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4 August 2016, International Center for Trade and Sustainable Development

Digital trade: new frontier

A new phase of globalisation has begun, driven by the rise of digital flows. This phase brings about new questions for the WTO and other global economic and trade governance. A multilateral approach must balance protectionist sentiments along with a desires for digital openness.

Distinguished Fellow, Geoeconomics Studies Programme

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Globalisation has entered a new phase, driven by the rise of digital (data and information) flows, raising new questions for the WTO, and global economic and trade governance. India and other emerging markets need to fully engage in developing universal standards conducive to innovation, productivity, and growth.[1]

Let’s first look at the facts about recent developments in global trade, before turning to their implications for sectors and regions, and for global governance and growth:

  • Since the global financial crisis, overall trade has clearly stalled—globally as well as for emerging markets. Before that, the long term average growth of global trade was about five percent a year, considerably higher than global growth.
  • The slowdown in trade has taken place despite favourable factors, such as declining transport costs, and may reflect lingering cyclical conditions.
  • While there have also been one-off disruptions to the trade slowdown, structural factors are clearly at play, such as falling trade elasticities to growth (Constantinescu et al. 2015). The structural factors clearly include China’s falling demand for raw materials and capital goods, and stalled efforts at global trade liberalisation.
  • While global goods trade as well as cross-border financial flows have fallen sharply since 2007, flows of digital information have surged.[2] Growing international evidence, recently from the McKinsey Global Institute (MGI), suggests that cross-border bandwidth use has grown 45-fold over the past decade, with about 12 percent of global goods trade already conducted in e-commerce channels (Manyika et al. 2016). These rising cross border flows of digital globalization are already circulating intellectual content and innovation around the world, with rising implications for productivity and growth.

IMPLICATIONS OF DIGITAL GLOBALISATION

Let’s consider now the implications of the rise in the new information-intensive goods and services for productivity and growth. Why is there not already greater empirical evidence of their impact on output? Certainly, the reality is that, since the global financial crisis, overall productivity growth has been very slow in absolute terms and relative to previous decades, in advanced and emerging market countries.

There are clearly wider forces at play, such as the hypothesis of “secular stagnation” as proposed by Larry Summers (2016), and history tells us that that lags are historically evident between innovation and productivity.

But, we are already seeing growth effects from the surge in digital information flows. Indeed, the cited research from MGI finds that “cross-border flows of goods, services, finance, and data during this period increased world GDP by roughly 10% – roughly an additional $7.8 trillion in 2014 alone. Data flows exerted a larger impact on growth than global goods trade” (Tyson and Lund 2016).

Let’s now look at the broader potential implications of this surge in digital flows:

  • Evidence is building through recent research that digital connections can directly promote productivity growth. Most importantly, barriers aside, the marginal costs of digital communications and transactions are potentially near zero, hence creating new scales for conducting cross-border business (ibid).
  • This provides new and remarkable scope for companies to overcome local market constraints and connect globally with customers, suppliers, financing, and human resources.
  • All of this offers new potential for developing economies to “move closer to the productivity frontier by exposing their business sectors to global and innovative technologies, investment, and best management practices” (ibid).
  • Evidence also suggests that the potential could be higher in the tradeable services sector, such as trade in business services. This fits well with emerging markets’ priorities, especially China which is rebalancing growth to focus on services, and India with its early emphasis on services, and India’s creation of the world’s first digital ID infrastructure that is transforming India’s potential for online services.

But all this requires that countries build the necessary domestic digital infrastructure and provide access to global data flows. And we are not there yet:

  • Much of the developing world still needs to bring their offline population online. Estimates are that more than half of the world’s population, close to four billion people, are still offline.
  • And, “in many developing countries, connectivity is too slow, unreliable, or expensive to allow entrepreneurs and individuals to take full advantage of these emerging new global business and educational opportunities” (ibid).
  • This explains why digital globalization is already playing directly to the strengths of the United States and other advanced countries in technology and innovation—offsetting the disadvantages advanced countries faced during the period when low labour costs were paramount in global manufacturing value chains.
  • McKinsey’s research on the connectedness of countries linked to their participation in global flows (including of digital technology) finds that these flows are disproportionately concentrated among a small group of advanced countries. From emerging markets, China is the only country within the top ten of this Connectedness Index reflecting also its push to raise its innovation clusters.
  • Certainly, developing countries will need to adjust their human capital by emphasizing education in technology and digital skills, to participate much more fully in digital globalisation. This is particularly important for the G20 to support, and ensure that countries with low cost labour do not lose out in jobs as digital technology and automation begin to take over.
  • Thus, “lagging countries are closing their gaps with the leaders at a very slow pace, and their limited participation will have a real cost to the world economy” (Manyika et al. 2016). We see this also in the indicators of declining productivity and growth, globally, and in emerging markets.

GOVERNANCE IMPLICATIONS

Let’s now turn to the new policy challenges posed by the surge in digital trade flows and their governance implications.  The reality is that globally there are high barriers to trade and investment in business and other services, and the challenge is how to promote an open and level multilateral playing field for trade in digital goods and online services. Regional trade and investment treaties, such as through the proposed Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, are taking over from the WTO as the main forum for agreements, including for trade in services, although they are politically far from adoption (Schott 2016).

In its present form, it is important to note that the TPP seeks to promote a free and open market for digital goods and online services, prohibiting customs duties on digital goods. It also seeks to limit domestic restrictions on data flows, and encourages trade by SMEs, and introduces potentially binding dispute settlement procedures in all area. Over time, these principles should lower costs and intensify the development of new digital goods and services.

The trade diversion risks for countries potentially excluded from such regional agreements, which are now also covering digital trade, are potentially more immense.  These risks could constitute a new barrier to sustaining growth in areas that could be the forward anchor for boosting innovation, productivity, and growth, especially in services.

This is particularly important for India which needs to open new external markets for trade in services—that has been India’s strength. Such external integration can also be a driver of needed domestic reforms for India’s domestic economy.

At the same time, countries would create these risks by national efforts at “data localization”—which could limit cross-border data flows, servers, and storage with potentially high regulatory and compliance costs. Recent research clearly indicates that such regulatory barriers that impede adoption and diffusion of technology are already affecting investment and growth in a number of countries (Bauer et al. 2014).

This emphasises the need for universal standards and raises the stakes for the G20 to support the WTO’s efforts to play this role and negotiate agreements for trade in services. An early test is the Trade in Services agreement, initiated by the United States and Australia, with at least 50 participants that represent 70 percent of the world’s trade in services. The WTO established the last major services agreement, the General Agreement on Trade in Services in 1995 but, since then, as we have seen, the world has evolved dramatically from the result of technological advances, and deeper global digital flows and integration.

An agreed multilateral approach is needed to strike the right balance between assuring digital openness while mitigating the privacy and security risks inherent in a new stage of interconnectedness and globalisation. Otherwise, rising protectionist sentiments could especially affect investment and growth in developing countries who are still distant from the productivity frontier.

This chapter was originally published in “G20 Hangzhou Summit: Proposals for Trade, Investment, and Sustainable Development Outcomes” published by ICTSD. You can find the full report here.

Anoop Singh is Distinguished Fellow, Geoeconomics Studies, Gateway House.

Anoop Singh was a speaker on the Re-energizing Global Trade Growth: Trends and Measures panel at the 2016 T20 Trade and Investment Conference conducted by the International Center for Trade and Sustainable Development.

© Copyright 2016 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

References

[1] This paper is based on a presentation at the T20 Trade and Investment Conference, June 8 2016, Geneva, Switzerland.

[2] These digital flows cover an expanding span of flows in cross-border electronic commerce issues, such as innovative technologies in information, manufacturing, biotech, energy, financial, and defence.

Bauer, Matthias, Hosuk Lee-Makiyama, Erik van der Marel, and Bert Verschelde. ’The Costs of Data Localization: Friendly Fire on Economic Recover’, European Centre for International Political Economy, March 2014,  <http://ecipe.org/app/uploads/2014/12/OCC32014__1.pdf>

Constantinescu, Cristina, Aaditya Mattoo, and Michele Ruta. ’Working Paper: The Global Trade Slowdown: Cyclical or Structural?’ International Monetary Fund , January 2015 <https://www.imf.org/external/pubs/ft/wp/2015/wp1506.pdf>

Manyika, James, Susan Lund, Jacques Bughin, Jonathan Woetzel, Kalin Stamenov, and Dhruv Dhingra, “Digital Globalization: The New Era of Global Flows”, McKinsey Global Institute, February 2016, <http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/digital-globalization-the-new-era-of-global-flows>

Schott, Jeffrey J, ‘Understanding the Trans-Pacific Partnership: An Overview’, in Cathleen Cimino-Isaacs and Jeffrey J. Schott, ed., Trans-Pacific Partnership: An Assessment (July 2016), pp. 9-21. Peterson Institute for International Economics, <https://piie.com/commentary/speeches-papers/understanding-trans-pacific-partnership-overview>

Summers, Lawrence H., ‘The Age of Secular Stagnation.’ Foreign Affairs, March/April 2016. <https://www.foreignaffairs.com/articles/united-states/2016-02-15/age-secular-stagnation>

Tyson, Laura and Susan Lund, “Digital Globalization and the Developing World.”, Project Syndicate, 25 March 2016. <https://www.project-syndicate.org/commentary/digital-globalization-opportunities-developing-countries-by-laura-tyson-and-susan-lund-2016-03>

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