Part 1: What is Digital Trade?

[Español] Digital trade as traditional trade, is a part of the larger picture of the economy. Digital trade is part of the growing digital economy and affects the non-digital larger economy. Digital trade is not new. However, despite it being around for a while, there is no definitive definition and scope globally agreed upon. This has led to lack of consensus and a plethora of debates and discussions on how to best apply rules to digital trade. This paper shall delve into that later.

As for now, a simple way of defining digital trade is to use the narrowest definition of electronic commerce (e-commerce) which is the sale and purchase of goods and services via the internet of which the digital good or digital services are delivered digitally. Many argue that even if the whole process happened online, if the end product is a physical good or service, then it is not digital trade. This will be delved further into later in the paper. To expound on this narrow definition better, some examples of these digitally enabled transactions are presented below.

A first example of digital trade is that the whole production chain from placing the order to developing to receiving the good digitally, all happen via the internet. For example, a small company has decided that it wants to establish its presence on the internet. It then contacts a website developer who can provide the server space, the domain name and create and design the website. The website developer agrees, both parties agree on a price and timeframe and then once the website is set up online and ready to go, the small company that ordered it would pay the developer by placing a wire transfer from their bank to the developer’s bank account. Payment is received and the transaction is successful. This is digital trade.

Second example is that of streaming services of movies and TV shows. There are several companies, but for sake of brevity, this report cites the example of the pioneering company in this field, Netflix. Movies and TV shows delivered digitally are technically goods, the way this transaction is defined however, is paying for a service that is delivered directly to the consumer digitally. It is defined as a digital consumer service because Netflix does not sell the movies or TV shows, instead, it requires a subscription fee that can be paid monthly or annually via a credit card. The subscription then gives direct access to its library of movies and TV shows to the consumer. This model has been highly successful as Netflix now has 195 million worldwide subscribers[iii], earning Netflix a spot in the top 40 global companies based on market capitalization. Other brands have popped up and started offering the same subscription model, but the closest competitor, Disney Plus has only reached 60 million subscribers so far. This business model is under digital trade. A consumer service is being provided digitally and payment is enabled electronically.

Third example is that of a business to consumer model providing transportation. Uber is a tech company that provides consumer service in the form of transportation. The Uber application needs to be installed onto a smart phone, the user then registers their details including credit card information and their address. The consumer is then able to use the Uber application and request for transportation via the application. The application then shares an alert to Uber drivers allowing them to respond to the request, usually, the one who is closest in proximity responds and is connected by Uber to the consumer. These Uber drivers are not professional taxi drivers with a taxi, but rather, an Uber driver is someone who has a car, a smartphone and has registered with Uber to be part of the roster of drivers that can be contacted via the ride hailing application. These Uber drivers then get a share of the payment that is paid to Uber. All these transactions happen and are enabled digitally. Even your tip at the end of the ride is given to the driver via the application, not in cash, even if you are physically able to give it to the driver after they drop you off at the destination you listed when you requested the ride. Also, Uber is now available in many countries, allowing its users to access the service even if you are not in your home country that you’ve registered. Being able to hail a ride from your phone in a foreign country that you’ve just traveled to, provides convenience, you wouldn’t even need to have the local currency nor speak the language, the application does all the communicating and enabling payment digitally between their Uber driver and you, the Uber customer. This is the delivery of a service enabled digitally. This is also digital trade. Following the success of the Uber model, several other tech companies have made this service available as well, such as Lyft, Grab and others.

Fourth example is a financial transaction. It is quite straightforward. For example, conference documents need to be translated into a number of languages so that participants can access them in the language of their choice. The conference organizers then contract the services of a number of professional interpreters to translate the documents. A price and timeframe are agreed upon. The translated documents are delivered via the internet to the conference organizers, who then in turn, send the agreed payment. This payment can be made several ways such as a bank transfer. In this case, the example is a payment hub called PayPal. Both the payee and payor sign up to PayPal online then either using a bank account or a credit card, the conference organizer can then send the payment to the translator via PayPal and then he/she receives into their account. This is digital trade.

Fifth example, is buying a digital good, for example, a digital book or e-book. There are many online bookstores or websites that sell e-books, one of which is Amazon. The consumer is assumed to have a gadget – an e-book reader, a Kindle, an iPad, a computer or any other tech that allows you to read digital material like e-books; that consumer then orders one or a few e-books from Amazon online, pays for it with a credit card and then receives the book/s digitally directly to their preferred gadget. That is the sale and delivery electronically of a digital good. That is digital trade.

Sixth example is buying applications or software for your gadgets. For example, people who have iPhones can connect online, browse through the App Store and choose the applications – anywhere from ride hailing apps like Uber to games to various photo editing software to document readers, the list of choices is long. All of this is done online and paid for online with your already pre-registered credit card on your gadget and then delivered to your gadget directly. This is digital trade.

There are several other examples of digital services and digital goods such as health services, technology and consumer services, consumer goods, and many more.

Definitions and implications

The examples listed above however, are potentially non-controversial as it falls under the narrowest definition of digital trade, that is, that the service or good is delivered digitally. It is the wider definitions and scopes that draw discord. These other examples that are considered to be in a gray area, of debated definitions of electronic commerce or digital trade include: The broadest example includes any use of digital technologies such as information, communication and technology, which could potentially include everything done on the internet, even if it is just data flows and not necessarily the transaction itself.

  • The United Nations Conference on Trade and Development (UNCTAD) on the other hand, follows the general consensus that digital trade is purchases and sales enabled by the internet, however, instead of only including digital goods and services, it also includes physical goods which is a heavily disputed definition. The UNCTAD coverage would mean that for example, a customer ordering a physical product, say, a smart phone, on Amazon, and paid for it online with a credit card, but then receives the physical product – the smart phone, on their doorstep, delivered by Amazon, is included in digital trade. This is up for debate because nowadays, many physical products are available to shop online, and although the transaction was all done online, receiving an actual physical good raises questions on whether that should then be subject to tariffs or other taxes especially as it crosses borders.
  • The definition of e-commerce in the WTO work program is: “electronic commerce is understood to mean the production, distribution, marketing, sale or delivery of goods and services by electronic means. The work programme will also include consideration of issues relating to the development of the infrastructure for electronic commerce.”[iv] Breaking down this definition, it is understood that e-commerce under the WTO would involve any or all parts of the global value chain of the end good or service. This is not a definition universally agreed to, today as other definitions only count the transaction to be e-commerce if the end product or service delivered is digital.
  • The Organization for Economic Cooperation and Development (OECD) for example, emphasizes this point that it is the end not the supply chain. Furthermore, the OECD includes an important aspect of the process, the digital good or digital service has had to have crossed a border for it to be classified as digital trade. For the UNCTAD, as mentioned above, it is a broader scope, “defines “e-commerce” as purchases and sales conducted over computer networks. To the UNCTAD, “e-commerce can involve physical goods as well as intangible (digital) products and services that can be delivered digitally.”[v]
  • The European Union also has its own terms with regard to digital trade, “This is defined operationally as an area where individuals and businesses can seamlessly access and exercise online activities under conditions of fair competition, irrespective of their nationality or place of residence.”[vi]

The variations in definitions have a very important role because definitions determine international trade rules. And as of writing this paper, there has yet to be an internationally agreed definition and parameters of digital trade. The existing rule followed in general is the WTO agreement on the Moratorium, which basically is an agreement to not impose custom duties on e-commerce. This Moratorium and the different debates around it will be discussed later on in this paper.

Categories of digital trade

To visualize better a flow of digital trade, below is a typology of digital trade, see Figure 1. To break it down, the trade is first enabled by infrastructure such as cables, wires, and all the other technology that is involved in making the internet possible. Then, there are data flows that may or may not be directly contributing to the e-commerce; and there are digitally enabled flows of services and goods, whether or not they are digitally delivered or physically delivered is included in this typology for visualization but as stated, this is under dispute because physical goods that are delivered across a border is usually subject to a tariff. Finally, the chart shows the current actors involved in digital trade: businesses, consumers and government.

Meanwhile, to expound on the different categories of e-commerce that are generally used to classify and measure the amount of trade happening. There is business to business or B2B; there is business to consumer or B2C; and there is government but this is sometimes not measured separately; and an also relatively unmeasured type is customer to customer.

B2B as can be seen in Table 1, involves billions in dollars, well ahead than the B2C, although quite substantial as well. As seen below, “The global value of e-commerce is estimated by UNCTAD to have reached $29 trillion in 2017, which is equivalent to 36 per cent of GDP. Global business-to-business (B2B) e-commerce was $25.5 trillion in 2017, representing 87 per cent of all e-commerce, while B2C e-commerce was $3.9 trillion in 2017.”[i]

Although it seems to be self-explanatory, it is worthwhile to give examples of what would be classified under business to business and business to consumer. For business to business or B2B as the tech world refers to it, includes companies from manufacturing to wholesaler to retailer or companies that specialize in providing goods and services. Business to consumer or B2C examples include companies that deal directly with the consumer albeit via an app or the internet. Examples range from transportation services such as Uber, accommodation such as AirBnB, to many more. As with B2B, B2C sells or provides goods and services but this time directly to the consumer. These are classified as e-commerce as whether they are done under B2B or B2C, the goods and services are enabled and delivered digitally.

Digital trade though, has a very significant difference from “physical” or “regular” trade, aside from the fact that the internet and digitalization of goods and services play a critical role in the enabling of e-commerce. The crucial difference is the role of data flows in the chain of manufacturing to delivery of digital goods and services. As illustrated in the above figure, Figure 1, data flows are represented as flowing under the radar as goods and services are enabled, sold and delivered to either other businesses, consumers or governments. Exchange of data is of course not new in the current traditional global value chains of physical goods and services, however, in e-commerce, data flows are critical in enabling the smooth transaction for these digital goods and services. In a digital global value chain, data flows include much more largely due to the growth and advancement of ICT or Information and Communications Technology. This refers to IT for short (Information Technology) and includes all communication technologies, wireless networks, mobile phones, conference call systems, computers, and more. These gadgets all communicate the data they gather that would be relevant in improving e-commerce amongst other things. In the case where the consumer is asked for data, everything from name, age, sex, location, and at times financial information, these are all stored as raw material and securely kept for future data mining. Usually when ethical companies use this data, they do not divulge sensitive information but rather use the general profile they can gather from their data in order to then tailor the advertisements or suggestions you see when you go online, making your online experience more targeted and inducive to you as a consumer. The next chapter will go into deeper detail on how advertisers are able to generate targeted advertising from your data.

What is a Global Value Chain?   A global value chain (GVC), is when the production of a good or service is fragmented and spread across places or countries. A GVC chain begins at the source of the raw product where it is harvested, this, some will refer to as the low end of the chain as the work of the farmers or workers is seen as cheap labor whose skill and efforts are not seen as valuable by some of the transnational corporations (TNCs) that use them. The UNCTAD World Investment Report in 2013 elaborates on these chains and advocates for developing countries to move up and out of the lower ends of these value chains, where they are unable to get better than this low value capture of low prices and low incomes.   The raw product then moves through the chain, getting processed along each step of the way Value is added in these steps and the people involved in these parts of the chain are usually more highly skilled workers who can demand higher income. These higher parts of the value chain are also more capital intensive. The end product of the chain that has gone from raw material to various processing and input, is then sold at a profit by a TNC. In the abovementioned UNCTAD report, it states that because TNCs own most of these GVCs, TNCs investment choices determine these GVCs and all those participating in them from the low end to the high end. “TNC coordinated GVCs account for some 80 percent of global trade”    Note that in digital trade, a digital value chain may not be as straightforward as a traditional GVC and in some examples this report will delve into later, the raw material in several of these digital global value chains is data. And as with other raw materials, digital data will first need to be mined then processed in the global value chain in order to make it monetized. 

Box by Author

The development of data as the new raw material – or to be more blunt – as your data as the new raw material collected, harvested, mined and then turned into monetized goods that are then sold; together with the rapid advancement in information and communications technology has paved the exponential growth of a new kind of economy: the digital platform economy.

Before delving into the digital platform economy, here is an illustration, see Figure 2, that can help visualize the digital global value chain, which is then broken down as the digital platform economy is explained. The data flows and are processed from data through collection to storage to analysis and transformation to a form that can than be monetized by various platforms flow in a data value chain where it goes from raw material to monetized form. These digital platforms are a new development in the digital economy and has advanced a new kind of economy facilitating the growth of digital trade.

[i] United Nations (2019) “Digital Economy Report: Value Creation and Capture: Implications for Developing Countries 2019” United Nations Conference on Trade and Development UNCTAD. New York, New York. 

[i] Klebnikov, S. (2021) “Elon Musk Falls To Second Richest Person In The World After His Fortune Drops Nearly $14 Billion In One Day” Forbes

[ii] Markman, J. (2020) “Zoom Enters Perilous New Growth Phase” Forbes

[iii] Zeitch, Steven, (2020) “Netflix new subscriber signups plummeted over the summer, halting pandemic-fueled growth.” The Washington Post

[iv] World Trade Organization (1998) “Work programme on electronic commerce” Adopted by the General Council on 25 September 1998. Geneva

[v] Herbert Smith Freehills (2018) “Digital Trade – definition” Herbert Smith Freehills

[vi] Herbert Smith Freehills (2018) “Digital Trade – definition” Herbert Smith Freehills

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