The minor rules shaping the development impacts of digital marketplaces.

As e-commerce and platform-based trading expand across the globe, one of the major developmental claims is that digital marketplace trading might unleash small firm creativity and profits. Selling online, even reaching lucrative foreign customers, has been a key ambition for many small firms and part of wider digital development policies.

An important question for researchers would be whether the current rules and logistics systems genuinely support such small firms. If these favour larger firms or foreign sellers, they may be the ones who benefit from expanding e-commerce apps and platforms.

A key area of policy are the fundamental rules on how goods are imported and exported when they are sold on e-commerce platforms. Recent research shining a light on such rules highlights a complex and understudied area of policy [1]. Below I will argue that prevalent directions, although pitched as developmentally beneficial, are much more ambiguous and could lead to counterintuitive and problematic outcomes.

The role of small-package logistics

Many cross-border marketplaces in the global south, such as Jumia, Lazada and Shopee operate using cross-border platform models. Rather than running operations within a single territory, they operate regionally integrated business models.

In comparison to global north countries, this results in major differences in how logistics are organised. Where e-commerce platforms operate marketplaces independently in each country, the “downstream logistics” to the customer takes place in-country (i.e. from a local warehouse to a local customer). In contrast, in cross-border platforms, goods being sold may not be available in local warehouses. When a consumers makes an order, logistics then have a cross-border component.

The most common way such goods are transported across borders is through “small-package trade”. Sellers on marketplace platforms will package each sale individually, sending them through cross-border delivery or third-party (3PL) logistics firms such as FedEx, DHL and many others.

Why small package trade is a norm, is a quirk of history. Prior to the Internet, parcel trade was seen as a niche, individual-to-individual exchange. Under the assumption that these parcels were low volume and low value, they were subject to lower regulation (in comparison to general trade) making them quicker and cheaper.

This is specified by so-called de minimis rules on trade (roughly translated as “lacking significance or importance”). So the argument goes, the cost of trade regulation, taxation or other documentation checks for small packaging trade would have higher costs than benefits. As such they are less regulated.

As e-commerce trade has expanded globally, small parcel logistics has rapidly expanded particularly in global south countries. What does it mean when these rules, that are a quirk of history, become mainstream?

Small-package logistics for the digital age

When e-commerce is in its infancy in a country, small package logistics can support the emergence of digital marketplaces. As cross-border models expand though, countries may struggle to handle the unruly volume of small packages. This will require investments and upgrading to allow small package logistics to work in the digital age.

Support has readily come from private firms and donors. When the Russian postal system was reportedly struggling under the weight of small packages, it was Alibaba that stepped in to support and invest. Other marketplace platforms, global logistics firms and payment providers have also readily supported this through investments, partnerships and technical support.

There has also been action at an international level. Rules on small packages can still be variable across different countries [2]. Discussions within the WTO and regional “digital trade” agreements have begun to touch on these topics [3]. The goal here is that countries make binding commitments to equalise rules on small packages for e-commerce. Ambitions often go further than this. Global south countries are pressured into higher threshold levels – allowing higher-value goods to be considered small packages – with more agile cross-border e-commerce potentially emerging.

These campaigns for expanded small package logistics have been closely associated with development. Within major discussions on “e-commerce for development” or “aid for e-trade”, maximising small package trade is seen as a key to pushing SMEs in the global south to be part of regional markets. So it is argued, in the digital age, we need to remove any logistics barriers to allow creative “micro multinationals” to operate more regionally or globally.

The deregulatory dynamics of rules

There is, however, another side to this debate. The emergence of small package logistics in e-commerce is having major regulatory challenges. Goods that go through traditional general trade (i.e. imported/exported in bulk) are supported by a well-agreed global system with regular tariffs, rules, procedures, checks and taxes. As more goods move through small package delivery these rules are side-stepped by the less regulated system of small package trade.

This has significant implications. The most direct impact is that it often gives foreign firms an unfair advantage in cross-border marketplaces involving global south countries. With e-commerce small packages not needing to go through detailed checks and with lower taxes, foreign firms may be at an economic advantage (including lower taxes and regulation) over local producers (who pay local taxes, VAT etc).

Evidence from Malaysia, for example, showed some such evidence when the country upgraded its small-package systems [4]. Even though a few local SMEs were able to gain through integrating better with Chinese platforms and exporting small packages, this was dwarfed by the expansion of cheap online goods imported into Malaysia. Local firms were being “crowded out” by Chinese imports – leading to net national losses.

With e-commerce expansion, regulation may also begin to risk eroding an important tax base. For many developing countries, industrial policies have also been an important measure to develop local skills and industries. One way these are applied is through tariffs or quotas on foreign trade. For example, by focusing policy on imports of certain goods (such as clothing, machinery, and certain technologies) a country might seek to support domestic industries in this area. Within the deregulated system with expanding small packages, these strategies become more difficult.

Conclusion

Small package logistics is rarely discussed and when it is, it is seen as a developmental good. However, with significant tensions and choices to be made by developing countries, there needs to be more critical analysis. At present, there has been a strong skew towards pushing small package logistics expansion in the name of efficiency and development. But it might be useful to consider this further. There needs to be a discussion of alternative approaches that have longer-term benefits for smaller nations and reduce the risks of deregulation and crowding out.

As an illustration, Chinese policymakers, well aware of the growing challenges of small packages e-commerce have sought to radically reform their e-commerce logistics systems [1]. In legislation enacted in recent years, rather than deregulate small packages, they look to redefine and guide cross-border e-commerce much more strongly. Although these Chinese rules have their own challenges, they highlight that there may be alternatives to the small-package logistics orthodoxy for digital marketplaces.

References

[1] This paper summarises a recent working paper:

Foster, C.G. (2023) Shaping a Digitalising Infrastructure: Logistics and the Dynamics of Chinese-Southeast Asian e-Commerce, Digital Development Working Paper Series, 102, University of Manchester, Manchester, UK.

[2] For example, the de minimis level a maximum package value under which small packages are subject to lower regulation varies across the globe. In Australia it is 1000AUD ($660) in Costa Rica, the level is $50, in Indonesia it is $3, in Kenya and Tanzania it is $0. Even where this level is similar, different types of deregulation may apply

[3] For example, in the WTO Trade Facilitation Agreement, all signatories agreed to “provide, to the extent possible, for a de minimis shipment value or dutiable amount for which customs duties and taxes will not be collected”

[4] Yean, T.S. (2018) The Digital Free Trade Zone (DFTZ): Putting Malaysia’s SMEs onto the Digital Silk Road, Hong Kong Trade Development Council, Hong Kong.