GLOBAL ECONOMICS


Patrick Grady and Kathleen Macmillan
The E-Commerce Juggernaut
from Seattle and Beyond: the WTO Millenium Round(1999), Chapter 6.

E-Commerce Takes Off

Electronic Commerce, which is defined is a 1998 WTO study as "the production, advertising, sale and distribution of products via telecommunications networks," has taken off for the stratosphere with the Internet. For what it's worth, the WTO estimates that by the turn of the century the value of e-commerce will have reached US$300 billion and international e-trade will represent 20 per cent of this or US$60 billion and growing. These are, of course, guestimates. The only existing information on e-commerce flows is for the United States and a few other industrialized countries and data for cross border transactions simply does not exist. Needless to say, it always takes a while for statistics to catch up with reality, but as usual policy can't wait.

The potential for further growth of e-commerce is mind-boggling. Internet-based commerce, which currently only accounts for 2 per cent of all commercial transactions, is expected to swell to 50 per cent in ten years. The 13-per-cent share of consumer shopping currently conducted electronically is expected to more than double by 2007. The greatest potential for expansion is in financial services, telecommunications, advertising, travel, entertainment and professional services. But who knows for sure with such a new and revolutionary medium?

The Incredible Lightness of E-Commerce

E-commerce transactions have the same four stages as more conventional transactions searching, ordering, paying, and delivery. For the commerce to qualify for an e, at least some of its stages must be electronic. Usually, at a minimum, this includes ordering.

E-commerce is not only over the Internet. More mundanely, it also can occur over the telephone or fax. Just pick up the telephone and make an order. The delivery may be made in the traditional way of post or van, but it still counts as e-commerce. Much Internet-based commerce still relies on old-fashioned delivery methods.

ATM machines, which deliver banking services, are also a very specialized form of e-commerce. No one has yet figured out how to get currency into or out of a computer. But many banks offer Internet banking, which enables customers to pay bills and switch money from one account to another.

Professional services can also be delivered electronically. Architects and engineers can speak to clients over phones and send drawings and designs electronically. Doctors can provide diagnosis and prescribe treatment electronically. Accountants can prepare financial statements on line.

The quintessential form of e-commerce occurs on the Internet for digitalized products like software, books and music. All four stages of the transaction be conducted electronically. The product can be ordered, paid for by credit card over a secure system, and downloaded electronically.

Internet-based commerce, like the Internet, is still in its infancy. It is the most exciting type of e-commerce, and is largely a US-based phenomenon with 85 per cent of Internet revenues generated in the United States. The pioneers are Microsoft, Dell Computer, Amazon.com, Charles Schwab, Home Depot, e-Bay, Realtor.com, E*Trade, Adauction, Chemdex, and NTE. You name it and they sell it over the net software, computers, books and music, securities, building supplies, merchandise, real estate, advertisements, chemicals, transportation services. Even groceries and flowers are now being offered in the United States. And everyday something else is offered as "cybermalls" proliferate.

Canada is not far behind in e-commerce. Canadians are already accustomed to cross-border shopping. Making purchases in the United States is nothing new even if the medium is. Canada has also sprouted its own growing number of "virtual shops" on the web Chapters.ca sells books, Corel.com software, and HMV.com music.

The best part of Internet shopping is that you don't even have to take your hands off the keyboard or get out of your ergonomically designed chair to find the lowest prices and the best products or to make a purchase. And no fossil fuels are burned and pollution created, other than for the generation of electricity that is.

With Internet-based commerce, all you have to do to open a shop is construct a web page, subscribe to a secure and reliable payments system, and set up a system for ordering and delivering purchases. The computer will replace many salespersons and shop clerks. The costs are much lower than for a traditional retail store. The potential size of the market is enormous, reaching 300 million PCs with Internet access. This will enable many small and medium-sized businesses to participate in international trade for the first time.

Internet-based commerce is spurred by lower transaction costs such as search costs, delivery time and charges, and travel and transportation costs. Internet search engines can search out the lowest prices.

Consumers outside the US, and particularly those in high-income industrialized countries, have watched the emergence of Internet-based commerce through their computer screen with growing fascination. This has not gone unnoticed by their suppliers who are hastening to join the Internet revolution before their customers disappear in cyberspace along with their revenue.

The same advantages of the Internet that spur domestic e-commerce also foster international e-commerce. The Internet makes international advertising and price comparisons possible just as it does domestically. It also reduces transportation costs for digitalized products to zero, making formerly high-transportation-cost international suppliers competitive for these products. On the internet, consumers can buy digitalized products anywhere in the world and have them delivered almost instantaneously for free.

The Moratorium on Customs Duties

The United States, which has a massive comparative advantage in e-commerce and is probably the only country with a whopping surplus in e-trade, is understandably the champion of free trade in digitalized products. On February 19, 1998, it presented a proposal to the WTO General Council calling for an agreement among WTO members "to maintain... current practices not to impose import duties on electronic transmissions." The United States and the EU had earlier reached an agreement on December 5, 1997 "to work together towards a global understanding, as soon as possible, that: (i) when goods are ordered electronically and delivered physically, there will be no additional import duties in relation to the use of electronic means; and (ii) in all other cases relating to electronic commerce, the absence of duties on imports should remain.."

In its May 1998 "Declaration on Global Electronic Commerce," the WTO General Council agreed to establish a comprehensive work programme to examine trade-related issues relating to e-commerce" and to "continue ... current practice of not imposing customs duties on electronic transmissions." The moratorium on customs duties will be reviewed at the Seattle Ministerial in the light of the results of the work programme. It is important that this moratorium be transformed into zero bound tariffs on e-commerce and become a permanent feature of the international trading regime. This dynamic sector must be allowed to flourish and make its full potential contribution to the global economy.

GATT, GATS or What?

E-commerce doesn't fit neatly into one of the WTO's boxes. Goods like books and music CDs that are ordered electronically but delivered physically across the border are covered by the GATT and all the usual customs duties and procedures apply. But if they're digitalized and delivered electronically, there are no duties.

Computer software can also be delivered electronically. But there is no tariff on computer software because of the Information Technology Agreement. The only duty is on the value of the disk or CD containing the software. Thus the issue of different treatment of electronic and physical delivery does not arise.

Some e-commerce such as for professional services could be covered by the GATS if it falls under any of the specific commitments made by countries to provide national treatment. These commitments can vary depending on mode of supply. Is the acquisition of professional services from abroad "cross-border supply" or "consumption abroad?" The answer to this question can make the difference between gaining market access and being denied if the commitment is only with respect to one mode.

On a theoretical level, it's not obvious whether the delivery of digitalized information over the Internet should be considered trade in goods or in services. Some types of e-commerce have a permanency like goods. Others are intangible. To confuse the issue even more, electricity is treated by some countries like a good in their tariff schedules even though it is intangible.

Whether e-commerce is trade in goods or in services is important because it determines whether it should be covered by the GATT or the GATS. There are important distinctions between these two agreements. As noted above, the GATT covers cross-border supply of goods and governs tariffs, whereas the GATS covers cross-border supply of services and commercial presence. The GATT provides for general national treatment, while the GATS only provides for specific national treatment commitments. The GATT has a general prohibition against quantitative restrictions, whereas the GATS permits members to limit market access. If e-commerce were to fall under the GATT and be subject to zero tariffs, it would have much more liberalized market access than it would under the GATS. Nevertheless, because of the widely different characteristics of some of the transactions falling under the rubric of e-commerce, it is unlikely that it will be possible to develop one overall regime for this rapidly growing new form of international trade. Various WTO bodies are looking into these issues and will report on their conclusions at Seattle.

Legal and Regulatory Issues

Regulatory principles that were accepted by the signatories of the WTO Telecommunications Agreement and the GATS Annex on Telecommunications provide the required access to the telecommunications network to carry out e-commerce. This is important in establishing the interconnections necessary for the growth of e-commerce.

The Internet is still the wild, wild west. There are not yet laws and regulations for Internet-based commerce; these will have to be developed. But new laws, rules or regulations should not be any more restrictive than necessary. Complex legal issues must be resolved. For instance, which country's law applies, the buyer or the seller's? Are electronic signatures and documentation sufficient for a legally binding contract? For starters, the OECD has proposed a uniform international commercial code for international electronic commerce.

For international e-commerce to take place, digital signatures and certifications must be interoperable across countries and internationally-accepted encryption methods must be available in all countries. The Secure Electronic Transactions (SET) Standard developed by two of the main credit card issuers meets these criteria. In this case, it's the private sector rather than the government that is providing the framework for e-commerce. While the Internet may have got its initial push in the late 1960s from the government in the guise of the Defense Department and the Advanced Research Projects Network in the United States, the emergence of the World Wide Web in the 1990s that led to the rapid expansion of e-commerce was a private sector development.

Governments will also inevitably want to regulate the content of the Internet. The WTO identifies three categories of regulation of e-commerce. The first seeks to prohibit or control content in the pursuit of universally-shared objectives such as the prohibition of child pornography or other information of a criminal nature. These types of regulation will have broad public support in most countries. The second category of regulation also seeks to prohibit or control content deemed politically subversive by the government. There will be much less agreement about the appropriateness of these types of regulation because the political objectives are not shared by other jurisdictions. The third seeks to protect consumers through licensing or qualification requirements and requirements for the provision of information. These types of regulations are also recognized as useful as long as they are not more restrictive than necessary.

Because of its unique and decentralized nature, the Internet will severely try the capacity of any one government or even governments collectively to regulate. Governments will have to rely on Internet users to regulate themselves to a much greater extent than has ever been the case for any other medium. This is not necessarily a bad thing as it will preserve the flexibility and innovativeness which is the Internet's strength.

The WTO as the watchdog of the international trading system is not in a position to judge the legitimacy of domestic regulatory objectives and their enforcement. However, there are two fundamental principles embodied in all the WTO agreements that it will need to ensure are respected. These are the "non-discrimination" and the "least-restrictive-trade" rules for regulations. The regulations should provide "national treatment" to make sure that foreign e-commerce suppliers are treated the same as domestic suppliers and should provide MFN treatment to make sure that foreign suppliers from different countries are treated equally. The regulations should also be specified so that they are no more trade-distortionary than necessary to achieve their objectives.

The WTO will also have to determine whether e-commerce constitutes "cross-border supply" or "consumption abroad." This has important implications for the national treatment commitments made under the GATS, if that is where e-commerce were to fall.

Intellectual Property

Much e-commerce is in products such as software and information that need to be protected by intellectual property rights. The TRIPS Agreement specifies that "computer programs, whether in source or object code, shall be protected as literary works..." (Article 10:1). Other information including databases is also protected.

It's one thing to have an international agreement that provides protection for digitalized products like software, books, and music. It's another thing to enforce property rights in digitalized product when they can be reproduced at a zero cost and distributed across the web for free. An important issue in the Millennium Round will be to reach agreement on adequate enforcement mechanisms.

Government Procurement on the Net

Government procurement on the Internet is another kind of e-commerce. Governments are routing an increasing share of their procurement through the Internet because it enables them to reach the most suppliers and to get the best prices. It is also an easy way to meet the requirements for openness and transparency in the Government Procurement Agreement. The procurement section of the WTO website has hotlinks to all the member governments procurement sites. As the GPA is modernized and streamlined, the web and e-commerce will play a much larger role.

Free Trade in Digitalized Products

E-commerce has the potential to increase competition and consumer choice throughout the world. It also promises to be a powerful transmission mechanism for the new information technologies that will shape the 21st century. A key objective of the Millennium Round should be to preserve an environment free of tariff and quantitative restrictions for trade in digitalized products. If this objective is met, all of the other questions become secondary.