INTERNATIONAL TRADE IN A DIGITAL AGECHAPTER 77CHAPTERINTERNATIONALTRADE IN ADIGITAL AGEDigital technology is shaping the future of global trade and investment. Oneaspect of the adoption of digital technology by global exporters and importersis the purchase and sale of goods and services online, which is part of whatis broadly understood as “e-commerce”. The use of automated data exchangesystems, cloud computing, big data and open source operating systems canhelp businesses run international supply chain management more efficiently.However, the use of digital technology in trade activities can, in fact, go beyondonline buying/selling; in this chapter, the term “digital trade” refers to the useof digital technologies to facilitate businesses without limiting it to just onlinesales or purchases.Asia-Pacific Trade and Investment Report 2016 103

The impact of digital technology on global trade hasattracted public attention worldwide with the discussionsmainly focused on online sales. The rising importanceof digital trade was already noted by internationalorganizations in the late 1990s. For example, in1999, UNCTAD stated that “electronic commercehas the potential to be a major engine for trade anddevelopment on the global scale” (UNCTAD, 1999, p.1). WTO work in the same period stated that “thevalue of electronic commerce has catapulted fromvirtually zero to a predicted 300 billion in the 10years up to the turn of the century” (WTO, 1998, p.1). A decade later, OECD (2012) indicated that morethan 95% of all companies in OECD countries useInternet in doing their business. According to themost recent estimates made by UNCTAD (2016a),“e-commerce includes both business-to-business (B2B)and business-to-consumer (B2C), valued respectivelyat around 19.9 trillion and 2.2 trillion each.Thistrade is mostly domestic, but is becoming more andmore international.”Despite worldwide recognition of its importance, thereare no official statistics on e-commerce or digitaltrade. Without proper valuation, there is also anabsence of systematic discussion that can lend toevidence-based policy formulation in digital tradeissues. Existing studies, mainly based on privatedata sources, are difficult to generalize because thedata are often not comparable across countries, andare subject to variation in definitions and collectionmethods. Relative to the OECD countries, thedearth of data and analysis on digital trade issuesis especially evident in developing countries. Withoutan internationally comparable measurement of digitaltrade, key questions for proper policy design andregulation remain unanswered. For example, “howlarge is cross-border e-commerce in comparison withdomestic e-commerce?”, “which sectors are involvedin digital trade?”, “how is the economy performingunder these modern business models?”, or “whatdoes a digital value chain look like?”Using the official statistics available, this chapter aimsto contribute towards closing the knowledge gap byhighlighting major trends and policy implications withincross-border digital trade. In doing so, it also focuseson a factual exploration of digital trade at the globaland Asia-Pacific levels.The chapter comprises four sections. Section Aprovides an overview of how digital technology hasaffected global trade. Section B highlights issuesrelated to quantitative assessment and proposes ananalytical framework that can be used to estimate104 Recent Trends and Developmentsrelevant indicators for digital trade. Section C appliesthe framework with international statistics in order toprovide a preliminary assessment of digital trade atthe global and Asia-Pacific levels. Assuming that digitaltrade is becoming the mainstream of global trade inthe future, section D suggests some recommendationsfor building supportive environment for the digital ageof global trade. Although main policy implicationsare considered, recommending comprehensive policyactions is beyond the scope of the chapter.A. BACKGROUND OF DIGITALIZATION OFTRADEUnderlying the rapid growth in digital trade is therevolution in computer and software technology,telecommunications technology and the expansionof Internet access. Since the mid-2000s, Internetaccess has greatly increased globally. According tothe United States International Trade Commission(2013), while only 5.9% of the world’s population hadInternet access in 2000, the number had grown toan estimated 34.3% by 2012. Internet access hasexpanded greatly, both in developed and developingeconomies. For example, the Internet penetration rate,which is measured by the share of Internet users intotal population, more than doubled from 37.3% inJapan and 33.8% in the United States of Americato 79.5% and 78.1%, respectively, during 2000 to2012 (USITC, 2013). However, it is in emergingeconomies, such as Brazil, China and India, whereInternet penetration has rocketed from 2.9%, 1.8%,0.5%, respectively, to 45.6%, 40.1% and 11.4%(USITC, 2013).According to the International TelecommunicationsUnion (2013), 2.3 billion people have access to theInternet and this figure is expected to grow to 5billion by 2020. For Asia and the Pacific, the growthof ICT connectivity over the past decade has beenleading the world average. A report prepared byESCAP (2016a), reveals that more than 52.3% ofthe global fixed broadband subscribers are in theAsia-Pacific region; however, this impressive numberis mainly driven by China and a few countries inEast and North-East Asia (ESCAP, 2016).1 Onlineconnectivity has been greatly improved as a result ofthe increase in mobile telephones and social mediaactivity, and the deployment of national and internationalfibre-optic networks (UNCTAD, 2015). As Internetaccessibility expands, trade transactions are movingfrom physical interactions between sellers and buyers,to cyberspace – with the marketplace being basedon online activities without requiring direct interactions.

INTERNATIONAL TRADE IN A DIGITAL AGEFor example, the virtual marketplace has proliferatedin forms of websites and through the use of socialmedia such as eBay and Craigslist. In this process,the widespread lowering cost of mobile phones andtablets has been an important means for digital trade,especially in developing countries (UNCTAD, 2015).According to OECD (2012), the number of mobile phonesubscriptions worldwide has more than doubled since2005 and tripled in non-OECD countries. According toAhmed and Andolas (2015, p. 1), mobile devices “willaccount for four out of five broadband connectionsby 2016”. The latest statistics, released in June 2016by ITU, indicate that the global mobile-broadbandpenetration rate was 49.4% while the penetration rateof fixed broadband was only 11.9%. The expansionof mobile broadband, in particular, is reducing thedigital gap for developing economies whose accessto fixed-broadband (8.2%) is much more limited thanaccess to mobile broadband (40.9%). Therefore, itis not surprising that a survey by Fedrikkson (2013)found that 90% of online consumers in Latin Americause smartphones to do online shopping. In China,“almost half of all online shopping is carried out onsmartphones” (Wilson, 2016). Similarly, the surveyby USITC (2013, p. 12) showed that “portability andwireless broadband, particularly when accessed viatablets, were key drivers of the increase in UnitedStates demand for digital content”.While the development of ICT hardware andinfrastructure contributed greatly to the expansion ofdigital trade in the past decade, new ways of usingtechnology and the information it generates, includingbig data, social networking and cloud computing, hasincreasingly become an important element of digitaltrade. Social networks, such as Facebook and Twitter,have become a standard means of communicationbetween businesses and consumers.B. TOWARDS THE QUANTITATIVEASSESSMENT OF DIGITAL TRADE1. Problems in measuring digital tradeApart from the comprehensive quantitative analysis ofdigital trade in the United States by USITC (2013),there are few studies for other markets. The reasonsbehind this void in quantitative analysis are linkedto limited data on digital trade or even e-commercespecifically. As noted by UNCTAD (2015, p. 12), “onlya few countries – mainly developed ones – compiledata on e-commerce revenue.” The work on ICT fordevelopment done in partnership between UNCTADCHAPTER 7and ITU suggest core indicators of digital trade;however, the indicators that measure the readinessof countries to engage in digital trade do not lendthemselves well to measuring the value of suchtransactions. The problem is compounded whentrying to separate domestic and cross-border digitaltrade. Without official statistics, previous studies havegenerally been based on private data sources, followedvarying methodologies, and have limited geographicalcoverage (mainly OECD countries).In trying to measure e-commerce, UNCTAD (2015)categorizes e-commerce into four types basedon electronic relationships between governments,enterprises and consumers: (a) B2B (business-tobusiness); (b) B2C (business-to-consumer); (c) B2G(business-to-government); and C2C (consumer-toconsumer). Among these categories, B2B – which isthe digital trade between businesses, such as betweena wholesaler to a retailer – is dominant (UNCTAD,2015; Asian Development Bank, 2015). An estimateof worldwide B2B e-commerce amounted to 19.9trillion in 2015 and for global B2C about 2.2 trillion(UNCTAD, 2016a), while estimates for the e-commerceof the other categories are not available. The AsianDevelopment Bank estimated that B2B transactionsaccounted for 90% of total e-commerce transactionvalue in Asia (ADB, 2015).However, these estimates are based on limited dataand depend very much on the method of measurement.Despite accounting for a smaller share in total digitaltrade globally, the previous studies used estimatesbased on B2C e-commerce statistics (such as onlineshopping) to discuss trends and developments indigital trade due to the fact that data on B2C arerelatively more available. Overall, it is estimatedthat B2C e-commerce is growing faster than B2B,and with Asia and the Pacific seemingly growingfaster than the rest of the world (UNCTAD, 2016b).Figure 7.1 shows the values of the B2C e-commerceindex provided by UNCTAD for selected Asia-Pacificcountries. It is important to note that indices suchas this one measure e-commerce readiness fromthe capability or infrastructure perspective, and notactual trade flows. Even so, information is usefulespecially for countries aiming at strengthening theire-commerce enabling infrastructure.Despite those efforts, there is still no official definitionof e-commerce, which makes it difficult to do a crosscountry analysis on digital trade (box 7.1). Instead,there are various working definitions of e-commerce,which may result in different value and growth rateestimates. For example, WTO (1998, p. 1) definedAsia-Pacific Trade and Investment Report 2016 105

Figure7.1UNCTAD B2C E-commerce Index, aBangladeshNepalLao esiaIndiaSri LankaPhilippinesKazakhstanGeorgiaArmeniaIslamic Republic of IranThailandViet NamChinaAzerbaijanTurkeyRussian FederationMalaysiaAustraliaSingaporeNew ZealandRepublic of KoreaJapan0Source: UNCTAD (2016b).e-commerce as “the production, advertising, saleand distribution of products via telecommunicationnetworks”. OECD (2013) defined e-commerce as “thesale or purchase of goods or services, conductedover computer networks specifically designed for thepurpose of receiving or placing of order. The goodsor services are ordered by those methods, but thepayment and the ultimate delivery of the goods orservices do not have to be conducted online”. UNCTAD(2015, p. 3) defined e-commerce as “purchasesand sales conducted over computer networks, usingmultiple formats and devices, including the web andelectronic data interchange, using personal computers,laptops, tablets and mobile phones of varying levelsof sophistication. E-commerce can involve physicalgoods as well as intangible (digital) products andservices that can be delivered digitally”.Digital trade also has implications for the improvementof existing systems of international trade statistics.One aspect of this is the need for the improvementof trade statistics to catch up with the fundamentalchanges in trade. The growing digitalization of tradeis blurring the boundary between trade in goods andtrade in services. For example, the digital purchaseand delivery of books, films or music have increasinglyreplaced physical transactions. In some manufacturingindustries, 3-D printing is transforming the shipmentof physical goods into the online transfer of a digital106 Recent Trends and Developmentsfile that can be used to produce the good at its pointof consumption. Digitization in trade has also turnedpart of non-tradeable services to become tradeable.For example, most of the medical and educationalservices were previously seen as difficult to tradeacross borders but today are almost a standardpart of tradeables taking the form of Telehealth oronline courses.Current international trade statistics has not been ableto track digital trade properly. The need for servicetrade statistics at the disaggregated level has becomegreater than ever. For example, trade in products thatcan be digitized is increasingly shifting from trade inphysical products such as DVD books or films to tradein services such as in the subcategory of personaland recreational services. In addition, conductingdigital trade depends on inputs from computer andinformation services, telecommunications services,and professional services such as web design,data engineers, IT professionals etc. Unfortunately,tracking trade in services is highly limited due tothe lack of comprehensive data. For example, unlikestatistics on trade in goods, there are still no officialstatistics providing bilateral trade in services. Data oninternational trade in services is available for broadcategories under the sixth edition of the IMF Balanceof Payments and International Investment PositionManual (BPM6) from the WTO database.2 However,

INTERNATIONAL TRADE IN A DIGITAL AGEBox7.1CHAPTER 7The definition and scope of digital trade used by some organizationsWithout a common definition, the discussions and measurements of digital trade or e-commerce arefragmented and the approaches followed in previous studies vary. Overall, the scope and definitionsof digital trade vary across countries and organizations. The narrowest definition is defining digitaltrade as trade in digitized products, while a broader definition of digital trade seems to be the use ofdigital technologies (ICTs) to conduct business. The definition and scope of the term “digital trade” or“e-commerce” used by some organizations is summarized below: World Trade Organization – In WTO the term “electronic commerce” has generally been employedrather than “digital trade”. The WTO Work Programme on e-Commerce was launched in 1998.Under this programme the term “electronic commerce” is understood to mean “the production,distribution, marketing, sale or delivery of goods and services by electronic means” (WTO, 2016).Despite the efforts to date, WTO members have, so far, failed to agree on a new multilateralregime for digital trade or electronic commerce; WTO does not report separate trade statisticsin this area. However, WTO members have agreed to continue the practice of not imposingcustoms duties on electronic transmissions for the time being. In addition, the WTO InformationTechnology Agreement lowers tariffs on ICT goods, and was renegotiated in 2015 to expand andupdate product coverage; however, given the constant pace of new product creation in the sector,the agreement is likely to necessitate further updating in future. Likewise, digital services are onlypartially covered in the specific General Agreement on Trade in Services (GATS) commitmentsby WTO members because the “positive list” approach requires active national commitments withregard to newly developed services (Weber, 2010). Organisation for Economic Co-operation and Development – An OECD (2013) study discussedsome of the issues related to measuring the Internet economy in general, within which crossborder digital trade would be a subcategory. It noted that most existing industrial classificationsystems were too broad to identify relevant digital trade-related activities and that new compositeapproaches might be needed to gain a good understanding of the rapidly evolving digital economy. United Nations Conference on Trade and Development – UNCTAD (2015) defines e-commerceas purchases and sales conducted over computer networks. To UNCTAD, e-commerce can involvephysical goods as well as intangible (digital) products and services that can be delivered digitally. United States International Trade Commission – USITC (2013) has adopted a relatively narrowdefinition of digital trade as the delivery of products and services over either fixed-line or wirelessdigital networks. It excludes commerce in most physical products, such as goods ordered onlineand physical goods that have a digital counterpart such as books and software, music and filmssold on CDs or DVDs. European Union – The European Union has set a target of creating a “digital single market”.This is defined operationally as “an area where individuals and businesses can seamlessly accessand exercise online activities under conditions of fair competition, irrespective of their nationality orplace of residence” (European Commission, 2016). This initiative goes beyond reforms to improvethe environment for digital trade; it embraces increasing competition in the telecoms sectors, andimprovements to data protections and privacy provisions. McKinsey Global Institute – McKinsey (2014) studies have used the volume of cross-border dataflows as a primary measure of trends in digital trade. This broad measure encompasses the directexchange of digital goods, and digitally enabled exchanges of services or labour. However, it alsocaptures a huge range of cross-border data flows that would not normally be considered as “trade”,such as personal communications. Other technical shortcomings include the likely overestimationof traffic as Internet hubs route data across multiple borders to connect two endpoints (Lund andManyika, 2016).Source: ESCAP compilation from various sources.comparability of service trade data across countries islimited, especially when going into the level of servicesubcategory. Measurement problems surroundingservice trade statistics include the differences betweencountries in terms of data collection methodology andthe level of data disaggregation.2. Suggested analytical frameworkThe analysis in this chapter is based on theconcept proposed by the Markle Foundation (2005)in a report on WTO, e-commerce and informationtechnologies: from the Uruguay Round through theAsia-Pacific Trade and Investment Report 2016 107

Doha Development Agenda, prepared for the UnitedNations ICT Task Force. The report, which givesan overview and discusses how WTO memberscan apply the WTO rules-based trading system topromote the development of the physical, human andlegal infrastructure for e-commerce, suggests thatdiscussions on policy issues in digital trade shouldconsider four groups:(a) Group 1 – Digital-infrastructure goods, i.e. ITgoods providing hardware to conduct digitaltrade. Examples include computers, networkdevices, mobile phones, etc. that are the part ofphysical infrastructure needed to conduct digitaltrade. The Markle Foundation (2005) suggeststhat products under the Information TechnologyAgreement (ITA) can be a representation ofthis group;(b) Group 2 – Digital-infrastructure services, providing virtual infrastructure forconducting digital trade. According to theMarkle Foundation (2005), these include basicand value-added telecommunications services,and computer and related services;(c) Group 3 Digitized products – “Content” products,such as software, books, music, films andgames that can be traded in a physical formon a carrier medium such as video tape orCDs, but are now traded electronically viathe Internet and which may then fall into theservices category, such as personal culturaland recreational services.3(d) Group 4 – Electronically enabled service,which cover services that have adopted digitaltechnologies to sell e-services. This is a largecategory because most services nowadays haveadopted digital technologies and are sellinge-services to varying degrees.4Figure7.2The data analysis in this chapter follows the frameworkshown in figure 7.2. The first part of the quantitativeanalysis is looking at the digital intensity of exportsat the global and Asia-Pacific levels. As there is nodirect measure of this intensity, this chapter uses theshare of services that are digital infrastructure (computerand related services, and telecommunication services)embedded in exports of a country as a proxy.5 Theseservices are highly relevant to digital technology anddigital trade. For example, the emergence of Internettelephone and other Internet services such as e-mail,video conferencing etc., in particular, have enhancedand accelerated the developments of digital trade.Voice-over Internet Protocol (VoIP) has generateda surge in global cross-border telephone calls.Cross-border computer-to-computer Skype-callinghas generated a torrent of cross-border data flows.People and companies are using digital and mobileconnections to share ideas, collaborate and make socialconnections. These platforms range from e-commercesites, including Amazon, Alibaba and Airbnb, to theG-Cloud of the Government of the United Kingdom,which provide electronic channels of distribution tosmall businesses providers of goods and service.This analysis relies on an input-output approach to theclassification of the analytical framework (figure 7.2).The data source is the OECD-WTO Trade in ValueAdded (TiVA) database (October 2015 version).6 Whererelevant, international statistics on trade in servicesand goods have been used. Data on internationaltrade in services are from the WTO database underthe sixth edition of the IMF Balance of Payments andInternational Investment Position Manual (BPM6).7 Dataon trade in goods are based on HS classificationsfrom the United Nations COMTRADE database whichare available from the World Bank World IntegratedTrade Solution (WITS) platform.Analytical - al- a:value- ‐addedbytelecomunicaBonservicesandcomputer- adeingoodsunderITAandtradeinvalue- ‐addedoftelecommunicaBonservicesandcomputer- ‐relatedservices108 Recent Trends and Developments

INTERNATIONAL TRADE IN A DIGITAL AGECHAPTER 7C. PRELIMINARY ESTIMATES OFELECTRONIC CONTENT IN EXPORTSBY ASIA AND THE PACIFIC1. Digital technology used by Asia-Pacific exportersMeasured by the share of telecommunications8 andcomputer-related services embedded in total exportsthere is a rise in digital intensity in total exportsat the global and Asia-Pacific levels. The valueadded by telecommunications and computer-relatedservices in world exports grew by 8.8% annuallyfrom 1995 to 2011.9 The growth rate is higher thanthe growth of world gross exports of 7.6% duringthe same period, causing the share of value-addedby telecommunications and computer-related servicesin total export value to increase from 2.7% in 1995to 3.3% in 2011. Similar to the global trend, theshare of value added by telecommunications andcomputer-related services in total exports of Asiaand the Pacific economies increased from 2.1% in1995 to 2.6% in 2011.10 The smaller share in theAsia-Pacific region’s exports compared with worldexports, which may also be related to the lack ofICT infrastructure in the region as pointed out inESCAP (2016b). It indicates that the region still hasa great deal of latent potential for expanding the useof digital technology. Although developing Asia-Pacificeconomies are still considered to be latecomers todigital trade, they are catching up rapidly. The valueof telecommunications and computer-related servicesrooted in total exports by the Asia-Pacific region grewby 11.1% annually from 1995 to 2011, while that ofFigure7.3non-Asia-Pacific exporters was only 7.9%. Specifically,the use of computer technology by exporters in theAsia-Pacific region grew quickly at 14.6% per year,while the growth rate was only 11.1% for exports bythe rest of the world.2. Trade enabled by digital technologyThe advancement of Internet and computertechnologies has directly transformed the patternsof trade in goods that can be digitized. Goodsthat can be digitized are essentially software andmedia products, including films, various types ofprinted materials, video games and various types ofrecorded information on carrier media.11 Cross-bordermerchandise trade in products that can be digitizedwas equivalent to 0.3% of world merchandise trade in2014. Exports of printed books accounted for nearlyhalf of this number (figure 7.3). Based on merchandisetrade data, exports by Asia-Pacific economies accountfor about 30% of world exports of products that canbe digitized. China dominates the region’s exports ofgames and printed books, while Singapore leads theregion’s exports of software and sound media. Themajor Asia-Pacific exporter of films is Japan, followedby the Republic of Korea.However, part of the declining merchandise tradevalue of goods that can be digitized after the peakin 2008 was replaced by the potential growth oftrade in their digital counterparts. Digital downloadsof these products (films, sound media, softwareetc.) may be classified as part of trade in services,World exports of goods that can be digitized, 1996-201480Billions of United States dollars70605040302010FilmsGamesSoftwareSound 0032002200120001999199819971996-Printed materialsSource: ESCAP calculation using data from United Nations COMTRADE downloaded from WITS, accessed August 2016.Asia-Pacific Trade and Investment Report 2016 109

such as under the personal and recreational servicesubcategory. The change in trade classification hasled to the interpretation of merchandise trade datafor those products to potentially be misleading. Forexample, software trade has not been reported undermerchandise trade for many countries since 2006. Inaddition, switching towards digital downloads may be afactor in explaining why merchandise exports of filmsby Japan were three times larger than the export ofthe same item from the United States (consideringits strong motion picture industry) in 2014.Using statistics on trade in services shows that thevalue of world exports of personal and recreationalservices increased steadily from 25 billion to 40billion between 2006 and 2015. This suggests thatthe underestimation of trade in products that can bedigitized is far beyond 50% of the value based onthe merchandise statistics above.Yet analysis using trade statistics for services is notfully possible due to complicated issues in recordingthose transactions. For example, an intuitive way ofthinking about digital trade in books, films or musictends to be in terms of transactions that an individualmight make in purchasing an e-book, film or soundrecording from an online store or in subscribing to aservice that provides on-demand access to a catalogueof printed materials, films or music. However, thosetypes of transactions may not be registered as crossborder transactions due to the geographically-specificintellectual property rights protection of the content.There will only be the exchange of money from afirm in the importing country to a firm in the exportingcountry for the right to sell content that is protectedby intellectual property laws in a given geographicalarea, but not the value of the e-product delivered toconsumers in the importing countries. Furthermore,services trade statistics appear to be patchy acrosscountries. For example, some countries report tradein computer-related information and telecommunicationservices while a number of countries still report onlybusiness services in general but not the data onthose service subcategories.Digital technology does not only affect trade in personal,cultural and recreational services; the supply of mostservices has also been affected. For example, inthe tourism industry, booking and payment for airlinetickets, hotels, tours etc. are increasingly carriedout over the Internet. Electronic banking and onlineinsurance provision have taken an important shareof the financial and insurance services. Professionalservices, such as accounting, legal or medical, are110 Recent Trends and Developmentsincreasingly based on Internet-based communications;news services transmitted by digital networks, togetherwith Internet telephone, e-mail, voice mail etc.,constitute a majority of the communication servicesprovided. Furthermore, in the sectors where thesupply of certain services across borders appear tobe unfeasible, digital technology has allowed newforms of supply, such as Telehealth.12 As the scopeof Internet-enabled services is large, it then followsthat cross-border trade in these sectors accountsfor 88% or more of total world trade in commercialservices. Digital technology is having an increasingimpact on those services, but measuring it remainsdifficult. As explained above, the best that can beachieved is some es

The use of automated data exchange systems, cloud computing, big data and open source operating systems can help businesses run international supply chain management more efficiently. . B2B (business-to-business); (b) B2C (business-to-consumer); (c) B2G (business-to-government); and C2C (consumer-to-