United States International Trade Commission Digital Trade in the U.S. and Global Economies, Part 2 August 2014 Publication Number: 4485 Investigation Number: 332-540 United States International Trade Commission Commissioners Meredith M. Broadbent, Chairman Dean A. Pinkert, Vice Chairman Irving A. Williamson David S. Johanson F. Scott Kieff Rhonda K. Schmidtlein Robert B. Koopman Director, Office of Operations Nannette Christ Acting Director, Office of Economics Address all communications to Secretary to the Commission United States International Trade Commission Washington, DC 20436 United States International Trade Commission Digital Trade in the U.S. and Global Economies, Part 2 August 2014 Publication Number: 4485 Investigation Number: 332-540 United States International Trade Commission This report was prepared principally by Project Leader James Stamps [email protected] Deputy Project Leader David Coffin [email protected] Office of Economics Lin Jones, David Riker, Darren Sheets, Ravinder Ubee, and Bennet Voorhees Office of Industries Caitlin Blair, Sharon Ford, Eric Forden, Martha Lawless, Jeanette Leary, Katherine Linton, Kathryn Lundquist, Elizabeth Nesbitt, Erick Oh, Jeffrey Okun-Kozlowicki, George Serletis, Michael Stanton-Geddes, and Isaac Wohl Office of the General Counsel William Gearhart Content Reviewers Jose Signoret and Alan Treat Statistical Reviewers David Lundy, John Stephens, and Jeremy Wise Editorial Reviewer Peg Hausman Administrative Support Phyllis Boone, Trina Chambers, and Monica Reed Special Assistance Yasnanhia Cabral, Eleanor Coates, William Greene, Jeffrey Horowitz, Cynthia Payne, Jennifer Powell, and Alissa Tafti Help Desk and Customer Service Division Under the direction of Arona Butcher, Chief Country and Regional Analysis Division Office of Economics Abstract At the request of the U.S. Senate Committee on Finance, the U.S. International Trade Commission (“Commission”) undertook an investigation to better understand the role of digital trade—domestic commerce and international trade conducted via the Internet—in the U.S. and global economies, as well as the effects of barriers and impediments to digital trade that impede U.S. access to global markets. The Commission’s analysis provides findings at three levels: at the firm level, through 10 case studies; at the industry level, through a survey of U.S. businesses; and at the economy-wide level, using computable general equilibrium and econometric models. This analysis shows that digital trade contributes to economic output by improving productivity and reducing trade costs. Digital trade also contributes to the economy as a whole as it facilitates communication, expedites business transactions, improves access to information, and improves market opportunities for small and medium-sized enterprises (SMEs). Digital trade’s combined effects of increased productivity and lower trade costs are estimated to have increased U.S. real gross domestic product (GDP) by $517.1−$710.7 billion (3.4−4.8 percent), and increased U.S. aggregate employment by 0.0 to 2.4 million full-time equivalents (0.0 to 1.8 percent). These estimates of the effects of digital trade are not exhaustive, however, as other effects of digital trade were not captured in these findings. According to survey results, U.S. firms in digitally intensive industries sold $935.2 billion in products and services online in 2012, including $222.9 billion in exports; they purchased $471.4 billion in products and services online in 2012, including $106.2 billion in imports. Online sales by U.S. SMEs in digitally intensive industries totaled $227.1 billion in 2012. However, the Commission’s analysis suggests that foreign trade barriers are having discernible effects on U.S. digital trade. According to the Commission’s econometric estimates, removing these barriers would increase the U.S. real GDP by an estimated $16.7−$41.4 billion (0.1–0.3 percent). 1 2 Table of Contents Abstract ..................................................................................................................................................... 1 Abbreviations and Acronyms ......................................................................................................... 10 Executive Summary ............................................................................................................................ 13 Chapter 1 Introduction ..................................................................................................................... 27 Objective ................................................................................................................................................. 28 Scope ....................................................................................................................................................... 29 Definition of Digital Trade ................................................................................................................... 29 Industries Particularly Involved in Digital Trade ................................................................................. 30 Approach ................................................................................................................................................. 31 Firm-level Findings: Case Studies ........................................................................................................ 32 Industry-level Findings: Survey of U.S. Firms ...................................................................................... 32 Economy-wide Findings: Quantitative Assessments .......................................................................... 33 Other Information Sources ................................................................................................................. 34 Organization of the Report ..................................................................................................................... 34 Bibliography ............................................................................................................................................ 36 Chapter 2 Digital Trade and U.S. Businesses: Domestic Operations and International Trade ............................................................................................................................. 39 Key Findings ............................................................................................................................................ 39 Results ..................................................................................................................................................... 40 Estimate of Digital Trade in the U.S. Economy ....................................................................................... 41 Online Sales of Products and Services ................................................................................................ 41 Online Purchases of Products and Services ........................................................................................ 45 International Trade ............................................................................................................................. 47 Business Practices ............................................................................................................................... 50 Advertising .......................................................................................................................................... 54 Online Advertisements ....................................................................................................................... 54 Cyber Incidents ....................................................................................................................................... 58 Bibliography ............................................................................................................................................ 61 Chapter 3 Broader Linkages and Contributions of Digital Trade to the U.S. Economy ................................................................................................................................................. 65 Key Findings ............................................................................................................................................ 65 Analytic Approach and Data Sources ...................................................................................................... 66 Economic Benefits of Increased Productivity due to the Internet .......................................................... 67 The Contribution of the Internet to Productivity................................................................................ 67 Economy-Wide Implications of the Productivity Effects of the Internet ............................................ 70 Economic Benefits of Reduced International Trade Costs due to the Internet ...................................... 72 Simulations That Combine the Two Types of Effects .............................................................................. 73 Bibliography ............................................................................................................................................ 76 Chapter 4 Barriers to International Digital Trade and Their Economic Effects ......... 77 Key Findings ............................................................................................................................................ 77 U.S.