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Digital Trade: Opportunities and Risks

Digital trade is on the rise. It offers great opportunities to both producers and consumers. At the same time, there are few rules governing this new type of trade – neither under the World Trade Organisation (WTO) nor in bilateral trade agreements. And there is a severe risk of protectionist setbacks.  

Digital trade has three components: trade in ICT products, international e-commerce, and cross-border data transfer. Digital trade reduces transaction costs, facilitates participation in global value chains, and improves market access and reach. For businesses, digital trade thus offers significant efficiency gains and competitive advantages. According to estimates by Accenture, cross-border business-to-consumer e-commerce is expected to reach one trillion U.S. dollars by 2020 – cross-border trade-commerce between companies is even more significant.

Cross-border data transfer is a prerequisite for international digital trade and is just as fundamental for the efficient management of global value chains. The consultancy firm McKinsey estimates that international data transfer (2.8 trillion U.S. dollars) already contributed more to global GDP than foreign trade in goods (2.7 trillion U.S. dollars) in 2014. Information and communication technology (ICT) represent an indispensable production input for many industrial goods. Trade in ICT accelerates the global digital transformation of the economy and society and facilitates participation in technological and economic development.

Digital Trade Needs New Trade Rules

Apart from the WTO’s Information Technology Agreement II (ITA II) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), few rules exist for this new type of trade. This leads to planning uncertainty and opens the door to digital protectionism. Since the eleventh WTO Ministerial Conference in late 2017, a large group of WTO members are negotiating a comprehensive e-commerce agreement. According to many of them, such an agreement should also cover cross-border data transfer and data protection. The first interim results should hopefully be available at the next Ministerial Conference in summer 2020.

In addition, countries around the globe are trying to set standards on data flows via their bilateral and regional trade agreements. For instance, there are provisions in the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) and in the Trade agreement between Canada, Mexico and the United States (USMCA). The EU is seeking regulations on data flows in its future bilateral trade agreements such as with Australia, New Zealand, and Indonesia. There is also a respective review clause in the trade agreement with Japan. However, European business is asking for a more ambitious approach than that currently proposed by the EU.

Curtailing Protectionism

Until now, it was and is common practice not to impose tariffs on electronic transmissions across national borders. At the second WTO Ministerial Conference in 1998, WTO members decided to continue this practice for the next two years. Since then, the moratorium was repeatedly extended. However, there is a severe risk that it will expire in December 2019. If the agreement is not renewed by the General Council of the WTO, new burdens and conflicts in world trade could arise; for example, customs clearance could become complex and controversial.

The European Centre for International Political Economy concluded in a 2019 study that tariffs would have a negative impact on WTO members. Thus, the costs resulting from the decline in economic performance would be significantly greater than the benefits from additional customs revenues. The BDI and international business associations, such as the International Chamber of Commerce, are therefore calling on WTO members to make the moratorium permanent. This would create certainty for businesses and consumers and put a stop to protectionism. Such a lasting solution should at least be possible within the framework of the plurilateral e-commerce initiative.