C The economics of how digital technologies impact trade This section focuses on how new technologies are transforming international trade, creating new opportunities for a more inclusive trading system and raising new challenges. The section opens with a discussion of how digital technologies affect international trade costs. This is followed by an assessment of how digital technologies change the nature of what is traded, how we trade and who trades what. Finally, the potential impact of important trends in technological development is quantified and long-term projections on international trade are made, using the WTO Global Trade Model. Contents 1. Lower trade costs: opportunities and challenges 64 2. Changes in trade patterns 80 3. Quantitative analysis of the impact of new technologies on trade 110 4. Conclusions 116 Appendix C.1: Trade costs decomposition 118 Appendix C.2: IP protection and comparative advantage in IP-intensive industries 120 Appendix C.3: Details on the quantitative analysis using the Global Trade Model (GTM) 122 Some key facts and findings • International trade costs declined by 15 per cent between 1996 and 2014. New technologies will help to further reduce trade costs. Our projections predict that trade could grow yearly by 1.8-2 percentage points more until 2030 as a result of the falling trade costs, amounting to a cumulated growth of 31 to 34 percentage points over 15 years. • The wide adoption of digital technologies changes the composition of trade in services and goods and redefines intellectual property rights in trade. Trade in information technology products has tripled in the past two decades, reaching US$ 1.6 trillion in 2016. • The importance of services in the composition of trade is expected to increase. We predict the share of services trade to grow from 21 per cent to 25 per cent by 2030. • Digitalization has led to a decline in trade of digitizable goods (e.g. CDs, books and newspapers) from 2.7 per cent of total goods trade in 2000 to 0.8 per cent in 2016. The trend is likely to continue with the advent of 3D printing technology. • Regulation of intellectual property rights, data flows, and privacy as well as the quality of digital infrastructure are likely to emerge as new sources of comparative advantage. • The decline in trade costs can be especially beneficial for MSMEs and firms from developing countries, if appropriate complementary policies are put in place, and challenges related to technology diffusion and regulation are addressed. Our estimations foresee that, in such case, developing countries' share in global trade could grow from 46 per cent in 2015 to 57 per cent by 2030. 1. Lower trade costs: opportunities North”) and between developed and developing and challenges (“North-South”) countries. Trade costs among developing countries (“South-South”) were the slowest to decline at the beginning of the period, but Section B discussed how digital technology is their decline gained momentum after the mid-2000s, transforming economic activity, focusing purchasing outpacing the rest. habits increasingly on the internet and changing the ways in which businesses operate by enabling them The declining trend is in line with a recent study by to access data on consumer preferences and to Egger et al. (2018), who show that total trade costs adapt their product cycles and marketing strategies declined both in the manufacturing and services to this information. In this subsection, we look at the sectors during the period between 1995 and 2011. potential of digital technologies to reduce trade costs. They also show that trade costs are higher for We show that digital technologies may decrease the services, mostly due to high variable costs. relevance of distance, be it geographical, linguistic or regulatory, and that they also facilitate searches for Figure C.2 breaks the costs of trading goods and products, introduce mechanisms to verify quality and services down into five components: transport reputation, and simplify cross-border transactions. costs, logistics costs, the cost of crossing borders, information and transaction costs, and trade policy To see how international trade costs have fallen over barriers. The first three categories capture the cost time, Figure C.1 plots the trend for three directions of delivering goods from suppliers to customers. They of trade flows between 1996 and 2014. The costs include the costs of transport, cargo loading, storage, are calculated as a ratio between international and port services and the costs of complying with customs domestic trade. A decline in this ratio means that procedures. Information and transaction costs international trade grew faster than domestic trade, include obstacles that firms have to overcome in order which is an indication that the world has become to search for trading partners, acquiring information more globalized and that obstacles to international about tastes, regulations and technical requirements, trade have declined. On average this decline was and enforcing contracts. Acquiring information about around 15 per cent between 1996 and 2014. The product standards in a foreign country, distribution trend was similar for trade among developed (“North- channels and customers' preferences is costly, and Figure C.1: Overall trade costs, 1996-2014 100 95 90 85 80 75 1996 1999 2002 2005 2008 2011 2014 North-North North-South South-South Source: World Bank-ESCAP database on International trade costs. Notes: Only those country pairs for which data were consistently available for the years 1996-2014 have been included, i.e. 107 countries that were classified as developed (high-income) and developing (middle-/low-income) based on the World Bank classification for the year 2006, which is the midpoint of the time series. Each time series is standardized to 100 at the beginning of the sample period. 64 THE FUTURE OF WORLD TRADE: HOW DIGITAL TECHNOLOGIES ARE TRANSFORMING GLOBAL COMMERCE Figure C.2: Trade costs breakdown, based on data from 2014 (per cent) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Goods Services C. HE ECONOMICS OF HOW IMPACT TRADE IMPACT TECHNOLOGIES DIGITAL T Transport costs Logistics costs Border costs Information and transaction costs Trade policy barriers Other costs Source: WTO calculations using World Input-Output Database (WIOD) data and methodology from Chen and Novy (2011). Notes: The figure shows to what extent various determinants of trade costs explain the cross-country variance in trade costs. The determinants of transport costs taken into account are the effective transportation distance between countries, as constructed by Egger et al. (2018), whether or not a country is landlocked, and whether countries have a common border. Logistics costs are proxied by the Logistics Performance Index and the Liner Shipping Connectivity index. Border costs are proxied by the lead time to export. The determinants of trade policy barriers taken into account are whether countries are part of a free trade agreement, whether they are members of the European Union, and exchange rates. The determinants of information and transaction costs taken into account are whether there is a common ethnic language, a common colonizer, whether different countries were previously the same country or one was previously a colony of the other, the bilateral stock of migrants, the depth of credit information index, and the enforcing contracts indicator. Other costs are the part of the total costs variation that remains unexplained by our variables. these costs increase with cultural and linguistic measures, these figures are likely to underestimate distance. Furthermore, transaction costs are high for the importance of all border costs. cross-border trade because of different institutional frameworks and the need for cross-border financial Information and transaction costs in goods flows transactions and currency conversions. The last play the second most important role after transport category includes policy measures that make access costs.3 In services, information and transaction costs to the domestic market relatively more difficult for are the most important trade barriers, accounting for foreign firms. These are tariffs, but also non-tariff 30 per cent of the total trade costs variation. Finally, barriers, such as technical regulations, product trade policy barriers also matter much more for standards or licensing. services flows, where they account for 15 per cent, as opposed to goods flows where they account for Transport costs account for the largest share of 11 per cent. cross-country variation in overall trade costs; that is, 37 per cent for goods flows and 17 per cent for The remaining unexplained component (“Other services flows.1 Logistics costs are equally important costs”) reflects trade barriers that are not captured by for the trade of goods and services, accounting for the variables introduced in the estimation. These may 11 per cent of overall trade costs.2 The costs of include, for instance, taste differences that are not crossing a border that stem from time delays account explained by the variables used to proxy for cultural for between 5 and 6 per cent of overall trade costs. and linguistic differences. It would also include However, since there are other administrative costs costs of customs and regulatory compliance that go related to customs compliance for which we lack beyond time delays at the border, and those that are 65 not affected by trade agreements. The unexplained trans-shipment that lengthens shipping time is component is considerably higher for trade costs in associated with a 40 per cent lower bilateral export services than for trade costs in goods, which may value. also reflect poorer measures for policy barriers in trade in services. For a detailed exposition of the (i) Artificial intelligence and autonomous methodology used to estimate the decomposition, driving reduce transport costs see Appendix C.1. Many recent technological advances have had a In conclusion, trade costs have declined in both significant impact on transportation and logistics developed and developing countries.