Digital Trade and the WTO E-commerce negotiations

On this podcast episode, Kellie interviews Stephanie Honey and they talk about digital trade, the last developments in FTAs regarding this topic, and what to expect from the WTO E-commerce negotiations at the WTO MC12.

TE Podcast - Episode 12 Stephanie Honey

Kellie: Welcome to the TradeExperettes Podcast. On today's episode, we're going to be talking with Stephanie Honey, and we're going to be talking about digital trade, the latest developments in FTAs and the WTO e-commerce negotiations.

Stephanie Honey is a trade policy consultant and former New Zealand trade negotiator. She focuses on digital trade and services, Asia Pacific, regional economic integration, the WTO agriculture and inclusion in trade. Stephanie serves as deputy executive director of the APEC Business Advisory Council,  Associate Director of the New Zealand International Business Forum, and is co-founder of Global Trade Insights, a business offering executive education in trade policy. 

But we also have Stephanie Honey as a Blog writer and a Directorette of TradeExperettes. Thank you so much Steph for coming and being on the podcast today. We're so happy to have you. 

Stephanie: Thanks so much for having me Kelly. And it's a real honor to be able to talk about digital trade, which is a subject I really loved.

Kellie: I feel like we can tell that you love it. And so hopefully our listeners will tell that as well. As an expert on digital trade and someone who loves digital trade, could you share with us your thoughts on the relevance of digital technology for international trade?

Stephanie: Thanks, Kelly. Yes. Well, one of the things that I love about digital trade is that we are witnessing this incredible transformation of trade and trade policy, sort of in real time, which is quite a novelty for trade, because, as I'm sure all of our listeners know often the time horizons are a little bit more, perhaps you could say geologic in nature, progress happens very slowly, the rules often only evolve over a very long time horizon, but what we've seen in digital trade is that business models, technologies and the trade rules that help to, I guess, provide some guardrails for all of this are actually changing at a much faster pace and in a much more sort of dynamic way than traditional trade.

So, it's a really interesting area, and it's also starting to touch on everything. I mean, there are very few aspects of trade now where you wouldn't see some dimension of digitalization or the sort of intersection of digital technologies with the way even very traditional forms of trade, like agriculture and food trade, for example, even that is becoming increasingly digitalized.

So we see, most obviously, there are a number of digital technologies and products that are sort of inherently in-and-off of the internet, so things like cloud computing, but also lots of those services that have been traded in a more traditional way are becoming increasingly digitalized. So we see, I think the estimate is something like 60 or 70% of all services can now be digitalized, and that is the sort of share of services trade now taking place through digital channels. We're seeing the digitalization of things that were once traded as physical goods. So it's something like a book or a DVD, although that's very old fashioned technology these days, are now being transmitted digitally. So, you know, you read your ebook on a Kindle or you stream in Netflix. But even of course, goods trade, which is inherently part of the physical world, we're now seeing a sort of digital overlay to that. So I'm sure every single person listening to this podcast has bought something on Amazon or on Alibaba using those digital platforms for the ordering and the transaction of the trade activity. So within this huge transition from very long standing models around how goods and services are ordered and paid for and delivered into the digital world. 

And just a quick note on the terminology. Kelly, you mentioned digital trade in your introduction and e-commerce, there are academics and commentators who get down into the weeds of whether there are distinctions between those two terms, or as one of a subsidy of the other. For today's podcast, I think we should just think of them as synonyms. Really, essentially, what we're talking about is trade that can be either digitally or physically ordered and then digitally or physically delivered, but there's a sort of digital component to what actually happens, as part of that end-to-end transaction.

Kellie: I hadn't thought of it like that, but digitally-ordered versus digitally delivered. Interesting. 

Stephanie: Exactly. And one of the other really interesting sort of dynamic new areas that, in fact, the World Trade Organization and the World Economic Forum have recently released a big report on, is this new enabling set of technologies called “trade techs.” So we see even for traditional physical goods trade, there are ways that digital technologies can facilitate speed up, increase the integrity of those transactions. So, blockchain, it is certainly becoming a more prominent tool in trade to enhance supply chain integrity and the sort of security and privacy of information, but also other enabling technologies. So we see paperless trade, something you might've heard of, where trade documents, trade administration documents like bills of lading or contracts, or even now things like sanitary and phytosanitary certificates are transmitted digitally. So that really strips out a lot of the hassle and paperwork and costs from trade. But also even really quite foundational building blocks for the digital economy, so digital identities, for example, of either individuals or businesses, are used to streamline transactions and make them more safe and secure and efficient and lower cost. All those great things that trade policy people have been worried about for many, many years. 

But the promise of trade tech is that it can help to smooth transactions and trade globally with either goods or services, strip out costs and make trade more resilient, which over the last two and a half years is something that we've all become a lot more concerned about than we used to be in the past. So we saw through the pandemic, lots of lockdowns and closed borders; these trade tech tools were able to keep trade flowing really well, whether through electronic signatures or paperless trade documents, we could keep trade flowing, which, of course, was essential for economic activity and lots of small businesses, but also to get those vital medical supplies and things around across borders. So, you know, these are potentially incredibly powerful enabling tools, but one of the really interesting things, if you're a trade policy nerd, is how do these new technologies intersect with trade rules? And, so, one of the very interesting things that I know we're going to talk about later on in this conversation is what are the trade rules and what's needed to enable us to realize the full potential of digital technologies for trade.

Kellie: Absolutely! And to your point, the free trade agreements that were negotiated before the advent of the internet, how are states adjusting to this drastic development of digital tools, digital technology, e-commerce, all of that? How are they regulating or adapting to this new development in their free trade agreements specifically?

Stephanie: Great question Kelly. And I mean, I think it's quite interesting to reflect on the fact that our sort of global rule book for trade, the WTO and all of its agreements, largely predated the internet. A fax machine was about as fancy as it got at the time that the WTO came into being. There was the internet, and people were starting to realize that, hey, maybe this is going to be sort of a potential force in trade, but there really wasn't the ubiquity of digital technologies that we see today. So, a lot of the WTO rule book, conceptually at least, really sort of predated what we see now in this rapid digital transformation. 

I'm going to come back to the WTO because I know we've got lots of interesting things to talk about there, but really the main game for digital trade, over the last 25 years and especially the last decade or so, has been in FTAs or regional trade agreements. These sub-WTO trade deals that essentially provide rules of the road for trade have increasingly started to incorporate digital trade, or they're often described as e-commerce chapters. And, so, we've seen a real surge in the way countries are starting to regulate digital trade through FTAs. But, in fact, fundamentally, most digital trade regulation actually happens in domestic regulation. A lot of the domestic economic and regulatory measures that countries put in place that affect digital trade, are mainly focused, in fact, on their own domestic economic regulation. So it's been quite interesting to see how countries are now starting to realize that actually, as with other areas of services trade, a lot of the structural reforms that might be needed, or the new thinking about how to regulate digital trade, actually start in the domestic economy. 

But what we see in FTAs is this huge increase in two main kinds of regulations. The first one relates to data flows and data, and is often described as the lifeblood of digital trade, it really underpins everything. So, the way data is regulated is absolutely critical and lots of FTAs have some sort of rule about how data flows can be treated. And then another really major area is around digital trade facilitation. So, I mentioned paperless trade earlier and sort of related aspects of that. So, those two big areas, data flows and trade facilitation have been the sort of bedrock of the way digital trade has been regulated. And of course, within that, there are some really important, for example, the protection of personal information, which we often describe as privacy regulation, and the sort of frameworks for electronic transactions. 

One of the really interesting and dynamic things that we've seen happening over the last few years, and especially actually ironically, with the advent of the pandemic, we've seen a real surge in this activity, it's a new way of designing digital trade rules and FTAs. So, one of the most interesting new digital models that has been developed is the DEPA, the digital economy partnership agreement that was signed in the middle of 2020, and very appropriately for a digital agreement it was signed virtually because of course we were in the initial throws of the pandemic at that point, and people couldn't travel. This was an agreement that was developed, among New Zealand, Singapore and Chile. And it's really an innovative way of regulating digital trade and the digital economy. 

So, where previous FTAs had those two big components I talked about, data flows and trade facilitation, the DEPA has tried to look at the digital economy more holistically. In fact, it does what it says on the ten, it's about trade and the digital economy rather than digital trade as such. And, so, it's innovation is to bring in a lot of new elements that hadn't really been considered as part of digital trade regulation previously. So it has those core elements around data flows and of course, digital trade facilitation, and it really amplifies those and builds out some new rules and new areas, things like, not just paperless trade, but also e-commerce, e-invoicing, and a number of those sort of foundational elements that help trade to flow, digital identities, for example. But as well as that, it brings in a whole lot of other new and emerging technological models and issues, things like artificial intelligence data innovation, FinTech and also some really important aspects of sort of, I guess you could say, the social context or the broader public policy goals that governments might have in this space. So, things like digital inclusion, how do we make sure that women or indigenous communities or underserved communities are able to participate fully, but, as well, how do we make sure that small businesses are able to make use of the digital economy? 

So, there's a kind of something that's become a bit of a cliche, which is that small businesses can really benefit disproportionately from digital trade. A lady trade policy consultant like me can sit at home at my kitchen table and essentially deal in global trade from home. But, as well as that, things like an open and safe Internet, and open and rich digital realm and data realm, so all of these other aspects of the digital economy that hadn't really been part of digital agreements or digital trade chapters have been now brought into the rules framework for the digital.

And one of the really important aspects of the DEPA is that it's an open model. So it's a plurilateral agreement that others can join, and, in fact, since it was signed back in 2020, we've now seen Korea starting the process of acceding to the DEPA, but also China signaling that it also wants to accede. And very recently we've also seen the great news that, in addition, Canada has also decided to apply to join the DEPA. So, we can really see that this model is going to be like a tiny snowball, rolling down the hill and sort of gathering momentum as it goes, hopefully building up more and more countries. And the significance of that it's because unfortunately digital trade regulation has become quite fragmented, so we don't have that foundation of the global rule book, really, to any great extent, but we're seeing lots and lots of FTAs and other digital trade models starting to develop, and what that means, if you're a business person, is that you don't have a clear set of rules for the digital economy. The DEPA is a model that is trying to act as a building block for a much bigger set of rules to make life easier for business and more streamlined for consumers and governments in this area.

But things don't just stop with the DEPA, we've also seen over the last couple of years, a real explosion of digital economy agreements, and Singapore has been a real thorough leader in this space. It's negotiating digital economy agreements with a range of partners, mostly in the Asia Pacific; it's done a deal with Australia that 's actually part of the bilateral FTA, but it's a very detailed digital economy agreement. It's also negotiating with a number of other regional partners, like Korea, it's talking to Vietnam and it's done a digital economy partnership agreement now, as well, with the United Kingdom. So, this is really a kind of a big trend that we're seeing in digital trade. This new model of digital economy agreements that take a much more holistic view. But, the only open one that can serve as a sort of building block is the DEPA, the others are more bilateral sort of closed set type of agreements.

Kellie: And so you just gave us two examples, one of a multilateral framework, and then the ones that you were just saying were bilateral. Why is it so important to have that multilateral framework? 

Stephanie: Well, that's an interesting question because I think countries have tended to use FTAs for really broad and deep sets of trade rules, and perhaps one might even say that's the whole rationale for FTAs. We really had seen this huge sort of exponential growth in FTAs, ironically, since the WTO itself was formed. The FTA game has really been stronger since we've also had this global set of rules. But when you dig into what FTAs have actually achieved, they go further, faster, deeper, and that's what we see in digital trade agreements as well. You can be much more ambitious if obviously there are two of you sitting around a table rather than 164 members of the WTO.

But, unfortunately, the downside of that is, when it comes to digital trade, fundamentally, this is a mode of trade that is really borderless. I mean, in the way that traditional trade is very bounded by geography, especially if you're talking about physical goods that go from country A to country B; it's fundamental to the trade transaction, with digital trade it's really conceptually quite a different proposition. In essence, the Internet is really borderless, you can have global instantaneous reach just as easily as you can essentially have a sort of bilateral connection with another country. So, it just makes sense for digital trade rules to reflect that fundamental nature of digital trade, that it should have a global perspective. 

And to bring it down to a sort of more practical level, if you're a small business wanting to sell a digital service, it's going to be much more efficient, cheaper, easier, more straightforward if you can essentially export into global markets using the same set of rules. We don't want the digital economy to be bound by these sorts of artificial non-tariff barriers that curtail your potential market. So, ideally the rules would be global or at least interoperable across lots of markets. But, unfortunately, in practical terms, that's not what we're seeing in digital trade. We're seeing some really great ambitious rules, but they're piecemeal in different FTAs. 

And, unfortunately, the sort of flip side of that is we've starting to see growing restrictions on digital trade. The OECD has done some fantastic work on digital services trade restrictiveness; unfortunately, the trend for that is definitely outwards, we're seeing growing restrictions, particularly around data flows, but also even in some of the more innovative technological areas. And, in addition, we're seeing lots of countries now starting to regulate data flows in a way that is not necessarily aimed at restricting trade, but, de facto, is having that impact. As well as that, there's another problem, which is that countries and even businesses are developing their own sort of set of proprietary standards or approaches or systems, which in and off themselves might be great, but if they can't talk to the standards and systems across markets in another countries, you're not going to hear the seamless potential of digital trade to be realized. So, there's also a sort of work that is needed to make sure that across these different layers of trade transactions, technical standards, regulatory standards, sort of regulatory interoperability, we can have trade actually flowing efficiently.

And a really good example of that is something very technical and kind of boring, e-signatures, or even e-documents where we see, particularly through the pandemic, lots of countries wanted to make use of these technologies when you couldn't get a wet signature, you couldn't go to a customs official and sign a document in front of them or get an official certificate endorsed or whatever. So, it makes sense to be able to do it electronically. But, one of the problems that we've seen is lots of countries have legal structures or regulations that prevent that from happening. And there's a whole job of work throughout the layers of digital transactions to make sure that systems, standards, legal requirements are interoperable. So there's a kind of bring down the barriers, but also create the enabling environment for digital trade and what these building block digital trade agreements like the DEPA can do is facilitate that process. The ideal of course, would be for a multilateral framework, for a WTO agreement or set of rules that could work around the global economy, but until we get to that Nirvana, we have digital economy agreement models, particularly the DEPA, that can help us build towards that. 

Kellie: Right. And in your blog article, you mentioned these divergent rules, you call them a “noodle bowl,” but the DEPA is something that can maybe help to solve that noodle bowl look of all of those divergent rules.

Stephanie: Right. So its structure is in modules, countries can either accede to the DEPA as a whole, or could pluck out a particular module, let's say on paperless trade, and utilize that, with the idea that, over time, we will get this process of sort of gradual accretion of similar or more coherent approaches or rules for digital trade, eventually building towards a more sort of a unified digital economy regulation, straightening out the noodle bowl, if you like. 

Kellie: Straightening out the noodle bowl, exactly. What is the challenge then to achieve this at the WTO negotiations? 

Stephanie: Well, this is very timely podcast, we're recording this just ahead of MC12, and so I don't want to make too many predictions in case I'm very quickly proven wrong, but the challenge at the WTO, which will be absolutely visible in the coming week is to reconcile quite a big range of different approaches to digital trade regulation to straighten out that noodle ball.

So, in the WTO, as we discussed earlier in our conversation, essentially the rule book was written before the Internet. Although, in fact, to a certain extent, the rules were designed in a way that was future-proof. So, there are some foundational elements of the GATT and the GATS, so the General Agreements on Trade and Services, that have stood the test of time and the digital economy pretty well. But I think there's been a general view that actually, those rules aren't really fit for purpose and, perhaps, we need to develop some cross-cutting approaches to things like data flows or paperless trade, or whatever it might be. 

So, the WTO has, in fact, had a work program on e-commerce - digital trade - since 1998, so since the very earliest days of the WTO existing as an institution and as a global rule book, there has been this ongoing conversation, but it really failed to deliver a lot, I mean, there was a good engagement, but not really any concrete outcomes. 

So, back in 2017, a group of countries, at that point, there were 76 WTO members, decided that it was really time to try to develop and build out, and make concrete those new approaches, and reflecting also the work that had been going on in FTAs over the previous decade or two. At that point, they launched one of these plurilateral agreement negotiations, at the WTO, the joint statement initiatives - now called “joint initiatives” - on e-commerce. And that has actually been a remarkably active and successful process. There are currently 86 participants, which account for about 90% of global trade. So it's a pretty inclusive group and it's open to any WTO member to participate. And it's been a very active process, there've been lots of submissions, that countries have contributed, there have been a lot of discussions and different sort of variable geometries of plenary discussions, and small groups trying to build out different aspects of digital trade, across a range of different headings, including a range of topics, around enabling electronic commerce, openness, trust cross-cutting issues, telecommunications, and market access. 

So, you can see from those headings, and of course there are a lot of different issues underneath each of those headings, it's quite a cross-cutting and holistic conversation, it doesn't go quite as far as the DEPA or some of those other digital economy agreements, but it's, you know, a change from the way the early thinking about digital trade was undertaken. And it's made good progress. There's been a lot of convergence in some areas, particularly around the sort of digital trade facilitation aspects, and some texts that's been developed, and has really coalesced around a lot of common ground in some areas. But, unfortunately, the really big points of friction that we see in FTAs, in the real world, so in actual trade transactions, as well, around data flows in particular, are still, unfortunately, areas where there are big gaps in the WTO e-commerce plurilateral as well.

So the co-conveners of this e-commerce joint initiative are Singapore, Australia, and Japan, and they have been reporting to the wider WTO membership on progress, and last December, they gave a report saying that there's been great progress, and the goal was to produce some outcomes by the end of this year, by the end of 2022, and hopefully we'll also see some progress next week at MC12. But if you're listening to this after in MC12, of course, you'll be able to judge with an end date if any significant progress was able to be reported at that point. It seems unlikely that there's going to be any quick progress on the really big points of friction around data flows going across borders. 

And if I can just explain a little bit why that matters. I mentioned earlier that data flows are like the lifeblood of digital trade; really, no digital trade can happen if data can't flow. But what we see in the regulatory space is countries starting to regulate how data can flow or restrict what kinds of data can flow across borders. So the sort of most obvious version of that is around personal information. Often countries regulate to say you can't transfer personally identifiable information across a border, or there are very strict rules around how that's done, but there are also restrictions that relate to cyber security, or financial services regulation that really restrict how the data, the underpinning of digital trade, is able to flow across board. 

Now, lots of countries also say you can only store or process data of whatever kind of information, including personally identifiable information, within a country. If you're a big company, if you're a Google or an Amazon, you know, that's probably not such a big deal, you build a server in your markets and deal with your business model that way. But if you're an SME essentially those rules around data localization - as they are called - are really a big deal. If you're a small business operating on low margins, it's much more challenging for you to process and store data across potentially many different markets, as opposed to being able to utilize what's fundamental about the digital economy, which is the borderless model of cloud computing, for example. So, this is a really practical problem for small businesses, as well as being a very interesting intellectual challenge for economists and trade policy nerds, but it's really at the cutting edge of whether the nine points of contention and friction of digital trade regulation are going. And that is likely to be a real challenge, to resolve some very different models for the regulation of data flows that we see. 

In sort of broad brush terms, there are three realms for regulating data flows: there's the EU model, and I think everybody listening to this podcast would have seen, for instance, GDPR pop-ups on every website that you look at. There's, the U.S. Model, which we see in the CPTPP agreement, but also in a lot of those more innovative digital economy partnership agreements, and digital economy agreements, and then is also a Chinese model of data flow regulation, which is much more, restrictive and really very focused on sort of curtailing flows of data across borders. So it's hard to see how those different realms can be reconciled; if it's going to be possible to find a way for those models to interoperate in a way that allows digital commerce to keep working, but also allows governments to have sufficient policy space to address the concerns that they may have, from whichever party you're talking about.

There's another really important issue that's on the agenda for MC12 and the digital economy generally, which has the very un-snappy name of the Permanent Moratorium on Customs Duties on Electronic Transmissions - so the moratorium, let's call it. And this is something that has also been on the WTO agenda since the very earliest days, so since 1998 as well. This is essentially about, am I paying a tariff on my Netflix? To use a kind of real world example. So this is the issue of should electronic transactions - whatever you might define those - when you might be talking about cloud computing or Netflix or your e-commerce purchases on Amazon or your other sort of digital services, should those transmissions be subject to tariffs, just like physical goods are. So, I buy a book in traditional trade, I pay a tariff on that when it's important to the market, should my purchase of an ebook also have to pay a tariff. 

So, there are some really interesting issues there that you can immediately see around the sort of economics and legality, and trade policy questions, but, in a practical sense, in effect, electronic transmissions have not had to pay tariffs either. But what we're seeing now is this very live question of whether or not the moratorium on imposing tariffs, which has been reinstated every couple of years, it's now up for a further renewal. So one of the big questions at MC12 is: is the Moratorium on Customs Duties on Electronic Transmissions going to be renewed? And up until this point, it's been an agreement that yes, it should be renewed, there are strong reasons related to the growth in the electronic economy that have pointed towards keeping that moratorium alive. 

But, we're now seeing a number of developing economies, particularly India and South Africa, and perhaps to some extent as well, Indonesia, saying that they don't believe that the Moratorium should be renewed. They should be allowed - or every country should be allowed - to impose tariffs on electronics transmissions. It's a complex issue because, in fact, quite a lot of the countries who are part of this conversation have already agreed in FTAs that they will maintain that moratorium, they will not charge tariffs; but what we see, in the WTO context is a very strong argument from a number of those proponents, that - particularly for developing countries, for revenue raising purposes - they need to have the ability to charge tariffs on electronic transmissions. 

So, it's a really important conversation, because the work that has been done by a lot of really important think tanks, quite a few years ago now. The European Center for International Political Economy (ECIPE), in Brussels, did some really important work looking at what the impact would be of removing that moratorium. The OECD has very recently done some really great work, led by Javier Lopez Gonzalez and Andrea Andrenelli; they have looked at what would be the sort of economic impact of removing that moratorium, and there are some really compelling arguments for how, while there might be some revenue benefits for developing countries, in fact, they're vastly outweighed by the broader economic impact on growth, on innovation, on the ability of small businesses to participate in digital trade, on domestic productivity; there's a really compelling case to maintain it moratorium, but it will be definitely one of the key issues that's going to be discussed at MC12.

Kellie: Well, you've given us a lot to look out for throughout the MC12 discussion, so thank you for kind of lining that all up for us and teaching us about the digital economy partnership agreement. 

Stephanie: Thanks so much for having me, these are all such interesting issues, I really encourage people to dig into them, obviously read my blog, but there's lots out there, some really great thinkers and writers working on this aspect of trade, and it's a fascinating one. 

Kellie: Absolutely. Thank you so much, Stephanie Honey, for joining us on today's podcast episode for the TradeExperettes Podcast and yes, check out her multiple blog articles, not just the one on digital trade, but multiple blog articles on our Blog. And thank you very much.

The TradeExperettes Podcast is hosted by me, Kelly Kemock and Belén Gracia is our Executive Producer. If you would like to know more about the TradeExperettes, you can find us online at tradeexperettes.org, at LinkedIn and on Twitter. 

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