play in The author suggests and enhance market helping women three valuable courses access for MSMEs, of action for the WTO. many of which are realize their full First, the WTO could women-owned. potential in the develop a set of Blockchain’s potential to world economy.” guidelines for the use slash coordination and of blockchain in processing costs is international trade to what led major stakeholders involved in provide guidance to national authorities international trade, from banks to on how they can create a business- shipping companies and big retailers, conducive regulatory environment for to inject millions to build blockchain- the use of blockchain. Second, the based consortia to enhance author proposes the establishment of transparency and remove frictions a Blockchain Advisory Committee to along supply chains.1 The cost identify regulatory hurdles, study the reductions that could result from these applications of blockchain that can have 318 CHAPTER 14: COMMENTS

an impact on international trade and information and communications make recommendations on how such technology (ICT) infrastructure and applications can be regulated in a information technology (IT) education coherent manner. Third, training on for women. Women’s access to the blockchain could be integrated into internet and ownership of digital WTO training, in particular the woman devices remain significantly lower than entrepreneurship programme that the men’s2 and tech-related jobs remain Organization is planning. male-dominated. This is also true for blockchain.3 Multilateral organizations Blockchain can be a powerful tool to have a key role to play in helping remove frictions from international trade address these issues and turn and promote women’s access to blockchain’s potential for women into a international markets but realizing the reality. And so do women themselves. full potential of blockchain will require Women’s blockchain networks, such more than the technology. It will require as Global Women in Blockchain4 and political will and action to allow African Women in Blockchain,5 that interoperability of blockchain platforms assist women and help them seize and to create a regulatory framework the opportunities that this new that is conducive to the large-scale technology opens, are welcome deployment of the technology. But it developments that will, no doubt, will also require addressing the digital contribute to making blockchain work divide through investment in physical for women’s economic empowerment. CHAPTER 14: COMMENTS 319

Endnotes References

1 For an overview of various consortia Intel Corporation and Dalberg, “Women and established in the trade and trade finance the Web: Bridging the Internet Gap and space, see Patel and Ganne (2019). Creating New Global Opportunities in Low and Middle-Income Countries”. https://www. 2 In developing countries the internet intel.com.au/content/dam/www/public/us/en/ access gap is 25 per cent on average, documents/pdf/women-and-the-web.pdf with a wide variation across regions (Intel and Dalberg, 2012). Longhash (2018), “Blockchain’s Gender Divide: A Data Story”. https://en.longhash. 3 A 2018 study by Longhash showed that com/news/blockchains-gender-divide-a-data- among 100 blockchain start-ups, female story employees accounted for just 14.5 per cent and female managers for 7 per cent Patel, D. and Ganne, E. (2019), “Blockchain only. In 78 out of the 100 start-ups, there is and DLT in Trade: A Reality Check”, white no female leader (Longhash, 2018). paper, London: Trade Finance Global.

4 https://globalwomeninblockchain.org/. World Bank and World Trade Organization (2020), Women and Trade: The Role of Trade 5 https://afriblockchain.org/africa-women-in- in Promoting Gender Equality, Geneva: World blockchain/. Bank and WTO. SECTION 4 The ways forward

Chapter 15 Data regulation in trade agreements: different models and options ahead

Henry Gao*

* The contents of this chapter are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. 324 CHAPTER 15

Introduction the collection, analysis and utilization of data. Similar changes can also be “Data is the new oil”. Just like oil, observed in the realm of services which powered the economy in the trade, where the advent of the internet last century, data are what moves the has not only removed the natural world today. This is especially true for barrier of physical distance and made international trade. The crucial role many hereto non-tradable services played by data can be observed at tradable, but also, through the every step of the process, from the servicification of goods (Lanz and conception of a new product and the Maurer, 2015; WTO, 2018, pp. 111-116 sourcing of raw materials and parts, and 157), rendered the movements of to the manufacturing process and the physical goods unnecessary and transportation of products across turned them into new categories of borders, until they finally reach the services trade. hands of consumers from every corner of the world. More importantly, rather than acquiring the goods or services for their sole To be sure, the process of international use, consumers nowadays often find trade has always been accompanied that all they get is the temporary right by the exchange of data, be it about to access and deploy data. At the the product, the seller or the buyer. same time, as the access to data is What is unprecedented, though, is the democratized, the amount of data ubiquity of data in the modern generated by users also grows economy. This is a manifestation of the exponentially. A report by McKinsey, many important changes that emerged for example, estimated that global data in the first two decades of the new flow has grown 45 times in the decade century. For trade in from 2005 to 2014 goods, these include (Manyika et al., 2015). the following factors: Such phenomenal the emergence of “Rather than growth also led to regional and even global acquiring breakthroughs in supply chains, which the goods or artificial intelligence, involves the sharing services for where powerful machine and exchange of data their sole use, learning helped to among many parts consumers unleash the full potential manufacturers during of big data to generate the various stages nowadays often refreshing insights into leading to the final find that all everything it touches. products; the invention they get is the In the area of trade, for of 3D printing, which temporary right example, big data not makes it easy to to access and only helps us to gain customize products more comprehensive based on the needs of deploy data.” and accurate information customers and blurs the about the shifts in boundary between the demand and supply so manufacturer and the consumer; and that manufacturers may better adjust the Internet of Things, which turns their productions, but also churns out traditional products into conduits for more refined granular analysis about CHAPTER 15 325 the crucial differences between privacy of users. A good example different segments in the market so in this regard is the General Data as to better tailor the same product Protection Regulation (GDPR) of the into many variations to cater to the European Union, which recognizes individual needs of consumers. “[t]he protection of natural persons in relation to the processing of personal National regulations data” as “a fundamental right”.1 On the other hand, some jurisdictions put the Given the growing importance of commercial interests of firms first. In data in business and trade, more and the United States, this is reflected in more firms are trying to gather as much the 1996 Telecommunication Act, data as possible in this new gold rush. which notes that it is “the policy of the Due to the network effects (OECD, United States … to preserve … free 2017, p. 135), the electronic commerce market …unfettered by Federal or industry is, more often than not, a State regulation”.2 In contrast, national winner-takes-all game. This means security concerns are often cited to that data is increasingly being justify restrictions on cross-border concentrated into the hands of a few data flows, albeit in varying degrees in e-commerce giants such as Amazon, different countries. A recent example Facebook and Google. Such is China’s 2017 Cybersecurity Law, concentration of power leads to which imposed several restrictions concerns over potential abuse, which aiming to “safeguard cyber security, in turn heightens the need to regulate protect cyberspace sovereignty and the flow and transfer of data, both national security”.3 within and across national borders. Traditionally, restrictions on cross- Any framework for data regulation border data flow were the most would involve three groups of players: common type of digital protectionism the individual, who provides the raw (Wu, 2017, pp. 22-23). More recently, data, and uses the processed data; however, data localization requirements the firm, which processes the raw have also become popular, with the inputs from the consumer, and usually following as main variations (Gao, controls such data; and the state, 2018a, pp. 303-304): which monitors and regulates the data used by the first two groups. 1. Local commercial presence or Their different interests often result residency requirements. The in conflicting priorities, with the origin for such requirements can individual advocating privacy be traced back to the General protection, the firm promoting Agreement on Trade in Services unhindered data flow, while the state (GATS), where service providers focusing on the security implications. are often required to have a local commercial presence before they While all regulators would agree on the can provide a service. While such need to strike a balance between the requirements could potentially affect clashing interests of different all service sectors, e-commerce is stakeholders, their approaches often especially vulnerable as it is often differ in practice. Some jurisdictions detached from traditional brick-and- prioritize the need to safeguard the mortar establishments. 326 CHAPTER 15

2. Local infrastructure requirements. type of restriction. While such These include both hardware restrictions make it more difficult requirements for service providers for firms to move data around, to use computing facilities located in it could reduce data breach risks for the host territory and software individuals and regulatory costs for requirements to use computer states. On the other hand, data processing and/or storage services localization requirements tend to affect located in such territory. mostly foreign firms so they are more of a National Treatment issue. Such 3. Local content requirements. requirements obviously would increase Depending on the modus operandi costs for foreign firms, but they could of the local content requirements, also increase risks of personal data this obligation can be further divided breach and even regulatory costs for into two categories. One is granting states due to the duplication of data preferences or advantages to goods on both local and off-shore servers. or electronically transmitted contents produced in a territory, or Emerging approaches to local computing facilities or computer processing or storage E-commerce has been featured in services supplied locally. The other the World Trade Organization (WTO) is requiring foreign service suppliers negotiating agenda since 1998, when to purchase or use local goods or the members adopted the Declaration electronically transmitted contents. on Global Electronic Commerce,4 which also established a temporary 4. Local technology requirements. moratorium on customs duties on This can also be broken down into digital transmission. Pursuant to the two types of obligations. The first is Declaration, the General Council the requirement for foreign service adopted the Work Programme on suppliers to transfer technologies Electronic Commerce,5 which divided as a condition of providing a up the work among several WTO service. This is often tied to the bodies such as the Council for Trade requirement to have a local partner. in Services, the Council for Trade in The other is the requirement for Goods, the Council for Trade-Related foreign service suppliers to Aspects of Intellectual Property Rights purchase or use local technologies. and the Committee on Trade and Development. However, notwithstanding While data flow restrictions and data its ambitious agenda, the Work localization requirements are both Programme has so far languished barriers to e-commerce, it is important along with the rest of the Doha Round. to note the differences between the This changed only very recently, two. Data flow restrictions curb the when renewed interests among cross-border transfer of data. This the membership led to the launch normally targets the outflow, but can of the Joint Statement Initiative on also affect the inflow, such as banning E-commerce on 25 January 2019.6 certain websites. As the restriction normally affects both domestic and Even absent new rules, however, some foreign firms alike, it is more akin to a of the existing rules in the WTO can most-favoured nation (MFN) treatment still be expanded to cover e-commerce. CHAPTER 15 327

To the extent that e-commerce affects are the United States, the European trade in goods, such rules could Union and China, with each having include the existing MFN and National its own model. Treatment rules in the General Agreement on Tariffs and Trade 1994 1. The US model (GATT 1994), as well as the prohibition As the world leader in digital trade, of local content requirements under the the United States has included rules Agreement on Trade-Related on data regulation in many of its free Investment Measures (TRIMs). As trade agreements (FTAs), with the most e-commerce activities do not now-defunct Trans-Pacific Partnership involve tangible products, however, (TPP) Agreement and the recently it seems that the GATS is more concluded United States-Mexico- promising. For example, as mentioned Canada Agreement (USMCA) as earlier, data flow restrictions and data leading examples.7 The obligations localization requirements could in the two agreements can be divided potentially be subject to GATS MFN into the following categories: and National Treatment obligations. Moreover, to the extent that data The first are passive obligations, which regulations are part of the specific prohibit the members from adopting commitments various protectionist undertaken by a WTO policies such as member, they would be “Even absent customs duties on subject to the domestic electronic transmission, regulation obligations new rules, some discrimination against under Article VI of the of the existing foreign digital products, GATS, such as the rules in the restrictions on cross- requirements for the WTO can still border transfer of rules to be based on be expanded information, forced objective and localization requirements transparent criteria, to cover and forced transfer not more burdensome e-commerce.” of source codes. than necessary, and The provisions administered in a are designed to reasonable, objective and impartial minimize the distortions created manner. Given the close relationship by government interventions and between the internet and leave the development of the telecommunication, one may also e-commerce market in the hands argue for the application of the existing of the e-commerce players. GATS disciplines on the telecom sector (Gao, 2011), such as the GATS The second type are enabling Telecom Annex and the Telcom provisions, which require member Reference Paper. governments to introduce or maintain regulatory frameworks that facilitate the In contrast to the slow progress in the development of e-commerce. These WTO, many regional trade agreements include, for example, the requirements (RTAs) have been able to include new for the members to adopt domestic rules on data regulations (Wu, 2017). laws in line with the principles of the The three main players in this regard United Nations Commission on 328 CHAPTER 15

International Trade Law (UNCITRAL) sector, except that the USMCA Model Law on Electronic Commerce provides that the prohibition on 1996 or the United Nations Convention data localization requirements would on the Use of Electronic continue to apply to the sector so Communications in International long as a financial regulator has access Contracts, the recognition of the to the relevant data for regulatory legal validity of electronic signatures purposes. Both agreements also or electronic authentication methods, include language to cooperate on and the acceptance of electronic cybersecurity matters, with the documents as the legal equivalent of USMCA going one step further by their paper versions. These provisions calling for risk-based regulations. all deal with one key issue facing the e-commerce sector, i.e. the As the main proponent of the recognition of e-commerce plurilateral Trade in Services transactions as equivalents of the Agreement (TISA) negotiations, traditional pre-internet ones. the United States also proposed similar provisions in the draft TISA In addition, recognizing the huge agreement. Most of these can be market power of the big digital found in the e-commerce chapter, players, the two agreements also where the United States called for include rules to check corporate provisions that guarantee service power. First, market players that own suppliers the freedom to transfer or control key infrastructures could information across countries for the abuse their power by unreasonably conduct of their business; freedom denying their business users access for network users to access and use to their infrastructures, making it services and applications of their impossible for these users to conduct choice online, and to connect their e-commerce activities. To address choice of devices; prohibition of data this problem, the agreements provide localization requirements as a condition consumers (including business users) of supplying a service or investing; and with the freedom of access to and use prohibition of discrimination against of the internet for e-commerce, subject electronic authentication and electronic only to network management and signatures. In addition, the horizontal network safety restrictions. Second, provisions also include prohibitions on to deal with potential misuse of a host of localization requirements as consumer information, the agreements mentioned earlier. While they apply to also include provisions on online all service sectors, they would be of consumer protection, personal particular relevance to e-commerce information protection and unsolicited due to the nature of the sector. commercial electronic messages. 2. The EU model Recognizing the special needs of The main concern of the European governments, both agreements have Union, when it comes to e-commerce, excluded government procurement is privacy protection. This is and information held or processed by demonstrated by the GDPR, which the government from the coverage of recognizes privacy as not only a the digital trade chapters. Both also consumer right, but also a fundamental carved out the financial services human right. The GDPR provides that CHAPTER 15 329 prior authorization is required before Until very recently, it has not even personal data can be transferred to included e-commerce chapters in a third country, unless that country its RTAs.9 This only changed with is recognized by the European Union its FTAs with Australia and Korea, as providing an equivalent level of which were both signed in 2015. data protection. Moreover, the provisions in these two FTAs are rather modest, as However, in its RTAs, the European they mainly address trade facilitation- Union has not been able to include related issues, such as a moratorium substantive language on such issues. on customs duties on electronic This is due to the internal differences transmission, recognition of electronic between the two Directors-General authentication and electronic signature, (DGs) with overlapping jurisdictions protection of personal information in on the issue, i.e. DG-Trade, which e-commerce, paperless trading, favours free trade for the sector, and domestic legal frameworks governing DG-Justice, which has concerns over electronic transactions, and the need personal information protection to provide consumers using electronic (Aaronson and Leblond, 2018, commerce a level of protection pp. 261-262). Thus, notwithstanding equivalent to that in traditional forms its strong interest in privacy protection, of commerce. the EU positions in its existing FTAs have been rather modest, which 4. Reasons for the differences? usually requires Parties to adopt The diverging approaches among their own laws for personal data the three major players are not protection to help maintain consumer randomly chosen. Instead, they trust and confidence in electronic reflect deeper differences in their commerce. In February 2018, however, respective commercial interests and the two DGs were finally able to reach regulatory approaches. a compromise position, which includes, on the one hand, horizontal First, the global e-commerce market clauses on the free flow of all data and is mostly dominated by China and a ban on localization requirements, the United States. Among the ten while, on the other hand, affirming the biggest digital trade firms in the world, European Union’s right to regulate in six are American and four are the sector by making clear that it shall Chinese.10 Of course, this does not not be subject to investor-state necessarily mean that they must share arbitration.8 Given the potentially the same position. Upon closer intrusive rules in the GDPR, we examination, one can see that the US might start to see a more aggressive firms on the list tend to be pure digital push for stronger language on service firms. Firms like Facebook, personal data protection in the Google and Netflix do not sell physical European Union’s RTAs in the future. products, but only provide digitalized services such as online search, social 3. The China model network or content services. In In contrast with the European Union contrast, two of the top three Chinese and the United States, China has firms – Alibaba and JD.com – sell traditionally taken a cautious approach mainly physical goods. This is why to data regulation in trade agreements. the United States focuses on digital 330 CHAPTER 15

services while China focuses on privacy protection framework. Instead, traditional trade in goods enabled it relies on a patchwork of sector- by the internet. specific laws, which provides privacy protection for consumers of a variety One may argue that China also has of sectors such as credit reports and giant pure digital firms like Baidu and video rental. This is further Tencent, which are often referred to, complemented by case-by-case respectively, as the Google and the enforcement actions by the Federal Facebook of China. However, because Trade Commission (FTC), and self- they serve almost exclusively the regulation by firms themselves. This domestic Chinese market and most explains why, in its RTAs, the United of their facilities and operations are States does not mandate uniform rules based in China, they do not share on personal information protection but the demands for free cross-border allows members to adopt their own data flow like their US counterparts, domestic laws. which have data centres in strategic locations around the world. On the other hand, in China, the internet has always been subject to As for the European Union, with no heavy government regulations, which major players in the game, their not only dictate the hardware one must draconian privacy rules could be use to connect to international viewed as a form of digital networks, but also the content that may protectionism (Aaronson, 2019) to be transmitted online.11 Many foreign fend off the invasions of American websites are either filtered or blocked and Chinese firms into Europe. in China, which confirms China’s cautious position on free flow of data. The second influence is their different Moreover, in 2017, China also adopted domestic regulatory approaches. In the the Cybersecurity Law, which requires United States, the development of the the operators of critical information sector has long benefited from its infrastructure to store locally personal “permissive legal framework”, which information they collected or generated aims to minimize government regulation in China. This is at odds with the US on the internet and relies heavily on demand to prohibit data localization self-regulation in the sector. Such requirements. Privacy protection is policy is even codified in the law, with also weak in China, as it was only the Telecommunication Act of 1996 incorporated into the Chinese legal explicitly stating that it is “the policy of system in 2009, along with extensive the United States … to preserve the exemptions for the government. vibrant and competitive free market that presently exists for the Internet The European Union, in contrast, and other interactive computer has a long tradition of human rights services, unfettered by Federal or protection, partly in response to the State regulation”. Therefore, it is no atrocities of the Second World War. surprise that the United States wishes Coupled with the absence of major to push for deregulation and the free digital players wielding significant flow of information at the international market power and the lack of a strong level. At the same time, the United central government with overriding States does not have a comprehensive security concerns, this translates into CHAPTER 15 331 a strong emphasis on privacy in the Platform (eWTP), an idea first digital sphere. Moreover, the European proposed by Alibaba Chairman Jack Union is also able to transcend the Ma. These positions have largely been narrow mercantilist confines of the carried over in their submissions in the United States, and recognize privacy Joint Statement Initiatives, which as of as not only a consumer right, but also 10 February 2020 has received 52 a fundamental human right. Such a submissions from the 77 participants.12 refreshing perspective is probably We can gather the following from the biggest contribution made by the these submissions: European Union to digital trade issues. First, most developed countries and Elements for some developing countries seem to the way forward agree on the need to ensure free cross-border data flow in principle. With the revival of e-commerce At the same time, such freedom is discussions in the WTO in 2016, many often reserved for provision of covered members have made new submissions. services or investment only, and has Most of these largely reiterate their been subject to exceptions on grounds existing positions in RTAs and other ranging from personal information plurilateral agreements. For example, protection to the special needs of in its July 2016 “non-paper”, the specific sectors like financial services. United States called for Some developing the dismantling of both countries are more cross-border and “Almost all hesitant on the issue, domestic barriers to countries agree due to either security digital trade such as or revenue concerns. restrictions on cross- with the goal border data flow and of privacy Second, almost all government regulations or personal countries agree with requiring localization or information the goal of privacy or forced transfer of protection, but personal information technology or source protection, but they code, and urged they differ on differ on how to get . e-commerce firms to be how to get there.” there. While many given more autonomy countries are content including the freedom to with each country use the technology, authentication adopting its own domestic laws that methods, encryption methods, and meet certain minimum standards, facilities and services of their own privacy regimes with strong choice. The Chinese submission in extraterritorial elements like the GDPR November 2016, on the other hand, could create pressure for affected focused more on trade facilitation trade partners to adopt similar or measures such as simplified border even uniform rules. measures and customs clearance, paperless trade and single window, Third, prohibition on data localization and the establishment of platforms for requirements is also widely accepted cross-border e-commerce transactions among more advanced economies, such as the electronic World Trade subject to carve-outs for government 332 CHAPTER 15

data, government procurement, developing countries lack the financial services, privacy protection necessary regulatory experience and security measures. While some with the sector. countries are considering data localization requirements in the false In terms of the substantive content, hope that such measures could create such an agreement shall include the more local jobs or nurture local digital following elements: freedom of data champions, more and more countries flow for the provision of covered are coming to the realization that such services, investments and intellectual measures would be more likely to harm property rights; prohibition of data rather than help the development of localization requirements relating to their digital sectors. the hardware, software or location of data storage, with narrowly defined Given the uneven development of the exceptions for measures to protect sector in different countries, the most data security or personal information; promising way forward would be to and commitment for each party to adopt a negotiation structure similar to introduce or maintain its own the Trade Facilitation Agreement (TFA), domestic laws on privacy with tiered obligations corresponding protection that meets certain to the individual level of development of minimum standards. different members. At the core, there should be a set of commonly accepted Like any negotiation in the WTO, minimum standards or basic principles, getting WTO members to agree probably along the lines of the highly on data regulation would not be easy. successful example of the Telecom To garner support among the Reference Paper. To enhance the membership, it would be useful to participation of developing countries, conduct a stock-taking exercise of there should also be technical existing issues regarding data flow and assistance provisions to help localization requirements, followed by developing countries progressively discussion and identification of best undertake more and more obligations. practices, so that the members can A major part of the technical assistance better understand the potential of data activities would undoubtedly be trade. Most importantly, data regulation devoted to building the technological should be negotiated as part of a capacities by equipping them with broader deal on digital trade, because the necessary hardware and software, trade, rather than the underlying data, but there should also be regulatory is the raison d’être of this institution assistance projects as many called the WTO. CHAPTER 15 333

Endnotes 6 WTO, Joint Statement on Electronic Commerce, WT/L/1056, 25 January 2019. This research is supported by the National Research Foundation, Singapore under 7 For an analysis of the US approach, see its Emerging Areas Research Projects Gao (2018c). (EARP) Funding Initiative. Any opinions, findings and conclusions or 8 Horizontal provisions on cross-border data recommendations expressed in this flows and personal data protection, 18 May material are those of the author(s) and 2018, available at: https://ec.europa.eu/ do not reflect the views of National newsroom/just/document. Research Foundation, Singapore. cfm?action=display&doc_id=52384.

1 Regulation (EU) 2016/679 of the European 9 For an overview of the evolution of digital Parliament and of the Council of 27 April trade related provisions in China’s FTAs, 2016 on the protection of natural persons see Gao (2018b). with regard to the processing of personal data and on the free movement of such 10 Wikipedia, List of Largest Internet data, and repealing Directive 95/46/EC Companies, available at: https://en. (General Data Protection Regulation), OJ L wikipedia.org/wiki/List_of_largest_ 119, 04.05.2016; cor. OJ L 127, Internet_companies (accessed 20 23.5.2018, Recital 1. February 2020).

2 Telecommunication Act of 1996,47 U.S.C. 11 For an overview of Chinese data 230(b)(2), available at: https://www.law. regulation, see Gao (2020, forthcoming). cornell.edu/uscode/text/47/230 (accessed 20 February 2020). 12 The submissions can be found on the WTO website starting with INF/ 3 Cybersecurity Law of the People’s ECOM document symbol. Republic of China [Zhonghua Renmin Gongheguo Wangluo Anquan Fa], as References adopted at the 24th Session of the Standing Committee of the Twelfth Aaronson, S. A. (2019), “What are National People’s Congress of the we talking about when we talk about digital People’s Republic of China on November protectionism?”, World Trade Review 18: 7, 2016, Art. 1. 541-577.

4 WTO, Declaration on Global Electronic Aaronson, S. A. and Leblond, P. (2018), Commerce, adopted on 20 May 1998 at “Another digital divide: The rise of data the Second WTO Ministerial Conference realms and its implications for the WTO”, in Geneva, WT/MIN(98)/DEC/2, Journal of International Economic 25 May 1998. Law, 21(2): 245 272. https://doi. org/10.1093/jiel/jgy019 5 WTO, Work Programme on Electronic Commerce: Ministerial Decision of 13 Gao, H. (2011), “Google’s China problem: A December 2017, Ministerial Conference, case study on trade, technology and human Eleventh Session, Buenos Aires, 10–13 rights under the GATS”, Asian Journal of December 2017, WT/MIN(17)/65, WTO & International Health Law and Policy WT/L/1032, 18 December 2017. (AJWH) 6: 347-385. 334 CHAPTER 15

Gao, H. (2018a), “Digital or trade? The Gao, H. (2020), “Data regulation with contrasting approaches of China and US to Chinese characteristics”, in Burri, M. (ed.), digital trade”, Journal of International Big Data and Global Trade Law, Cambridge Economic Law 21(2): 297-321. https://doi. University Press (forthcoming). org/10.1093/jiel/jgy015 Lanz, R. and Maurer, A. (2015), “Services Gao, H. (2018b), “E-commerce in ChAFTA: and Global Value Chains: Some Evidence on New wine in old wineskins?, in Piker, C., Servicification of Manufacturing and Wang, H. and Zhou, W. (eds.), The Services Networks”, WTO Working Paper China-Australia Free Trade Agreement: ERSD-2015-03, 2 March 2015. https:// A 21st-Century Model, Hart, 283-303. www.wto.org/english/res_e/reser_e/ ersd201503_e.pdf Gao, H. (2018c), “Regulation of digital trade in US free trade agreements: From Manyika, J., Lund, S., Bughin, J, Woetzel, J, trade regulation to digital regulation”, et al. (2016), Digital Globalization: The New Legal Issues of Economic Integration Era of Global Flows, McKinsey Global 45(1): 47-70. Institute, March 2016. https://www. CHAPTER 15 335

mckinsey.com/~/media/McKinsey/ World Trade Organization (WTO) (2018), Business%20Functions/McKinsey%20 World Trade Report 2018: The Future of Digital/Our%20Insights/Digital%20 World Trade: How Digital Technologies globalization%20The%20new%20era%20 Are Transforming Global Commerce, of%20global%20flows/MGI-Digital- Geneva: WTO. globalization-Full-report.ashx Wu, M. (2017), Digital Trade-Related Organisation for Economic Co-operation and Provisions in Regional Trade Agreements: Development (OECD) (2017), Key Issues for Existing Models and Lessons for the Digital Transformation in the G20, Paris: Multilateral Trade System, RTA Exchange, OECD, Report prepared for a joint G20 Geneva: ICTSD and the IDB. German Presidency / OECD conference in Berlin, Germany, 12 January 2017.

Chapter 16 Converging thoughts on digital trade in preparing for the future

Maarten Smeets*

* The contents of this chapter are the sole responsibility of the author and are not meant to represent the position or opinions of the WTO or its members. 338 CHAPTER 16

Introduction strengthening the infrastructure that facilitates digital trade, and further There is a growing convergence on reducing transaction costs, all of which the view that the factor having had are elements conducive to a better the most significant impact on trade linking to GVCs. The analysis and in recent years is the introduction of examples presented by the Chairs in new and innovative technologies. The many ways add significant value to the speed and intensity of the IT evolution research undertaken by leading are affecting trade and more generally institutions, including the WTO, in our day-to-day lives in unprecedented support of inclusive economic growth ways. It has rendered interactions and enhancing the development possible between humans, between perspectives of developing countries. humans and machines and between Their findings not only contribute to a machines in ways that could not fuller understanding of the complex be imagined even a few years ago. digital trade issues affecting The digital era is a new reality, and competition, they facilitate a better it is driving economic growth and appreciation of the challenges that development. It poses both challenges remain in designing policies for the and opportunities on all levels. It offers future. This final chapter discusses an opportunity for developing countries some of the main points of to better participate in international convergence on suggested trade, e.g. through global value chains approaches and directions for (GVCs), but there is no prescription policymaking. how to do that. The transformative effects In this book, the World Trade of digital trade on the Organization (WTO) Chairholders economy: key challenges addressed some of the key challenges and opportunities emanating from the The digital economy is transforming rapid technological evolutions and the our lives in unprecedented ways. How emergence of digital trade as an these changes exactly occur and the enabler for economic growth and impact they have are mostly little development. The case studies and understood. The Director-General analysis presented offer different of the WTO observed in 2018: “While perspectives in answering the question technological advances are an how governments can create an essential enabler of international trade enabling environment and in setting the expansion, the capacity to manage the right conditions at the national, regional changes at play is equally important. and global levels in support of Appreciating the depth and breadth digitalization and with a view of of these changes is critical to help countries’ fuller integration in world governments reap the benefits that trade. Views tend to converge on these technologies create and address several specific requirements that the challenges that may arise” (WTO, need to be fulfilled in order to take full 2018, p. 2). advantage of the opportunities offered in the new digital trade era. This Klaus Schwab, referring to the historic includes focusing more strongly changes driven by what he calls “the on specific services sectors, Fourth Industrial Revolution” in terms CHAPTER 16 339 of their size, speed and scope, challenges for developed and observes that “while the profound developing countries alike. He refers uncertainty surrounding the to it as the great convergence, development and adoption of emerging because of the ways all the elements technologies means that we do not yet are interconnected and have become know how the transformations driven inseparable (Baldwin, 2016). He by this industrial revolution will unfold, explains why the fragmentation of their complexity and interconnectedness production, the rise of GVCs and across sectors imply that all the rapid spread of knowledge and stakeholders of the information make it global society – ever more difficult for governments, business, “There is a governments to ensure academia, and civil steady economic growth society – have a tremendous and social coherence. responsibility to work challenge to Production processes together to better collectively are not only increasingly understand the appreciate and fragmented, they can emerging trends” deepen our easily be relocated from (Schwab, 2016, p. 2). one production centre understanding to another location There is a tremendous of the if better economic challenge to collectively technological conditions can be appreciate and deepen developments offered, generating our understanding witnessed today higher levels of of the technological efficiency. This has had developments in the era of significant implications witnessed today in the digitalization.” for the ways trade and era of digitalization in specialization are order to draw the right analysed and hence the policy conclusions addressing validity of the classical theory. The the implications of these rapid factors driving competitive conditions developments and evolution of the have changed: a country’s comparative technology. This is ever more relevant advantage is increasingly determined today, with globalization under serious by technology, skills sets, services, attack following the outbreak of access to capital, and intellectual COVID-19. The disruption of the property (IP) rights instead of labour, supply of medical devices witnessed capital and natural resources, which in many countries has put the health are at the origin of the trade theories. and well-being of citizens around the globe at risk. It also resulted in a The Nobel Laureate Michael Spence questioning of the validity of GVCs, considers that: “Trade is shifting from which may need some revisiting, for a stark version of comparative essential equipment. advantage based on differential labor costs and labor arbitrage, toward Richard Baldwin analyses how something that more closely resembles information technologies are reshaping the intra-industry model of trade among a new generation of globalization, developed economies based on generating a whole new set of policy product and technological 340 CHAPTER 16

differentiation. Of course, that process focus on the improvement of is far from complete, and there remain infrastructure and lowering barriers early-stage, and relatively low-income to entry and enhancing access to developing countries for which the foreign markets. growth models will continue to depend on accessing global demand via Services exports are becoming an ever labor-intensive, process-oriented bigger part of global trade and could manufacturing” (Spence, 2019). make up more than a quarter of total trade by 2030. The share of services Studies by leading international imports in manufacturing gross output institutions (the WTO, the Organisation is also expected to rise. The market is for Economic Co-operation and rapidly diversifying with an increasingly Development (OECD), and the World predominant place given to services, Bank) equally underscore the role such as e-medical services, the digital technologies can play in the expansion of cross-border ability of developing e-commerce, the rapid countries to enhance growth of social their potential growth “Services e-commerce and the perspectives through exports are development of online- value-addition. The becoming an offline transactions. Chairholders’ views The growth of digital largely converge on the ever bigger part trade will open up new role digital trade plays of global trade opportunities for the in enhancing the and could make provision of online economic development up more than services, promote perspectives of a quarter export diversification, countries and suggest boost efficiency various options and of total trade and growth in ways forward to cope by 2030.” manufacturing, improve with the challenges competition in the emanating from that financial sector, process. The fundamental question increase access to market-relevant remains which policies governments information and increase market need to put in place to benefit from access for micro, small and medium- the very same rapid technological sized enterprises (MSMEs). If evolutions. The policy options will developing countries want to benefit naturally differ by country or region, from this growth, they will need to as there is no single answer to this increase their services shares in their question and no standard recipe can gross domestic product (GDP). be provided. Yet, there are both theoretical and practical answers to The rapid growth of internet these questions, as the examples penetration and in the use of mobile provided by the Chairs confirm. Digital telephony, the development of mobile technologies can be drivers of money services, the increased use of inclusivity, particularly when more credit cards and increased access to attention is paid to the role services bank accounts have greatly boosted trade in the economy as a facilitator of financial inclusion and encouraged digital trade. Governments should also reliance on electronic payment, thus CHAPTER 16 341 establishing a strong basis for potential to support inclusive growth e-commerce development on the patterns and expand the channels, continent. Closely related to this is the opportunities, and accessible interaction between technological markets for SMEs. … Exploiting the developments such as artificial international potential of these intelligence (AI), robotics, the Internet platforms to expand trade and of Things (IoT), blockchain technology access for SMEs requires and services. This is an area where investment and infrastructure in rule making and developing laws and developing countries, but also new regulations governing information and trade regimes that increase the communications technology (ICT) openness of the ecosystems. In services, e-commerce transactions, other words, the potential to support data protection and access to growth and employment in SMEs via information are particularly challenging. access to global markets on digital Some countries have passed laws in platforms is as yet largely these areas providing a framework and unexploited. (2019, p. v) established one-stop shops for the delivery of government services to He furthermore notes that “in citizens and for trade logistics. developing countries, especially those Legislative actions have been taken at in the middle-income category, while the national and regional levels, which the pressures on the structure of jobs can eventually inform and guide the and employment are similar to discussions taking place at the developed economies, the net impact multilateral level, as will be discussed of digital technology appears to have further below. been positive for growth and for employment” (Ibid.). In the current services economy, it is becoming significantly easier David Dollar offers a similar to trade in services, thanks in large conclusion that “small and medium- part to digitalization. The growing sized enterprises in general have low cross-border tradability of services direct participation in international is opening new opportunities for trade, compared to large enterprises. national economies and individuals. … Yet, SMEs are underrepresented Equally important, digital trade will in GVCs. This may be changing, ease WTO members’ efforts to however, as access to information better connect to GVCs. Hence the and communication technology recommendation to devote more effort (ICT) continues to grow. For on developing the services economy. example, there is evidence that This holds specifically for small and the internet reduces search costs, medium-sized enterprises (SMEs), facilitating more exchange and depending on their capacity to build increasing firm productivity. Cross- the supporting infrastructure. border e-commerce platforms are According to Michael Spence: also providing new opportunities for SMEs and even micro firms” (Dollar, [T]he mobile-internet- and platform- 2019, p. 5). centered open ecosystems, along with mobile payment systems and He then argues that SMEs face a enabled financial services, have the number of additional challenges 342 CHAPTER 16

integrating into GVCs with the digital capital-intensive production, and they economy. On top of lagging behind continue to focus more on traditional large firms in terms of overall digital patterns, producing goods rather than technology use and capability, small services. Also, few developing businesses may also find it difficult to countries own IP rights, whereas access e-commerce platforms and increasingly the value of goods is payment systems. These findings determined by the combination of underscore the continuing need to goods, services and IP. improve the ICT environment and infrastructure as well as to expand A recent study by the WTO, focusing services such as e-payment and on the role of new technologies and e-commerce, all of which benefit digital trade as drivers of the SMEs disproportionally, but they transformation of global commerce, also highlight the lack of information underscores the interplay between regarding SMEs. technology and trade (WTO, 2018). It provides a qualitative analysis of Digital trade and GVCs: the changes that are underway and the role of technologies quantifies the extent to which global and building infrastructure trade may be affected in the next 15 years. As the Director-General notes The next question then is the role of in his foreword, “domestically, digital trade in achieving a better governments may need to look at how linkage with GVCs. An often-cited to tackle many of these challenges, specific requirement to achieve a including in areas such as investment better linkage to the GVCs and benefit in digital infrastructure and human from the new digital opportunities capital, trade policy measures and relates to improving the infrastructure regulation. International cooperation facilitating digital trade, including the can also help governments derive internet. Equally important factors in more benefits from digital trade and the digital era are the need to help drive inclusion. At present, WTO strengthen human and institutional members are trying to get to grips with capacities; build new skill sets; and these issues” (Ibid., p. 4). provide training, R&D, services, access to IP rights, investment The Secretariat underscores the role facilitation and access to capital as that technological advances play in drivers of economic growth and cutting international trade costs and development. Developing countries estimates that, between 1996 and stay relatively behind in these areas 2014, these costs declined by 15 compared to developed countries. The per cent (Ibid., p. 3). Technological shares spent in an economy on R&D innovation played an important role are mostly positively correlated to the here, and it has the potential to do levels of economic development in a even more. Prior to the trade tensions country. The higher the income levels, that rose between the leading trading the higher the spending rates on nations and prior to the economic training and education. Developing crisis following COVID-19, the countries are mostly lacking the prediction was made that trade could economic resources necessary to grow yearly by 1.8 to 2 percentage focus on technology, and hence points more until 2030 as a result of CHAPTER 16 343 the falling trade costs, amounting export (the introduction of a single to a cumulated growth of 31 to 34 window), thus reducing the percentage points over 15 years. The administrative costs and time for trade report finds that the decline in trade transactions. These recommendations costs can be especially beneficial for suggest that economic efficiency, MSMEs, and for firms from developing trade and the related policies are countries, if appropriate increasingly dictated by domestic complementary policies are put in policies rather than border protection. place and challenges related to The Chairs underscore the need for technology diffusion and regulation governments to create an enabling, are addressed. While the digital trade competitive environment for trade era offers many new opportunities, and investment in support of building the challenges should also not be productive capacity. underestimated, particularly the risk of a digital divide between developed and These findings corroborate two earlier developing countries. More recent analyses undertaken by the Chairs and forecasts and estimations by Bekkers, by the WTO as explained in its 2015 Koopman, Sabbadini and Teh are World Trade Report, which specifically presented in the first chapter of this focused on the challenges related to book, showing that between now and the implementation of the Trade 2030 global trade growth would be 2 Facilitation Agreement (Teh et al., percentage points per annum higher 2016; WTO, 2015). The main and developing countries’ trade growth objectives of and key provisions in 2.5 percentage points per annum the Trade Facilitation Agreement (TFA) higher, as a result of the adoption are all geared towards reducing of digital technologies and further transaction costs. The TFA puts reducing transaction costs.1 Bekkers, several mechanisms into place and Koopman, Sabbadini and Teh also find contains specific provisions to assist that services exports will become a beneficiaries in strengthening their bigger part of global trade, making up infrastructure to ease trade costs. more than a quarter of total trade by The TFA does not distinguish between 2030, while the share of services forms of trade, i.e. between physical imports in manufacturing gross output goods and digital trade. Based on also would rise. All figures are likely to a review of the literature, Teh et al. be adjusted in view of the impact of argued that for physical goods, trade COVID-19 on the world economy. costs could be reduced by some 14 per cent on average and even more The reduction of transport and for developing countries. It was also transaction costs is generally found to argued that the trade costs for least- be a key factor supporting economic developed countries (LDCs) could fall growth. To achieve that, the Chairs as much as 17 per cent. These findings suggest that governments focus more were largely confirmed by other studies on domestic policies, structural presented by the OECD, the World adjustment and innovation. The Bank and think tanks, with the recommendations include efforts to differences mainly explained by the improve domestic infrastructure for models used and the implementation transport, roads, railways, ports and scenarios of the TFA. There was a handling procedures for import and consensus on the fact that low and 344 CHAPTER 16

lower-middle-income countries are for digital trade, with several Chairs likely to see the biggest reductions in and commentators specifically trade costs. This also leads to the advocating the two as complementary commonly held view that developing approaches: in the absence of countries should exploit all the options multilaterally agreed trade rules offered through the TFA to strengthen (WTO), the regional and/or bilateral their infrastructure with a view to approaches adopted to digital trade simplifying transactions and reducing can ensure the free flow of digital data costs. More specifically, developing and information. Regional trade countries should consider how the TFA agreements (RTAs) increasingly can best be used to reduce their include provisions referring explicitly to infrastructure costs for digital trade, digital technologies and, interestingly thus preparing better for the future. enough, mostly in RTAs involving Many developing countries and LDCs developing countries. The most have indicated their need for support in common provisions refer to building and strengthening their e-government, cooperation and the infrastructure, and the efforts should moratorium on customs duties on be particularly geared towards electronic transmissions. facilitating digital trade. It is found that the regulatory Multilateral vs regional approaches adopted in regional approaches to digital trade integration initiatives can widely differ as explained by Gao (Chapter 15) and One area that has had the specific López, Condon and Muñoz (Chapter attention of policymakers in recent 10). This can be seen in Latin America years is the relation between with new rules on digital trade multilateral and regional trade negotiated under the Comprehensive liberalization. This relationship has also and Progressive Agreement for been analysed extensively by scholars Trans-Pacific Partnership (CPTPP) and again had the specific attention of and in the case of the United States- the Chairs as it relates to digital trade. Mexico-Canada Free Trade Agreement While it was long held that the two (USMCA). It is also the case in trade approaches are largely incompatible, relations between China, the with regionalism being the exception to European Union and the United States, the multilateral trade rules, condoned reflecting different methodologies under specific General Agreement on and regulatory systems. Interestingly, Tariffs and Trade 1994 (GATT 1994) the agreements often follow different provisions, the views have largely approaches in their regulations and evolved towards a more tolerant coverage. The implication is that the approach. Regional trade integration lack of multilateral rules on the free can be a stepping stone for multilateral flow of data has resulted in divergent trade liberalization and in some ways approaches in RTAs. Hence, there be complementary (Acharya, 2016). is a tension not only between regional In some areas not covered by WTO and multilateral approaches, but also rules, regional approaches can be within RTAs. considered as “laboratories” and eventually provide a basis for An in-depth review conducted by Wu, multilateral trade rules. It holds true covering almost all of the RTAs that CHAPTER 16 345 were signed between 2001 and 2016 provisions and/or commitments and notified to the WTO, led to established under the WTO, other identifying those RTAs with a provisions expand commitments or standalone e-commerce chapter or specify new ones. These provisions with provisions specifically addressing often complement other relevant e-commerce/digital trade (2017). He provisions found in RTAs, even though found 69 RTAs with a standalone they do not make explicit reference to e-commerce chapter or article(s), digital technologies. Most provisions dating back to 2001, including a small related to digital technologies do not number that had not yet entered into follow a specific, unique template, even force. He also identified at least 21 in agreements negotiated by the same other RTAs without a dedicated country. As a result, provisions related e-commerce chapter or article, but to digital technology remain particularly with one or more provisions specifically heterogeneous in terms of structure, addressing paperless trading, digital language and scope. rights management or general promotion. As he notes, due to the According to the WTO (2018), the slow pace at which the multilateral most common types of provisions trading system is updating trade rules related to digital technologies found for the digital era, much of the in RTAs refer to e-government innovation is occurring in RTAs. In management, as well as cooperation the absence of a wide-ranging WTO on e-commerce issues and the mandate for digital trade, RTAs have moratorium on customs duties on emerged as the primary laboratories electronic transmissions. An increasing for new rules and disciplines. number of RTAs also cover the general domestic legal framework of Divergences in approaches to the ways e-commerce and more specific issues, in which digital trade are addressed in such as electronic authentication, RTAs are also noted in the WTO’s consumer protection and intellectual World Trade Report 2018, which property. Other issues addressed in a underscores that provisions related to limited number of relatively more recent digital technologies can be found in RTAs include the cross-border multiple chapters of RTAs (WTO, electronic transfer of information, data 2018, fn 10). These provisions cover a localization and cybersecurity. Given broad range of issues, including trade the dynamic nature of RTAs and the rules and market access commitments; current trends, provisions related to telecommunications and the digital digital technologies are likely to keep regulatory framework; intellectual evolving with new and more property protection; management of comprehensive types of provisions. e-government (i.e. the use of ICT to deliver services in the public All of these elements provide useful administration), including paperless inputs into the policy discussions held trading; and the cooperation and at the WTO on e-commerce and show technical assistance on science and the complexity of establishing rules and technology, ICT and e-commerce. regulations that could eventually govern The WTO notes that although certain digital trade. As Wu concludes based provisions related to digital technology on his in-depth review of the key replicate or clarify a number of existing elements contained in RTAs on digital 346 CHAPTER 16

trade, “While a sizeable number of pressures to develop rules that WTO members have agreed to some address trade issues in the digital provisions related to digital trade in one trade era. or more of their RTAs, significant challenges exist in terms of extending There also is a convergence on the these provisions into any form of a view that while digital trade offers future WTO multilateral agreement” opportunities, there is a risk as it can (2017, p. 29). also exacerbate inequality and limit inclusiveness. Developed-country Conclusion policymakers tend to stress the importance of the free transmission There is a clear convergence in of data across borders, while some thinking on the elements that need developing-country policymakers have to be given priority attention in order advocated for a digital industrialization to benefit from digital trade and strategy to limit competition from the prepare the future. Many of those large technology firms to encourage elements are closely interlinked and the growth of local digital capabilities. re-enforce each other, including Developing countries that lack the services, infrastructure, innovation, tools to compete in the new digital R&D, skill sets, connections to GVCs environment are in danger of being left and IP to name a few. even further behind. The It is also clear that challenge is to achieve given the absence of “While digital inclusive growth to the multilateral trade rules trade offers benefit of all, with no covering digital trade, opportunities, member being left out WTO members tend and not deepening the to focus on their there is a risk economic divide. What domestic and regional as it can also to regulate, how to policies to cover the exacerbate regulate and at what key elements related inequality level? Multilaterally, to digital trade. Even if and limit regionally or bilaterally? all the “right” policies are put in place, there inclusiveness.” These are some of the is no guarantee that questions before the the expected benefits policymakers and that will materialize, as many other factors are at the heart of the WTO’s will influence the outcome and trade discussions with members with a view has become more dynamic than ever of deepening and strengthening the before. This also explains why WTO rules of the WTO multilateral trading members are reflecting on the reforms system and making it rise to the to be conducted in order to update the challenges of 21st century trade. The rules of the WTO multilateral trading Chairholders address these topical system. However, the pandemics issues from their national, regional and/ caused by COVID-19, the dramatic or subregional perspectives. What is decline in trade, the significant clearly evidenced from the analysis and slowdown of the world economy, and case studies presented in this book is the many trade restrictions applied by that governments have a significant WTO members are adding new role to play domestically regardless CHAPTER 16 347

of what will or can be agreed 2019: Technological Innovation, Supply multilaterally. International trade is Chain Trade, and Workers in a Globalized increasingly determined by the World, WTO, IDE-JETRO, OECD, UIBE, competitive and enabling environment World Bank Group, Geneva, WTO. created by countries at the national level, i.e. domestically. Of critical Schwab, K. (2016), The Fourth Industrial importance is the need to put the right Revolution, World Economic Forum. infrastructure in place, facilitate IT and reduce transaction costs, thus allowing Spence, M. (2019), Foreword to Global a better connection to markets, and Value Chain Development Report 2019: linking to the GVC. This requires Technological Innovation, Supply Chain adequate domestic regulatory systems Trade, and Workers in a Globalized World, as well as harmonization and WTO, IDE-JETRO, OECD, UIBE, World coordination of such policies at the Bank Group, Geneva, WTO. international level. Teh, R., Smeets, M., Sadni Jallab, M. and Endnote Chaudhri, F. (eds.) (2016), Trade Costs and Inclusive Growth, Case Studies Presented 1 The authors of Chapter 1 also made by WTO Chair-holders, Geneva: WTO. the calculations for the WTO World Trade Report. World Trade Organization (WTO) (2015), World Trade Report 2015: Speeding Up References Trade: The Benefits and Challenges of Implementing the WTO Trade Facilitation Acharya, R. (ed.) (2016), Regional Trade Agreement, Geneva: WTO. Agreements and the Multilateral Trading System, Cambridge: Cambridge World Trade Organization (WTO) (2018), University Press. World Trade Report 2018: The Future of World Trade: How Digital Technologies Baldwin, R. (2016), The Great Convergence: Are Transforming Global Commerce, Information Technology and the New Geneva: WTO. Globalization, Cambridge, Massachusetts, London, England: The Belknap Press of Wu, M. (2017), Digital Trade-Related Harvard University Press. Provisions in Regional Trade Agreements: Existing Models and Lessons for the Dollar, D. (2019), Executive Summary to Multilateral Trade System, RTA Exchange, Global Value Chain Development Report Geneva: ICTSD and the IDB.

Adapting to the digital trade era: challenges and opportunities looks at how the rapid adoption of digital technologies could help developing Adapting to trade the digital era: challenges and opportunities countries increase their participation in world trade. It also reviews the role that domestic policies and international co-operation can play in creating a more prosperous and inclusive future for these countries. This publication marks the conclusion of the second phase of the WTO Chairs Programme (WCP). It brings together contributions from the WCP Chairholders of Phases I and II, Advisory Board members, the WCP team at the WTO and other WTO Secretariat staff. The WCP is an important part of the WTO’s efforts to build trade capacity and to work jointly with academic institutions in developing countries.