E-commerce and digital industrial policies: Why we may still need a collective solution

8 December 2017

In this post, the author discusses e-commerce from the perspective of developing countries. By identifying the dependencies in regulating the digital economy, the author argues that digital industrial policies need to be supported through strong international collaboration and commitment towards fair digital trade. The author outlines a few principles for revival of international discussions in light of the 2030 Agenda for Sustainable Development.

 

The recent groundswell on digital trade in general, and e-commerce in particular, demonstrates two basic realities for developing countries. First, countries thinking about digital trade have moved beyond the traditional discourse on e-commerce to integrate issues of trade in goods and services, and intellectual property protection. These are now part and parcel of e-commerce negotiations. Secondly, in spite of submissions to the World Trade Organization in the lead-up to the Eleventh Ministerial Conference (MC11), there is no consensus on how this important area of policy should be tackled.

Leaving the topic untouched at the multilateral level – which may well be an outcome at MC11 – is risky because digital trade is currently not unregulated, or just self-regulated: it is selectively regulated through free trade agreements that are progressively ratcheting up e-commerce provisions. Trying to ensure that trade-related implications and opportunities for developing countries are part of the discussions is therefore urgent. Looking closely at what is at stake shows that while digital industrial policies are a priority, there may still be the need for a multilateral framework to buttress the triangulated goals of global trade, development, and individual privacy.

What is at stake?

The changed nature of e-commerce discussions are to be credited to the fourth industrial revolution, which while being a term in vogue, is still a figure of sphinx-like mystery to most of us. Much more sophistry surrounds it than with the three earlier revolutions that charted new directions for the world economy. Industry 4.0 is fuelled by extreme connectivity and a gigantic expansion of cloud computing. It is a maze of innovations and applications that connect existing devices (mobiles, phones, tablets, and laptops) to new devices (such as 3D printers) and advances (most notably, artificial intelligence, process automation, and the internet of things). That is why digital trade has been growing by leaps and bounds and promises yet more transitions in the near future. Among the key technologies that undergird Industry 4.0, big data analytics, robotics process automation (RPA), artificial intelligence (AI), and 3D manufacturing are regarded as widely disruptive. Big data analytics feeds into RPA and AI, which are the two most viable technologies right now. 3D printing is not yet fully available on an industrial scale, and cloud computing is still in its infancy, but projected to grow exponentially in the coming years. Breakthroughs in other sectors—such as nanotechnology and quantum computing—are also expected, extending the frontier of scientific innovation further and increasing the distance for industrial catch-up even more.

The global distribution of benefits from these technologies is highly skewed because they automate and connect existing industrial capacity. Most companies engaged in the research and development of RPA, AI, and 3D printing technologies are located in a handful of countries in Western Europe, the United States, China and South Korea. More importantly, as of 2015, companies using RPA in production tended also to be located in the same countries. World retail shares in e-commerce show that these economies are the top 15 markets where new digital technologies are concentrated, with the exception of the technological hubs of Mexico, Brazil, and India. But the downside of greater profits through e-commerce and increased use of RPA and AI in advanced economies will be felt in a large number of developing countries where jobs will be consolidated in the coming years, if not entirely eliminated.

The importance of digital industrial strategies

Future trade gains and the prospects for trade-led development in developing countries will depend on how good they are at absorbing these technologies and applying them to existing industry. To be “trade ready” in the digital economy, they will need two sets of capabilities. The first is routine skills, know-how, and competencies that are essential for the manufacturing sector and to create new products and processes interfacing manufacturing and services, as in conventional industrialisation. Given that much of e-commerce is selling traditional goods and services online, the lack of ability to produce many varieties of industrial output will directly affect the level of participation and share of gains. A second set of capabilities is the skills, knowledge, and technical know-how of particular significance to Industry 4.0. This means data scientists, RPA engineers, and people specialised in particular sectoral technologies. Over time, all industrialisation will face transformational pressures to become digital industrialisation. That is why it will be important to develop interdisciplinary skills that combine technical expertise with specific plant management expertise to run hybrid production systems. A dual focus on both kinds of capabilities is needed to adapt and retain jobs while at the same time promoting local industrial content.

A central pawn in the game is data, deserving a special mention. The internet generates staggering amounts of data each second through search engines, landing pages, online platforms, and social media. These can help to systematically map customer behaviour and competition trends and generate price comparisons (thereby showing ways to cut costs). But access to data alone does not guarantee information. Deriving actionable insights from this vast amount of information requires capabilities for data analysis, and developing other digital products using data can be daunting in the absence of high technology skills.

Digital industrial policies are therefore extremely important to reinforce the focus on capabilities and retain space for local manoeuvre. They can help countries control and check cross-border data flows, promote consumer protection and safety of online transactions, and protect individual privacy. But although such policies are harbingers of hope, they will also face several limitations. A first limitation is the choice of industrial policy instruments, since many of them entail trade-offs and concerns of privacy and development may be deeply intertwined. For example, data localisation is often advocated as an industrial policy option to retain data control and promote local industries (by sharing the data), while some countries also see it as an important tool to ensure individual privacy. Regardless, what is not clear is how data sovereignty – which relies on a country’s efforts to create large-scale digital infrastructure to route its internet traffic and requiring companies to store all information generated within national boundaries – can really help create technical protection from data misuse.

On the face of it, it seems clear that controlling cross border data flows through legal controls is not even a good second-best option given the fluid nature of such information flows and countries will all be worse off in the absence of good international cooperation in this regard. Developing countries would incur large-scale investments in creating such infrastructure, with the result that although the government has access to its citizens’ data, it may not automatically enable the local use of the data for many reasons. One, global companies are becoming adept at encrypting data that is stored in faraway locations, and two, because local firms may lack the expertise to analyse and use the data in industrial applications employing digitally advanced technologies. Intellectual property on existing applications may also pose barriers, making it harder for local firms to invent around. Limitations like this exist with many other proposed instruments, such as the disclosure of source code, which smaller developing countries may be unable to enforce because of their limited bargaining power with global companies. The choice of instruments for digital industrial policies, and policy coherence between them, will therefore be critical to ensure results.

In practical terms, industrial policies in this field should not only help build capabilities but also ensure that markets for digital products remain competitive so that local firms can compete and thrive. This is by no means an easy task. It involves overseeing large “incumbent” global firms and preventing them from using big data analytics to shape markets and market gains. There are several ways in which large firms can use big data. They can design their own expansion to ensure greater profits and market power; offer new digital products such as the internet of things, based on data generated on their online platforms, to further cement their monopolistic positions; or even sell their data pools to other firms on a selective basis. Digital industrial policies will have their limitations in foreseeing and averting such anti-competitive practices, since a large number of these effects will inevitably be cross-border in nature.

The imperative for a collective solution

Strong international collaboration and commitment to ensure that the digital economy operates in the interest of all countries should therefore form the backdrop in which national digital industrial policies operate. The case for a multilateral solution can be made from three perspectives. To begin with, digital industrial policies need to be supported through other efforts at the multilateral level that help countries to cooperate better to achieve the triangulated goals of trade, development and privacy, all three deeply intertwined in the digital economy. Moreover, in the absence of multilateral negotiations on e-commerce, there is a risk that national decisions – such as those on cross-border data flows - will inhibit the use and future development of digital technologies that rely on data flows, and also put at risk large parts of global commerce as we see it now. This could lead to a lose-lose situation all around. Finally, in the absence of multilateral discussions, FTAs will serve as a default position for a large number of countries on issues related to e-commerce and the digital economy. As of November 2017, over 80 of the 164 WTO member countries had already signed at least one FTA with e-commerce provisions, and over 70 FTAs with dedicated e-commerce chapters were in force. Mapping the countries that have signed these FTAs with global e-commerce revenues, it is shocking to see that 88 percent of the global e-commerce market is already covered by at least one FTA of this nature. An alternate regulatory environment created by FTAs – where digital products and technologies are protected through extensive rules and intellectual property portfolios – will impede developmental options of countries in the future.

In reviving the discussions on e-commerce, an important step will be to take an Industry 4.0 view of the digital economy, insisting that e-commerce issues related to security (cybersecurity, consumer protection) cannot be divorced from the larger questions of industry standards, classification, intellectual property, and technological neutrality, among others. There are many questions still open when country proposals to the WTO are reviewed, such as data privacy, encryption technology, the development of secure payments systems, electronic contracts, and taxation. These raise legitimate public policy questions and interact with other areas of domestic policy within countries. Trade officials will need to find answers that meet public policy objectives without restricting trade, and also ensure that they the benefits of access and lower costs for industry and local firms flow from it.

Key principles for an international framework

A sound consideration of the issues at the interface of digital trade and development calls for an approach that charts new ground away from the existing power play and political divides. Developing countries should therefore consider proposing a new framework on the digital economy that integrates both the older issues of e-commerce that were left open in the Working Group on E-commerce, and new issues raised by digitisation and Industry 4.0 as an independent solution, which could be negotiated and governed independently. Alternately, countries could also consider calling for an International Code on Digital Trade that could set some ground rules for how a balance between trade, privacy, and development can be achieved. Such a position is soundly in line with the 2030 Agenda for Sustainable Development. Fostering industrialisation through innovation (Goal 9), as well as a number of other interrelated goals of Agenda 2030, will be impacted by Industry 4.0, lending a much-needed impetus to considering digital trade in light of all the dimensions of development, which is not possible in the contours of the current multilateral set-up. 

In discussing the old and new issues of e-commerce and the digital economy, some key principles that could guide such an international framework are:

1. Prioritise the safety of personal data while dealing with concerns related to industry, innovation, and security of nation states. The international framework should establish clear rules on privacy of personal data of all global citizens while creating a balance with industry and innovation, and safeguarding security of all countries. To this end, a set of data neutrality principles with the aim of protecting privacy and security concerns associated with data use should be proposed. A global data pool mechanism can be considered to allow all firms globally to use data for new technological innovations across all sectors. All existing data can be deposited in the data pool for use, dependent on a user fee, by the private sector worldwide. Such a mechanism would share data subject to privacy and security. The data pool can also be a platform for countries to share data and update insights on issues of global security.

2. Foster global trade and enable competitive markets. The framework should establish and clarify the definition and scope of key terms such as digital products, the use of e-signatures, paperless trading, unsolicited electronic messages, encryption technology, the development of secure payments systems, among others, with a view to enabling global trade and fostering competitive markets. It should clarify issues of classification and application of e-commerce to new sectors such as taxation and finance. The borderless nature of the internet, the current corporate landscape, and the consumer protection dimension of all these measures reinforce the demand for a global competition authority with dispute settlement and enforcement to oversee digital trade. This proposal, which has been suggested in the past without success, should be revived in the context of promoting fair trade and reducing anti-competitive barriers.

3. Facilitate the developmental needs of countries. The framework should have dedicated provisions that enable special and differential treatment for countries, providing sufficient degrees of flexibility, in order that countries can exercise policy space to create exceptions keeping with public interest and social welfare. Developing countries could propose to retain the choice to determine liberalisation based on sectors, or to create special provisions for certain sectors, in a manner available under the General Agreement on Trade in Services.

 

Padmashree Gehl Sampath is an expert on trade and development issues working at the United Nations Conference on Trade and Development (UNCTAD). She is also affiliated as a Professorial Fellow at the United Nations University-MERIT. These are her personal views. A full paper, on which this blog is based, will be published shortly.