The Internet and international data flows in the global economy
Data flows underpin how the global economy works. Trade, supply chains and business operations are all enabled by the ability to move data globally. Data flows rely on the global Internet, but are not limited to it since data also flows over the industrial Internet and along internal networks within companies. When downloading software or music or when consuming services online, data itself can be a form of trade. But data can also enable trade, since data flows are needed to use Skype or access email.
McKinsey estimates that, in 2014, data flows accounted for a larger share of global GDP growth than did trade in goods.
There are two main ways that the Internet is affecting international trade. One way is through the impact on economies broadly, making businesses more productive and competitive both domestically and in international markets. Here, the Internet and data are enablers of economic activity that can lead to an increased capacity for international trade.
A key point is that the impact of the Internet and data is an economy-wide phenomenon. It represents not only an IT sector opportunity, but also affects how all business works today on a cross-sectoral level. Whether manufacturing, agriculture, services or R&D, the more these sectors have Internet access and use it to conduct business, the more likely they are to be productive, pay higher wages and engage in international trade. As Jeffrey Immelt, CEO of General Electric (GE), has recently stated, GE’s competitive advantage is derived from digital productivity and use of the industrial internet, not from low wage manufacturing.
Secondly, the Internet is also providing businesses with access to customers who are online, directly enabling international trade. This form of trade can be business-to-consumer as well as business-to-business. While most attention is on the former, it is actually the latter – the impact of the Internet on business-to-business trade – that is most significant. In fact, B2B e-commerce is estimated at 90 percent of the global US$16.5 trillion e-commerce market.
The opportunities of digital trade start with the fact that the Internet is now global – approximately 3.2 billion people are online. However, while Internet penetration in the EU and the US is close to 90 percent, 90 percent of those without Internet access are in the developing world. This reveals a digital divide and the need for action.
Internet access is also increasingly on mobile devices. In fact, in November last year, for the first time ever, there were more mobile devices than people in the world. And over half of these mobile devices are Internet-enabled. While mobile broadband penetration was over 87 percent in the developed world, it is at only 40 percent in the developing world. However this is up from 4.5 percent a mere 5 years ago, demonstrating growth of almost 900 percent.
Access to the Internet on mobile devices underscores the economic importance of mobile apps. In Europe for instance there are already 400,000 people building apps and this activity supports 1.8 million European jobs. Apps are also not only about games – there are transport apps that reduce traffic, pollution and travel time, and health apps for monitoring fitness and managing health care.
For example, Dys is a French App that helps kids with dyslexia read by sending text to scientists at Aix-Marseille University who then optimise reading space; Talkforme is an Irish app that helps speech impaired users; and Angry Birds by Rovio – a Finnish developer – is available globally in seven languages, including Chinese, Japanese, French, German and English. It is a great game, and has also been shown to reduce anxiety and depression.
In terms of the impact of the Internet and data on productivity, the US International Trade Commission estimates that productivity gains from Internet use have increased US GDP by around 3.5 percent. Approximately 17 percent of the increase in EU labour productivity between 2003-2010 is attributed to business engagement in e-commerce.
Productivity gains from digital commerce arise in a number of ways. One way is from access to cutting edge and often cheaper online services including cloud computing; professional services such as consulting, engineering, health and education; communication options such as Skype, WhatsApp or Google Hangouts that are often free; and access to market information online, which studies show has been key to helping businesses – in particular SMEs – to go global.
The Internet of Things is another developing industry that relies on the Internet and data flows, and is estimated to be a US$300 billion industry by 2017. Already, the use of Radio Frequency Identification Devices by companies such as Hewlett-Packard and BMW have reduced losses in transit by up to 14 percent.
The advent of sensors that relay data will have a range of business and consumer applications, from health care to robotics and driverless cars. This leads to the importance of big data. The global Internet and the Internet of Things generate large data sets within countries and regions, as well as on a global scale, which, when collected and analysed, yield new insights that increase productivity.
The opportunities here are not only reserved for businesses, but are also are having important impacts on human health and government functions. For example, analysis of tweets during Philippines Typhoon Hyan was used to direct emergency services to where they were most needed. The OECD has concluded that big data will be a key driver in the future of innovation and productivity.
Finally, supply chains would also not function without the ability to move data globally. Take Vestas, the Danish wind turbine company which collects data from globally situated turbines and analyses it in Denmark to understand the impact of temperatures, airspeeds and air pressure on turbine performance. This data is then used to identify when parts need replacing, allowing Vestas in Denmark to alert warehouses which may be located in Asia, to deliver parts to a turbine in Australia before problems arise.
All of these developments have a particularly important impact on the ability of SMEs to engage in international trade. Using Internet platforms, SMEs can reach consumers globally.
In the US for instance, for those SMEs on eBay, 97 percent export to four or more continents compared with 5 percent of offline businesses. 74 percent of these SMEs are still exporting after three years compared with 15 percent of offline exporters.
In the EU, only 12 percent of firms in retail are engaged in digital trade. In contrast, 93 percent of EU firms on eBay have cross-border sales, and these are not only within the EU. In France, 60 percent of firms on eBay sell to four continents.
The Internet and data flows are also affecting the composition of international trade, increasing trade in services and lower-value goods. For one, the Internet allows for services to be traded online – think of professional services, medical care or education for example.
Digital trade is also blurring the distinction between goods and services. For instance, goods such as software, music, books can be provided online.
Trade in lower-value goods reflects the growing participation of SMEs in international trade. Where large companies would often export in bulk, SMEs are now trading smaller-value goods – at times individual goods are being exported to customers.
To fully realise the opportunities of digital trade requires the development of an enabling environment. Here, a key underpinning of digital trade will be trust in online commerce. This includes: trust that personal data provided in the course of commercial transactions is protected; trust that consumers are adequately protected from false or misleading practices; ensuring that disputes, when they arise, can be settled in a timely and cost-effective way; and access to secure payment mechanisms.
To realise the opportunities of Internet platforms for SMEs, there is a pressing need to address various traditional trade barriers, including: customs procedures; de minimis levels for customs duties; and access to cost-effective express delivery services. And ultimately, the Internet needs to remain open and global, and data needs to be able to flow freely.
This is why data localisation requirements are potentially so problematic. On the one hand, they increase the costs of providing digital services and have the potential to leave some countries, particularly developing countries, with degraded access as companies choose to bypass these markets. Data localisation can result in a balkanised Internet, where the developing world will suffer the most. Governments such as China, Russia and India have enacted or proposed various forms of data localisation laws.
Ensuring growth in digital trade also requires addressing regulatory externalities that can arise. Given the opportunities to grow trade in digital services, barriers to services trade assume even greater commercial significance. Yet the ability to move large amounts of data quickly and seamlessly across borders can bypass regulators, thereby undermining regulatory goals in areas such as privacy, health and consumer protection.
At the same time, Internet access can improve the capacity of regulators to achieve their goals, such as the ability to provide medical services to remote communities. So we need to incentivise cross-border regulatory cooperation to manage the externalities while also maximising the opportunities.
The US and the EU are well situated to develop the rules and norms that will support an open and global Internet that maximises the opportunities for economic growth, jobs and digital trade. Here, interoperability should be a focus.
This includes regulatory cooperation that builds bridges amongst regulators and regulatory approaches, the aim being to give regulators the confidence that they can achieve their goals while maximising the economic and trade opportunities from the cross-border flow of data. The recently finalised US-EU Privacy Shield is one example of how different approaches to privacy can be bridged without unduly restricting data flows.
Interoperability is also needed in areas such as standards for the Internet of Things. EU-US success in developing new forms of regulatory cooperation and standards development can provide global templates.
Having in place balanced IP laws is also important. In the US, fair-use exceptions for copyright and intermediary liability protection have been key to enabling the growth in Internet companies.
Trade negotiations can be used to develop frameworks for such regulatory cooperation and to develop more specific commitments on the Internet and data flows, with the backdrop of renewed interest in the WTO across the Membership to do something more concrete on digital trade. The recently signed Trans-Pacific Partnership (TPP) provides a good example of where trade policy is going, with commitments on cross-border data flows and to avoid data localisation, subject to an exceptions provision. The Transatlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TiSA) are also key ongoing negotiations where the US and the EU can show leadership.
The EU and US can play a role in guiding the international community towards harnessing the potential – and navigating the challenges – associated with data flows for economies and for global trade in an inclusive and open manner.
This blog originated in Joshua P. Meltzer’s Testimony before the European Parliament, Committee on International Trade on 24 May, 2016.