E-commerce and trade: resolving dilemmas

Open trade policies spur the growth of e-commerce. But e-commerce blurs the line between goods and services and
raises issues for trade rules.
Julia Nielson and Rosemary Morris, Trade Directorate, OECD
Trade Directorate

There used to be only two ways to buy a book: either order it via a catalogue or book club a sometimes lengthy and
unreliable process or, more commonly, simply go to a shop, pay cash and take it home in a paper bag. Now, a
customer can visit an online bookshop, view a book, read its blurb, browse through the shops collection, make a
selection, and pay for the book online. The book may be delivered physically or, in some cases, downloaded onto the
buyers computer. These new ways of buying a book apply to other goods and services too. And as many of the
orders are international, this raises challenging issues for existing trade rules.
In other words, electronic commerce the production, advertising, sale and distribution of products via
telecommunications networks is both dependent upon trade and transforming the way in which trade is conducted.
Trade lies at the heart of these transformations, both of goods (e.g., computers) and services (e.g.,
telecommunications services), with liberalisation playing its part by making technology cheaper and more widely
accessible.
DEVELOPMENT TOOL
Electronic trade is booming. A growing number of products, from books to cars, are being marketed, sold and,
increasingly, delivered online, including across borders. While precise figures for e-commerce are hard to come by, it
is estimated that e-commerce will grow to $US2.5 trillion by 2004 (International Data Corporation, The Internet
Economy, www.idc.com). Electronic commerce has opened new markets for traders, large and small, including
those from developing countries.
But for much of the world, ordering a book over the Internet is not yet a reality. Good trade policy can help bring
technology closer to users and in so doing, bridge the so-called digital divide. In fact, the potential of e-commerce as
a development tool is very much on the minds of trade policymakers. A large engine manufacturer in Europe can, via
Internet, source a component to a small manufacturer in Asia, whose previous market was more local. This is
because well-designed trade policies open up markets and increase access, bringing prices down for infrastructure
and technology. Software engineering in India, insurance claims processing in Jamaica or remote bookkeeping in
Zimbabwe: all have grown thanks to a mix of technology and trade opportunities. Traditional activities have benefited
too, like farming and handicrafts, mainly by creating new possibilities for marketing, supply and distribution.
But while businesses around the world can use new communications technology to overcome many of the obstacles
to growth, the cost of doing business remains very real indeed. After all, the software engineers still require
computers and telecommunications links, not to mention training. And while coffee growers in Kenya can follow the
market more closely, bypassing the middleman, they still have to get their goods into the consumer markets that
count. Despite the new opportunities of e-commerce, traders can find themselves thwarted by more traditional
problems such as poor transport and distribution networks, inefficient customs procedures, or barriers to market
access in key export markets. Trade liberalisation in services can help to upgrade infrastructure and e-commerce and
ICT can help improve the efficiency of customs procedures. But what a pity it would be if e-commerce was ready to
offer consumers more choice and better prices, and suppliers a wider markets for their goods, only to be thwarted by
barriers such as high tariffs or unnecessarily restrictive trade practices in key export markets.
There are currently few barriers to trade conducted via e-commerce over the Internet itself, partly for reasons of
technological difficulty: it is harder to prevent a consumer from connecting to an online bookseller and downloading a
book than it is to stop a physical book crossing a border. A primary aim of trade policy has thus been not so much to
remove existing barriers but to prevent their emergence in future.
Take customs duties. The WTO Declaration on Global Electronic Commerce, adopted in May 1998, called for a
moratorium on the imposition of customs duties on electronic transmissions until the ministerial meeting in Seattle the
following year. But the failure of that meeting means there is no agreement as to whether the WTO moratorium
remains in force. Still, the Asia-Pacific Economic Cooperation forum (APEC), which accounts for over 40% of global

trade, agreed in June 2000 to an APEC-wide moratorium on the imposition of customs duties on electronic
transmissions until the next WTO Ministerial, expected before the end of 2001.
So, while e-commerce can help developing countries participate more in world trade, it poses some difficulties for
trade policy. E-commerce has already had a major impact on international business practices, changing how
transactions are initiated and managed and how relations unfold between buyers and sellers. It has blurred the
differences between time zones; with the Internet, production and trade can be conducted around the clock and
across the continents. It has blurred the boundaries between the old and new economies car manufacturers use ecommerce between tradable and non-tradable products, and between goods and services.
FUZZY PRODUCTS
One problem at the heart of e-commerce trade is the definition of goods and services. If a book is ordered online, but
is delivered physically, there is general agreement that, for the purposes of international trade rules, it is a good. That
makes it subject to the international rules for trade in goods, the GATT (General Agreement on Tariffs and Trade).
However, if the book is delivered electronically downloaded onto the computer there is no agreement whether this
digital product should be treated as a good under the rules, or a service, which would make it subject to a GATS
(General Agreement on Trade in Services) regime. Not a trivial distinction, since there are important differences
between the rules covering goods and services, including the type of market access granted and non-discrimination
between national and foreign suppliers. For example, discrimination against foreign suppliers is, in general, forbidden
for trade in goods, but not for trade in services. The status of these e-products is as yet to be agreed by member
governments in the WTO.
Another issue that has arisen is whether commitments made under WTO agreements in particular related to
services are technologically neutral i.e., whether they also cover electronic delivery. Generally, WTO members
and commentators argue that a countrys commitment to open its market for cross border supply of accountancy
services, for instance, applies equally whether those services are provided by letter, fax or over the Internet.
However, some question whether specific commitments made during the Uruguay Round (which predates the ecommerce era) should include supply over electronic networks.
LIBERALISATION HAS HELPED
One point seems hard to deny: open trade policies have spurred the growth of e-commerce. They have driven
technology costs down and made the basic information and communications technology (ICT) infrastructure more
accessible. And liberalisation has helped to increase the size of markets available to innovators, stimulating activity
even in countries with small domestic markets.
But lower telecommunications costs as a result of open policies has perhaps been the critical contribution. In fact,
there are direct links between lack of infrastructure competition, high access costs and low rates of Internet use (See
Databank). Moreover, competition among infrastructure and service providers, in combination with appropriate pricing
and licence policies, has improved the quality of infrastructure and access services in several countries.
However, telecommunications infrastructure and services are not the only inputs; many other players also support ecommerce. Buying a book online also relies on a network of supporting services, such as computers, telecoms,
finance and banking (especially payments), and courier and transport services. The current GATS 2000 negotiations
will play a key role in liberalising this group of services, making electronic commerce even more accessible. The talks
also hope to do something about making highly skilled people more mobile.
The GATS negotiations offer countries a chance to lock in pro-competitive reforms; disseminate best regulatory
practices; extend their benefits on a most-favored-nation treatment basis; and send a strong signal to foreign
investors on the irreversible nature of recently enacted policy changes, thus building their confidence in governments,
particularly in transition and emerging markets, reassuring them that, for example, privatisation programmes will not
be reversed at a whim.
Still, much remains to be done by way of international regulatory co-operation if cross-border trade in e-commerce is
to grow to potential. Areas as diverse as data privacy; encryption technology; the development of secure payments
systems; and taxation all raise legitimate public policy questions to which trade officials (as well as others) will need
to find answers that meet public policy objectives without restricting trade, nor preventing the benefits of access and
lower costs that flow from it.

OECD Observer No. 224, 2001

REFERENCES
OECD, Economics Department Working Papers No. 252 E-commerce: impacts and policy challenges, June 2000.
Mann, C., Global E-commerce a policy primer, Institute for International Economics, Washington DC, 2000.
UNCTAD, Building Confidence electronic commerce and development, Geneva 2000.
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