Digital globalization, digital trade policy, and the role of developing countries
Subjects: Africa Digital Economy Far-East Latin America Russia & Eurasia South Asia & Oceania WTO and Globalization
Digital trade has grown very fast in recent years, not least because of Covid-19 and its push to do online business. The pandemic, according to one news story, “has accelerated digitalization and is serving as a catalyst for the growth of non-physical goods trade” (Bloomberg, 2020).
While all this is true, digital globalization has been on the rise for years. In fact, global digital exports of services deliverable over the internet – such as R&D, information, computer, and other business services as well as charges for Intellectual Property Rights (IPR) – together show an average growth rate since the Global Financial Crisis (GFC) that is about 6 percent higher than non-digital sectors.
Newly published ECIPE work in the World Trade Review argues that the likely reason for this growth was the fast drop in digital trade costs that started around the time of the GFC. For example, after the crisis new providers saw an opportunity to sell their services cheaper online through digital platforms. Moreover, as goods trade performed sluggishly after the GFC, the need for supply chain-related services weakened too against the backdrop of a rising demand in digital services.
Falling trade costs have provided great opportunities for developing countries. Trading in the digital economy is substantially cheaper than trading in other sectors such as industry and agriculture, and poorer countries can profit from that. E-commerce platforms, for instance, cut the costly burden of distance for trade and enable micro-firms to participate in global markets.
Many developing countries have seized this trade opportunity. Especially upper-middle income countries have gained markedly from the global rise in demand for digital services. Examples are South Africa and Botswana. Both being upper-middle income economies, they have benefited substantially from digital globalization as they have seen an increase in digital services exports.
But here is the mystery: despite these positive effects of digital trade, few developing countries take part in global negotiations to shape new rules on digital trade. For instance, neither South Africa nor Botswana is part of the Joint Statement Initiative (JSI) on E-commerce in the WTO. That’s a missed opportunity, because by staying absent in these talks one cannot shape the terms of trade of this rising digital globalization into its own favour.
And the two examples illustrate that the African region is not well represented in the JSI at all. Only seven of the 54 states in Africa participate in these talks. That is far below the continent’s potential weight. Some African JSI members are relatively large, such as Kenya and Nigeria, and are also upper-middle income countries. If they want, they have some capacity to influence these talks to their own benefit.
Both countries would hold a lot more sway if they were joined by the rest of the continent. Two other large digital trade players in Africa stand out, namely South Africa and Egypt. They should team up with Kenya and Nigeria. Together the four countries would be well placed to take a lead in the JSI negotiations which could affect the outcomes in the interest of all African nations.
True, not all African and other developing countries have the means to maximize the benefits of digital trade. Poorer countries do not have a great digital network to start with, which is needed to leverage on e-commerce. Nor can they always draw on a large pool of skilled workers to tap into digital exports of higher value-added. They may therefore not have a strong comparative advantage in digital services all together.
But that should not prevent developing countries to partake in these talks. The reality is that countries with a weak digital comparative advantage, moderate levels of internet deployment, and ordinary levels of human capital all have been able to successfully tap into the globalization of digital services in one way or another, as the ECIPE work also shows.
For instance, Tunisia and Vietnam both rely on a lower level of human capital. But it’s these types of countries that have seen high growth in digital services exports, too. As a group together, countries with average levels of human capital have nonetheless experienced an increase in digital services exports over the last two decades that is almost 15 percent higher than non-digital exports.
So too for countries with an average level of digital infrastructure such as Peru, Pakistan, and Morocco. They all have intermediate degrees of internet penetration. Yet together these countries have witnessed an overall increase in digital services export which was about 10 percent higher than exports of non-digital services.
Even countries having difficulties in developing comparative advantage in digital services, such as Brazil, Kazakhstan, and many others in Africa, they nonetheless saw a rise in their digital services export. It therefore seems rather unsatisfactory that many developing countries do not participate in these digital discussions.
That does not mean however that these countries have no legitimate concerns about their ability to participate in the global digital economy, which is seriously constraint for them. They worry about their capacity building efforts and expertise in digital matters for which they seek technical assistance. These concerns must therefore be taken seriously by the trade community when negotiating rules on e-commerce.
Digital trade promises to have great potential for the world economy. Given that trading in the digital economy is less costly, it provides export opportunities for also the poorer parts of the world. They should therefore be on board with the JSI discussions as it helps them to tap into these digital opportunities now and in the future.