Global digital trade 1: Market opportunities and key foreign trade restrictions

Editor's note:

This is the written statement of Joshua P. Meltzer presented before the United States International Trade Commission investigation on Global Digital Trade 1: Market Opportunities and Key Foreign Trade Restrictions.

1. Introduction: How data drives economic growth 

The digitization of economies broadly means that access to and use of data has economic effects. For one, and as documented in the International Trade Commissions (ITC) 2014 Digital Trade Study, data use increases productivity.[1] Gains in productivity also expand opportunities for trade as firms increase their ability to compete domestically and globally.[2]

Globalization of the internet and the ability to move data across borders is also transforming the nature of international trade in four key areas:

  • Businesses can use the internet (particularly digital platforms) to export. This is a particular opportunity for SMEs who can use these platforms and the comprehensive set of ancillary services they provide, such as online payment mechanisms, to reach consumers globally.
  • Services can be increasingly traded online, particularly IT, professional, financial and education services. New digital service such as cloud computing have also been developed and are becoming crucial business inputs.
  • Data collection and analysis is allowing new services (often also provided online) to add value to goods exports. For example, in the mining sector Caterpillar has a technology solution CAT MineStar that collects real-time data analytics on grading accuracy, load quantities, and quality of work to help customers minimize fuel costs and downtime and improve productivity.[3]
  • Global data flows underpin global value chains.

The internet and data is transforming economies into digital economies where use of such technology expands across all sectors. A consequence of this is that a large range of domestic regulation has the potential to restrict digital trade.  This includes regulation in areas such as privacy, finance and consumer protection.

Moreover, an absence of regulation such as a lack of effective competition policy can also constitute a barrier to digital trade when dominant actors prevent the diffusion and uptake of innovative business models using such digital technologies.

To be clear, recognizing that restrictions may arise from regulation is not a judgement as to whether such regulation is legitimate.

  1. How businesses use data

In order to understand how data can improve business efficiency and productivity and the economic implications of restricting the free flow of data across borders, it is necessary to first consider how businesses use data.

2.1       E-Commerce 

The capacity for firms to use the internet to engage in e-commerce relies on access to and use of a range of data. The basic e-commerce interaction involves the purchase, payment and possible delivery online requires data such as the name, address and financial details of the customer.

2.2       Access to data-intensive services 

Data flows enable the delivery of digital services.  Such digital services can improve the efficiency and competitiveness of businesses and their capacity to compete in domestic and international markets.

2.3       Big data

Big data refers to data sets with sizes that are beyond the ability of commonly used software tools to capture, curate, manage and process within a tolerably elapsed time.[4]  Gartner, a research IT and consultancy company defines big data as high-volume, high-velocity and/or high-variety information assets that demand cost-effective, innovative forms of information processing that enable enhanced insight, decision making, and process automation.[5] Both of these definitions capture two elements – big data refers to larger than usual data sets where the data is often collected rapidly and continuously and the need for new and innovative tools to process the data in order to make use of it.

The capacity to collect data globally and transfer it across borders in order to create large data sets requires cross-border flows. The key benefits from big data are derived from the capacity to analyse this data to generate insights useful for business. Effective use of big data by industrial companies could increase annual revenues by an average of 2.9 percent and to generate 3.6 percent p.a. in cost reductions over the next 5 years.[6]

For example, data is collected on consumer preferences and analysed to better design products and improve delivery. Big data allows companies to better understand their business environment to create new products and respond to changes in usage patterns as they occur.[7]  For instance, UK online grocery retailer Ocado processes more than 100 terabytes of data to drive decisions such as predicting what people will buy next to planning the most efficient delivery routes.[8]

Access to data can also enable improvements in the health sector. For instance, big data is being used to develop more targeted drug trials across different populations. For example, AstraZeneca’s Open Innovation platform works with academics and non-profits globally to participation in drug discovery. Big data could also be used to provide more targeted health care, enabling more ‘evidence-based’ health intervention.[9] According to one estimate, big data could be used to reduce US national healthcare expenditures by about 8 percent.[10]2.4       Cloud computing

The U.S. National Institute of Standards and Technology defines cloud computing as “a model for enabling ubiquitous, on-demand network access to a shared pool of configurable computing resource  (e.g. – networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management efforts or service provider interaction.”[11] A common taxonomy of cloud services are:

  • Software as a Service (SaaS): which offers finished application for end-users such as a web- browser, Gmail, Google Docs
  • Platform as a Service (PaaS): which offers operating systems and software development tools such as Microsoft Windows Azure and Google Apps Engine.
  • Infrastructure as a Service (IaaS): which gives end-users direct access to processing, storage and other computing resources which allows them to configure them as they see fit. Examples include Amazon Elastic Compute Cloud and IMB Computing on Demand.[12]

Cloud computing uses internet access and the ability to move data across-borders to provide cheaper and flexible IT. Cloud computing provides businesses with the opportunity to access, scale, and use a pay-as-you-go option for software, platforms, and infrastructure. This reduces the need for upfront investment in IT and the associated costs of maintaining often underutilized computing power.[13] In effect, cloud computing turns a fixed IT cost into a variable operating cost.[14]

Cloud computing enables business to avoid the often large upfront capital costs of IT investments, which is of particular value for SMEs and startups where the costs of capital are often higher than for large firms.[15]

Cloud computing also gives small firms the ability to access computation power that was previously available only to large corporations. In addition, the flexibility and scalability offered by cloud computing means that a start-up for instance can start with a few computing resources and increase this as customer demand grows, avoiding the need to invest at the outset in large unused computing capacity with all the associated maintenance costs, while being confident that its computing needs can be rapidly met as business conditions improve. For SMEs in particular, the cloud computing offered by large cloud providers such as Amazon, Google and Microsoft also have the expertise to offer better security than could be achieved with their own in-house IT.[16]

Cloud computing also underpins the capacity for people to work remotely, using laptops to access software and files stored in the cloud. This can also facilitate global collaboration, sharing and innovation.

The range of uses of cloud computing underscore the importance of connectivity and cross-border data flows.

2.5       The internet of things  

The internet of things (IoT) refers to the ability of everyday objects to connect to the internet and to send and receive data.[17] The IoT will also generate a large amount of data and collecting this data and turning it into knowledge will be a key feature of the internet of things.[18] Maximizing the opportunities of the IoT will also require the ability to move data across borders—to collect data in one country, aggregate it with data from other countries, and to analyze it in a third country (another driver of big data).

The IoT will apply across industries. For example, businesses are already using sensors in factories to increase the efficiency of operations and use of radio frequency identification technology to track goods and manage distribution centers. Using sensors to track products, companies can collect data on the movement of intermediate products and monitor stock levels globally to increase efficiencies, reduce delivery times and minimize overheads. As Thomas Davenport and co-authors put it in a 2012 Massachusetts Institute of Technology publication, companies will use “real-time information from sensors, radio frequency identification and other identifying devices to understand their business environments at a more granular level, to create new products and services, and to respond to changes in usage patterns as they occur.”[19]

The IoT will give businesses the ability to better understand customer needs and to improve the value of their products. For example, French insurer AXA’s smart home hub uses the IoT to give households real-time protection against burglars, fire, floods and gas leaks.

The economic opportunity of the IoT will be significant.  For example, machine-to-machine IoT alone is expected to grow from $44 billion in 2011 to $290 billion in 2017.[20] The McKinsey Global Institute finds increasing Europe’s use of data analytics and the IoT could increase annual GDP by EUR 1-1.9 trillion by 2025.[21]

Cisco takes a broader view of the evolution and integration of data and things and instead talks of the internet of everything – the networked connection of people, process, data and things – which between 2013-2022 it sees as being a $14.4 trillion opportunity for the private sector alone.[22] According to Cisco, the U.S. and Europe (Western and Eastern) stand to gain the most from the IoT, particularly in services sectors such as health care, smart cities, driverless cars, smart grids and more connected markets.[23] Cisco identifies the need for companies to ensure privacy as an enabler of this technology but also emphasizes the importance of access to data, including personal data.

  1. Digital trade

There is no globally accepted definition of digital trade.  The ITC should continue to adopt a broad approach as to what constitutes digital trade, consistent with the ITC approach in its previous Digital Trade Reports.

Restrictions on cross-border data flows can negatively affect international trade in the following ways:

  • Increase the cost for business to use digital platforms for export
  • Increase the cost of digitally-intense services imports such an professional services and cloud computing will increase. Where these costs are passed through to customers that will increase business costs, reducing the productivity and competitiveness of business that use these inputs, likely leading to reduced sales and less exports .
  • Less participation by business in global value chains which rely on cross-border data flows, reducing productivity and exports.
  • Limit productivity gains from broad uptake of the internet and data with its related impacts on capacity to compete and engage in international trade.

3.1       International e-commerce opportunities

The global and open nature of the internet and the capacity to move data across borders means that a good or service available online can be accessed and often purchased by domestic and international consumers. According to Statist Dossier, in 2015 retail e-commerce sales worldwide amounted to $1.55 trillion US dollars and e-retail revenues are projected to grow to $3.4 trillion US dollars in 2019.[24]  The McKinsey Global Institute estimates that already 12 percent of global goods trade is conducted via international e-commerce.[25]3.2       The opportunities of data for SME participation in the global economy

The global internet and cross-border data flows provide a particular opportunity for SMEs to be engaged in the international economy.[26] Yet, the costs to business of restrictions on cross-border flows of data are particularly acute for SMEs that lack the resources to manage such challenges or absorb the costs.

There are various ways that the internet and global data flows support SME participation in international trade. For one, having a website gives SMEs an instant international presence without having to establish a physical presence overseas—often not an economic option for SMEs. Access to cost effective data-based services is another important enabler for SMEs, including online advertising and communication services, cloud computing, and access to critical knowledge and information on foreign markets.[27] In fact, the USITC’s first report on digital trade identified access to information on foreign markets and regulations as a key barrier to SMEs engaging in international trade.[28]

SMEs also use internet services such as YouTube and social networking sites such as Facebook to advertise and expand customers. Yet, nearly 60 percent of views of YouTube channels come from outside the home country of a channel’s owner and 80 percent of YouTube views come from outside the US.[29] These cross-border views of videos can translate into real economic gains for SMEs. For example, companies often see sales rise after they post videos of their product, and can use online videos as a launch pad to build real-world apps, products, and services for a global customer base.

Access to internet platforms is another key opportunity for SMEs to engage in international trade. For instance, 97 percent of SMEs in the U.S. using eBay export compared to 4 percent of their offline peers.

3.3       Global value chains

More than 50 percent of trade in goods and over 70 percent of trade in services is in intermediate goods.[30]   GVC are particularly important in countries such as China, Japan as well as the United States. For example, in 2011, foreign value added in exports comprised 21.8 percent for China 17 percent for Japan and 14 percent for the U.S. The data points to an increasing trend towards more use of foreign inputs.[31]

Countries that participate in GVC have on average 2 percent higher per capita economic growth than those outside of GVC.

Global value chains rely on cross-border data flows.  For instance, managing globally dispersed production requires managing HR data, production schedules and moving consumer data globally.

  1. Restriction on Digital Trade

Governments are introducing restrictions on internet use and cross-border data flows for a range of reasons.  For instance, data localization laws prevent the movement of data across-borders or which introduce costs. Motivations for data localization requirements include security concerns, law enforcement needs to access data, concerns over privacy in third countries and economic aims to force the building of data centers.

That there is an expanding scope of regulation that can affect trade is not new. The WTO and FTAs include disciplines on such behind-the-border non-tariff measures (NTMs).  The challenge is to draw a boundary around what is a trade measure and what is outside the scope.

In the WTO content, this challenge has largely fell to the non-discrimination norm which is central to the trading system. It has done a lot of the important work of identifying when NTMs have protectionist effect. Specific exceptions have allowed for regulations that are otherwise discriminatory

But the WTO jurisprudence has also made clear that there is no bright line between a measure that affects trade and should be subject to WTO disciplines, and one that has a merely incidental impact.

There are also specific disciplines in the WTO TBT and SPS agreement that take this scope further.  Under these agreement, a government can be found to be in breach of its WTO commitments for failing to use an international standard, even in the absence of discrimination.

There are similar scoping challenges for digital trade. In particular, mere protectionism, tilting the playing field in favor of a domestic product or business – may not capture enough of the activity that is important when it comes to digital trade.

For instance, the need to avoid limiting flows of cross-border data is not premised on a finding of protectionism. This raises the question whether all restrictions on cross-border data flows need to be justified, irrespective of whether the restriction causes discrimination.

In the WTO context, WTO Members have been content to let the Appellate Body to decide on a case-by-case basis whether a behind the border measure is discriminatory.

When it comes to data, its role in economies is deeper and broader than that of more traditional trade. It is economy-wide in ways that traditional trade is not.  This will mean that much more regulation has the potential to restrict cross-border data flows. As noted, this could include privacy rules, consumer protection, competition laws, financial sector regulation, health regulation, and the list goes on.

Given the range of regulations implications by digital trade and the parallel range of regulatory goals, it is important for the ITC to identify the broad range of restrictions on digital trade while making clear that this is not a judgement as to their legitimacy.