Making the Case for G7 Digital Trade Principles

MAKING THE CASE FOR G7 DIGITAL TRADE PRINCIPLES Digitalisation provides new opportunities to benefit from trade, tackle some of the consequences of the COVID-19 pandemic and help kick-start economic recovery. However, the benefits of digitalisation for trade, and of trade for digitalisation, are not automatic. They require a regulatory environment that enables crossborder digital transactions to take place and which allows governments to respond to new challenges raised by digitalisation.

As more and more firms and people embrace the digital transformation, agreement on the G7 Digital Trade Principles can help focus efforts and promote continued international discussions on how to make digital trade work for all, including in the context of ongoing discussions on e-commerce at the WTO. This note reviews the empirical evidence on the benefits associated to digital trade, highlighting the scope for a more consistent approach to challenges and emerging issues stemming from today’s rapidly evolving digital environment.

Open digital markets matter Digitalisation is linked with greater trade openness and with selling more products to more markets (LopezGonzalez and Ferencz, 2018[1]). A 10% increase in digital connectivity between countries raises goods trade by nearly 2% and trade in services by over 3%. 1 Importantly, digitalisation is found to have positive effects across all sectors. This means that whether you are trading carrots, wickets, cardigans, copper, household appliances or laptops, digitalisation has the potential to help increase exports (Figure 1). When such goods are traded internationally through small parcels, a 10% increase in bilateral digital connectivity raises parcels exports by up to 4%. Trade in parcels has played a critical role during the COVID-19 pandemic, enabling many firms to stay afloat and helping customers obtain goods they needed during lockdowns (LopezGonzalez and Sorescu, 2021[2]).

Moreover, when combined with a regional trade agreement (RTA), a 10% increase in digital connectivity gives rise to an additional 2.3% growth in goods exports. Digitalisation can therefore also help countries draw greater benefits from their RTAs (Lopez-Gonzalez and Ferencz, 2018[1]).

Digital connectivity between two countries, or the potential thereof, is proxied using the minimum of the share of the population that is using the Internet.

1

OECD Trade and Agriculture Directorate | October 2021 | 1

Figure 1. Digitalisation has a positive impact on trade in goods and services a. Goods

b. Services

3.5%

3.5%

3.0%

Transport and storage

Hotels and restaurants

Real estate

Finance and insurance

Other

Renting of machinery

Education

Health

Other business services

Computer and related

Vegetables

Wood

Footware

Textiles

Pulp

Food

Metals

0.0%

Chemicals

0.5%

0.0%

Vehicles

1.0%

0.5% Machinery

1.5%

1.0%

Misc. manufacturing

2.0%

1.5%

Electrical equipment

2.5%

2.0%

Post and telecom

3.0%

2.5%

Note: Figure shows the percentage increase in exports as a result of a 10% increase in bilateral digital connectivity derived from a gravity model on a sample including 160 countries.

Source: (Lopez-Gonzalez and Ferencz, 2018[1]).

Digital trade is especially important for developing country firms, MSMEs and women entrepreneurs Digital trade also helps enable access to cheaper, more sophisticated and diverse digitally deliverable business services. This includes productivity enhancing software which is important for enabling export competitiveness (Figure 2), particularly in less developed countries that might not produce domestic substitutes for such digital inputs (Andrenelli and Lopez-Gonzalez, 2019[3]). For example, a firm in Tanzania might have fewer domestic suppliers for conferencing software than a firm in Belgium, which is why access to international suppliers will matter more for the Tanzanian firm.

Figure 2. Digital services inputs help drive domestic value added in exports in countries at all levels of development Digitally deliverable business services

0.9 0.8

0.787

0.823

0.714

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

High income

Upper middle income

Lower middle and lower income

Note: Figure shows standardised coefficients capturing impact of increasing foreign value added in business services by one standard deviation on domestic value added in exports.

Source: (Andrenelli and Lopez-Gonzalez, 2019[3]).

2 | October 2021 | OECD Trade and Agriculture Directorate

In addition, digital trade can help developing countries overcome their trade cost disadvantage. The wider adoption of digital platforms and websites has reduced information constraints, connecting supply and demand globally and leading to growing international trade in digitally ordered goods (Lopez-Gonzalez and Sorescu, 2021[2]). As highlighted by a World Bank Group (2012[4]) study, online vendors benefit from trade cost reductions of as much as 65% relative to offline vendors. The cost-reduction effect of platforms is found to be greater for exporting countries that are unknown and/or less trustworthy to consumers. 2 By reducing the cost of being visible to buyers, especially the costs of distance, digital trade favours MSMEs and developing country traders, including female traders. Platforms such as Upwork, Freelancer or Amazon Mechanical Turk enable many individuals and small firms in developing countries to become online exporters. In practice, any online seller can be an exporter and empirical evidence shows that MSMEs in developing countries with a digital presence in the form of a webpage have a higher propensity to become exporters than those that do not have one (Figure 3) (Andrenelli and Lopez-Gonzalez, 2019[3]). 3 Figure 3. Digital technologies increase export propensities of firms in developing countries 0.42 0.41 0.4 0.39 0.38 0.37 0.36

SME

Large

Note: Bars represent coefficient estimates of the role of webpages on export propensities across firms of different sizes in developing countries.

Source: (Andrenelli and Lopez-Gonzalez, 2019[3]).

However, growing barriers on digitally enabled services can raise costs for businesses and consumers Barriers affecting services related to communications infrastructure and connectivity, including data connectivity, are particularly cumbersome as they affect all trade supplied through digital networks (Figure 4a). 4 Since 2014, the landscape for digitally enabled services has become more restrictive (Figure 4b).

Nevertheless, as a result of remote working and changing consumer habits during the COVID-19 pandemic, fewer barriers to cross-border trade in digitally enabled services were introduced in 2020 than in 2019.

Moreover, new policy measures that facilitated digital trade, particularly regarding e-signatures and epayments, were on the rise (OECD, 2021[5]).

2

This result is consistent with surveys conducted by the World Bank Group showing that an overwhelming majority of online vendors on e-commerce platforms sell to foreign markets, even MSMEs in countries like Sri Lanka, Bangladesh and Myanmar.

3

Estimations use the World Bank Enterprise Survey, and follow the method established in (Lopez-Gonzalez, 2019[19]) and (Lopez-Gonzalez and Sorescu, 2019[11]).

4

Barriers to digital trade are identified using the OECD Digital Services Trade Restrictiveness Index (DSTRI) which was developed for all G20 countries in

2019 under the Presidency of Japan (see (Ferencz and Gonzales, 2019[18])). The OECD DSTRI covers regulatory data for 2014-2021 and it is updated annually. For more details, see: https://sim.oecd.org/Default.ashx?lang=En&ds=DGSTRI .

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While some barriers have been lowered, the global regulatory environment for digital trade in 2020 continues to be complex and diverse across countries. Key challenges include reducing barriers on digital infrastructure and connectivity, which account for close to two-thirds of barriers identified (Figure 4a). These include regulations that limit access to high quality communications services as well as measures that inhibit the seamless transfer of data across borders. Further reforms are also needed to enable more electronic transactions and remove other barriers such as localisation requirements and limitations on online content providers. Strengthening intellectual property protection and effective enforcement measures against online infringements can further improve the regulatory environment for digital trade. Taken together, regulatory divergences can result in additional costs for firms as activities need to be aligned across multiple regulatory frameworks (OECD, 2021[5]).

Figure 4. Barriers to digitally enabled services are increasing a. Cross-cutting barriers affecting trade in digitally enabled services

b. Change in barriers to digital trade in 2020 and in 2014-2020 Cumulative trade restrictions

Infrastructure and connectivity

16%

Electronic transactions

2% 4%

16%

2019-20

Payment systems

62%

Intellectual property rights Other barriers to digitally enabled services

2014-20

0

0.5

1

1.5

2

2.5

Note: Panel a. shows the composition of the OECD Digital STRI for 2020. Panel b. shows changes in the OECD Digital STRI over time, aggregate across countries.

Source: (OECD, 2021[5]).

And more efforts are required to drive forward the digitalisation of trading systems and facilitate the flow of goods and services along the entirety of the supply chain Digitalisation of trade processes can help reduce the costs of trade at all stages of the supply chain. Progress in the implementation of the WTO Trade Facilitation Agreement and in the adoption of UNCITRAL instruments has enabled the wider digitalisation of trade processes (OECD, 2020[6]); (Nemoto and LopezGonzalez, 2021[7]). Indeed, today, e-authentication, e-signatures, e-contracts, e-invoices and e-payments support a growing number of physical and digital transactions. However, a range of legal, institutional and technical challenges impede scaling up the digitalisation of trade processes.

Trade documentation is still largely based on paper and only 3 jurisdictions have enacted the 2017 UNCITRAL Model Law on Electronic Transferable Records (MLETR) which aims to enable the legal use of electronic transferable records both domestically and across borders. The availability of transferable documents and instruments in electronic form benefits digital trade, allowing for faster and more secure transmission while reducing risks associated with unauthorised duplication. Given that a fully paperless trade environment cannot be established without electronic transferable records, progress in this area, as is supported in ongoing G7 discussions (G7, 2021[8]), can make a significant contribution to trade facilitation (ICC, 2020[8]) (Nemoto and Lopez-Gonzalez, 2021[7]).

4 | October 2021 | OECD Trade and Agriculture Directorate

Legal, institutional and technical challenges also affect the implementation of digital trade facilitation tools such as Single Windows, which can reduce costs for traders by facilitating the exchange of trade information and the operation of integrated trade procedures. But for Single Windows to deliver their full potential, issues around use of international standards and interoperability need to be addressed. Policy action can focus on improving legal frameworks for sharing of submitted data between various border management agencies, increasing interoperability with the systems of private service providers (e.g., logistics, financial services providers), and synchronising and co-ordinating border agency processes included in Single Windows platforms (OECD, 2018[9]) 5.

Automation of border processes are among the trade facilitation measures that can contribute most to reducing trade costs, particularly for low income and lower middle income economies (OECD, 2018[9]). Reducing performance gaps in the implementation of digital tools to streamline border processes and enhance agency co-operation, including tools such as Single Windows, can increase global trade in goods by more than 4% 6 (Figure 5) (OECD, 2020[10]). Even modest improvements in these trade facilitation areas can raise small parcels exports by between 6% and 14% 7 (Lopez-Gonzalez and Sorescu, 2021[2]). More importantly, digital trade facilitation can help MSMEs in developed and developing countries alike to engage more in international trade and increase the value of their exports and imports. For instance, automation of trade processes can increase the probability of an MSME starting to export by up to 3% (Lopez-Gonzalez and Sorescu, 2019[11]).

Figure 5. Automating border processes can enhance trade across all sectors % 4.5

Automating and streamlining trade processes

Enhanced co-operation between border agencies

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Agro-food

Pharmaceuticals and chemicals

Machinery and other manufacturing products

Note: Figure shows potential increases in trade value (%) based on 0.1 points reductions in the bilateral performance gap based on the OECD Trade Facilitation Indicators (TFIs) for 163 economies.

Source: (OECD, 2020[10]).

As part of their response to the challenges arising from the COVID-19 pandemic, many economies have been making increased use of digital trade facilitation tools. Examples include temporary acceptance of digital trade-related documents in place of physical copies (including sanitary and phytosanitary certificates 8) or increases in the number of procedures benefitting from electronic pre-arrival processing (OECD, 2020[12]).

Progress achieved during COVID-19 needs to be locked-in, but the difference in capacities among countries will also require continued investments in ICT infrastructure at borders and capacity building.

5

(OECD, 2018[9]) piloted five Single Windows indicators on 23 economies, covering the following aspects: institutional aspects and scope; data content and

structure; legal framework; technological architecture and scope; and interoperability.

6

Potential increases in trade value (%) based on 0.1 points reductions in the bilateral performance gap based on the OECD Trade Facilitation Indicators (TFIs) for 163 economies, using a gravity model (OECD, 2020[10]).

7

Estimates using a gravity model on a sample of 51 parcel origin countries and 76 destination countries (Lopez-Gonzalez and Sorescu, 2021[2]).

8

For the agro-food sector, the uptake of electronic sanitary and phytosanitary (SPS) certificates increases trade in animal, plant-based and processed products between 4% and 19% after one year of implementation (OECD, 2021[16]).

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More dialogue on data free flows with trust is needed to harness the opportunities of the digital economy and support the trade of goods and services Today, trade is underpinned by the movement of data across borders. It enables the co-ordination of international production, helps small firms reach global markets and can be an asset that can be traded, a conduit for delivering services and a key component of trade facilitation. It is increasingly difficult for an international trade transaction to take place without a cross-border data transfer of some sort.

However, the pervasive exchange of data, including across borders, has fuelled worries about the use and, especially the misuse, of data, amplifying concerns about privacy protection, digital security, intellectual property protection, regulatory reach, competition policy and industrial policy. As a result, countries have been adopting and adapting regulations addressing the movement of data, often introducing new measures that condition the movement of data across borders or, in some cases, measures that mandate that data is stored or processed in specific locations (data localisation) (see (Casalini and Lopez-Gonzalez, 2019[13])).

The resulting patchwork of rules and regulations is making it difficult not only to effectively enforce public policy goals such as privacy and data protection across different jurisdictions, but also for firms to operate across markets, affecting their ability to internationalise and benefit from operating on a global scale.

Against this backdrop, governments have been using a range of instruments to ensure that, upon crossing a border, data is granted the desired degree of protection or oversight. However, there is no one, single, mechanism to enable what has come to be called ‘data free flows with trust’. Governments pursue different, or even multiple and complementary, approaches (Casalini, Lopez-Gonzalez and Nemoto, 2021[14]) (Figure 6). However, by focusing discussions on commonalities, complementarities and convergences, across and within their approaches, countries can aim for a path to enable greater interoperability and “trust” in the environment that underpins the global flow of data.

Figure 6. Instruments for facilitating cross-border data transfers

Source: (Casalini, Lopez-Gonzalez and Nemoto, 2021[14]).

6 | October 2021 | OECD Trade and Agriculture Directorate

And new approaches are needed to enable greater digital trade and respond to the needs of workers, businesses and consumers How measures affect trade is also changing. A simple digital trade transaction rests on a series of enabling or supporting factors. For instance, ordering an e-book depends on access to a retailer’s website. This in turn depends on the regulatory environment setting the conditions under which the retailer establishes the webpage and the cost for the consumer of Internet access – a cost which, in turn, is affected by the regulatory environment in the telecommunications sector. The purchase of the e-book will also be affected by the ability to pay electronically, the download capacity (bandwidth) of the network and the tariff and non-tariff barriers faced by the physical device used to read the e-book (the e-reader). A barrier on one of these transactions will affect the need or ability to undertake the other transaction. Barriers traditionally associated with goods trade, such as tariffs, may have important implications for services delivery (and vice-versa) (Lopez-Gonzalez and Ferencz, 2018[1]).

Indeed, distinctions between goods and services and between modes of delivery have become blurred, and trade today must not only to be faster and more reliable, but also meet a range of regulatory requirements that differ across markets. This means that market openness in the digital age needs to be approached more holistically, taking into consideration issues that span goods, services and digital networks jointly (Casalini, Lopez-Gonzalez and Moise, 2019[15]).

At the same time, making the most out of digitalisation for and through trade requires thinking more carefully about how trade policy issues interact with other policy domains such as innovation, infrastructure, connectivity, competition, taxation, data, consumer protection and skills. Trade policy needs therefore to be seen in the context of a range of other policies that also matter for the shared benefits from digital adoption to materialise.

As the digital transformation further reduces trade costs and increases the tradability of goods and services, growing interconnectedness will imply that spillovers from regulatory heterogeneity will arise more regularly. International dialogue is needed between a range of stakeholders and policy communities to help mitigate the impact of negative externalities and promote positive externalities, such as increased trust, to deliver more inclusive digital trade outcomes for all. In this sense, principles of good regulatory practice in relation to market openness – in particular, transparency, non-discrimination, interoperability and avoidance of unnecessary trade restrictiveness – can provide guidance on how to approach some of these emerging challenges (Casalini, Lopez-Gonzalez and Moise, 2019[15]).

The benefits of digitalisation for trade and of trade for digitalisation are clear. However, the evolving policy landscape for digital trade has become increasingly complex and fragmented. This can hinder the benefits of digital trade from materialising. Building on common values and approaches to enable more inclusive, sustainable and resilient digital trade is an important contribution of the G7 Digital Trade Principles.

OECD Trade and Agriculture Directorate | October 2021 | 7

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