Digital trade and global governance of the digital economy

It is easy to forget that a decade ago, the digital economy was tiny in most countries. This is changing, and in many regions accelerated by the COVID crisis. The global growth of the digital economy has, however, not been matched by the growth of domestic digital firms. Rather, we have seen a growth in digital firms located in technologically-leading economies, operating across multiple markets and often with limited local investments.

This state of affairs has important implications globally, especially for countries who are looking to ‘catch up’ with technologically leading nations. In these contexts, digital development is as much about how policies (at all levels) shape foreign digital firms as it is about nurturing domestic digital economies.

We explore these issues in a recent paper which discusses the way that policies around digital technologies and data flows are becoming entwined with international trade [1]. We specifically look to examine such debates through a political economy perspective. Perhaps when we first started researching this topic a few years ago, connecting digital development outcomes to global political economy was an obscure topic. But in an era of app bans and global trade wars driven by a desire to control advanced technologies, political economy approaches are becoming ever more important.

Global governance and digital trade

Emerging from the birth of the Internet, so-called “Internet Governance” (IG) organisations were designed to govern technical issues as the Internet expanded globally (e.g. IP address allocations and standards). While there have been attempts to bring broader economic and social issues under the IG umbrella, the lack of formal rule making power limited the political power of these organisations.

As cross-border flows of data have expanded globally, actors have sought to integrate the governance of digital technologies and data within rule making on trade, typically referred to as “digital trade”. The goal of trade agreements is to encourage free-trade across borders. Following this, digital trade chapters in trade agreements look to enforce “open” digital trade, for example in binding commitments to “free flows of data” across borders and rules to prevent signatories undertaking certain domestic policies around digital and data [2]. The CPTPP (11 nations bordering the Pacific) and the USMCA (US, Mexico, Canada) are examples of recent trade agreements that include chapters with binding “digital trade” rules.

Clearly digital technologies and data have overlaps with trade, particularly in areas like e-commerce. But it is not clear if trade agreements are the most appropriate place to globally regulate digital and data [3]. From a political economy perspective, one can associate the growth of digital trade with the power of technologically advanced nations such as the US and Japan who seek to more strictly govern global norms around digital, and push open data flows. These nations are strongly backed by lobbying of ‘big tech’ firms who see such open digital trade as central to their global expansion.

Trade agreements are powerful because they offer binding rules unlike other spaces of global governance. In addition, dispute settlement mechanisms in trade agreements mean that signatories who break rules can face serious consequences. Even for a nation with a small digital economy, trade agreements can mean that breaking digital trade rules will lead to retaliatory tariffs in other sectors.

Ultimately the inclusion of digital trade in trade agreements (regional and bilateral) is a first step to powerful nations establishing digital trade rules at a global level. This would be through digital trade agreements in the World Trade Organisation (WTO). Digital trade rules at the WTO are controversial, not only because they look to enforce open digital trade globally, but because they potentially override existing trade agreements where developing countries have negotiated exceptions (such as the General Agreement on Trade in Services – GATS). These exceptions are thrown into question if goods and services that are transmitted digitally are subject to new rules [4].

This is best illustrated in the case of financial services, where some developing countries are permitted in WTO agreements to impose regulations on foreign operators to support development. But when a financial service becomes an application which is delivered digitally, how this is regulated can become a grey area. Would developing countries be able to continue to legitimately impose barriers, or would they be prevented if digital trade rules were present?

Global conflicts around digital trade

The path to binding digital trade rules within trade agreements has not so far been a smooth path. There is significant divergence in positions across powerful countries, including in Europe and China who see more strategic approaches and policy around digital as being an important part of their future development.

Vocal opponents to digital trade have also come from developing countries, especially India, South Africa and the “WTO Africa Group” [5]. They have opposed such rules arguing that they would override previous trade agreements, and potentially limit them undertaking new types of “industrial policy” to catch up in the digital area [6].

So far these alliances, alongside the recent anti-international approach of the Trump administration, has meant that digital trade has moved slowly and mainly in regional and bilateral agreements. But this story is still unfolding, and the political economy of digital trade is liable to change rapidly in the future.

These tensions are not just of policy concern. From licencing apps in the gig economy, to supporting local data pools for community development, to taxing the digital economy. Digital trade touches on crucial future directions of digital development [2].

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References

[1] Azmeh, S., Foster, C.G. & Echavarri, J. (2020) The International Trade Regime and the Quest for Free Digital Trade. International Studies Review, 22(3), pp. 671–692.

[2] For details on specific policies on digital trade, we have launched an accompanying website – The digital trade tracker tracks digital trade policy and its relevance to development

[3] Aaronson, S.A. (2016) The Digital Trade Imbalance and Its Implications for Internet Governance, Paper 25, Centre for International Governance Innovation, Waterloo, Canada.

[4] Kelsey, J. (2018) How a TPP-Style E-Commerce Outcome in the WTO Would Endanger the Development Dimension of the GATS Acquis (and Potentially the WTO). Journal of International Economic Law, 21(2), pp. 273–295.

[5] Foster, C. & Azmeh, S. (2018) The Digital Trade Agenda and Africa. Bridges Africa, 7(2). Available at https://infomediation.net/publication-the-digital-trade-agenda-and-africa/

[6] Foster, C.G. & Azmeh, S. (2020) Latecomer Economies and National Digital Policy: An Industrial Policy Perspective. Journal of Development Studies, 56(7), pp. 1247–1262.

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Image Credit: Kofi Annan, Monhla Hlahla and Gao Xiqing – World Economic Forum on Africa 2012 – Wikimedia Commons – CC Attribution Sharealike

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Digitally Removing the Middleman for Development: Trouble Brewing in East African Tea?

How do new digital technologies enable firms to develop? One process often highlighted is disintermediation, where digital technologies allow firms to “cut out the middleman”. Exploring the Kenyan tea auction we suggest that these ideas need to be rethought. Digital technologies bring change, but may lead to more challenging conditions for smaller firms.

 

The Mombasa auction. Source: Wikimedia Commons

 

One of the benefits often associated with digital technologies is the potential for disintermediation – or put more simply “cutting out the middleman”. This concept forms the basis for many hopes for development around digital technologies [1].

In the early days of digital technologies, it was found that they often failed to cut out the middleman due to the “digital divide” where digital skills, infrastructure quality and cost limited the use of technologies in smaller firms. But as firms have adopted technologies and with appropriate applications these foundational claims for digital development are important to revisit.

 

Digitalising the tea sector

Tea is an important export in East Africa and twice a week sellers come together in the Mombasa tea auction to trade tea with international buyers. The tea auction emerged during the colonial era, and with its antiquated traditions, slow speed, and accusations of corruption, there have been demands to move online.

An online auction would speed up the processes of trading by cutting out the middlemen in tea value chains (see below) and allowing tea producers to sell more directly to international buyers.

 

Roles of middlemen in the tea value chain: The tea trade centre in Mombasa, home to the tea auction (left); tea tasting (middle); auction warehousing of tea lots (right).
Source: Photos courtesy of Laura Mann.

 

The auction seems a good fit for digital disintermediation in terms of economic models of transactions [2]. Trade is predictable with a limited number of traders and a strong sectoral governing body. With falling costs of online access in the region, a digital auction seemed viable, particularly as competitor regions such as Sri Lanka and India are already in the process of digitalising their auctions.

 

Challenges faced in the tea sector

While on paper the case seems promising, change has not taken place as expected. An “e-auction” trial was abandoned and over the past decade, digitalisation has been slow and frequently resisted.

In discussion with key stakeholders involved in the auction, we identified three challenges:

• The nature of transactions: Tea transactions are often seen as generic and simple to trade, and so well suited to online exchange. But tea trading is becoming more complex.  Tasting the quality of tea, for example, is important to buyers who are mixing different teas together to produce retail products, and there is also a growth in value-added teas where buyers need extra information about ethical standards they want met. These factors make moving trading online more complex, where more complex factors need to be included in a digital system.
• The types of institution: Well-established rules and governance in the tea sector limit the ability to reform the tea auction. The balance of power in sectoral bodies is often skewed towards middlemen, exactly those who might be cut out by digital technologies. This meant that any kind of reform was strongly resisted by sectoral bodies.
• Middlemen adaptation: Eventually after much resistance, aspects of the tea auction were partially digitalised such as e-payments and digital auction catalogues. This did have an effect of reducing certain roles connected to the auction. But the intermediaries did not disappear. They adapted and took up new roles. For example, tea brokers who were previously important in facilitating payments repositioned themselves as providers of auction intelligence and price data for small tea producers.

A key finding related to these challenges was that international firms, dissatisfied with the slow pace of change, began to sidestep the auction by becoming involved in “direct sales” with selected producers, supported by digital technologies.

 

Making sense of digital disintermediation

The future for tea trade in East Africa is fragmentation which may be detrimental to smaller tea producers. Smaller tea producers were not connected enough to become part of “direct sales” with international firms. With the auction only slowly digitalising, it is falling behind as the centre of trading.

For the analysis of digital disintermediation, the case highlights the need for careful consideration of transactions: the nature of transactions, the role of institutions and potential externalities (such of adaptation of middlemen) [3]. These are factors that implementers might consider to better support small producers’ development outcomes from digitalisation – what are the institutional bodies that need to buy in? Which stakeholders should be considered? etc.

More than this though, a greater awareness of the way actors use their power as change occurs is crucial. Such an approach is very different from the abstract, economic approach normally used to explore digital disintermediation [4]. From this perspective a very different view of development emerges. In the Mombasa auction case, it has not been transformed. Through the challenges and strategic activities of more powerful actors, digital transactions are solidifying the relationships of those who are already well linked, and able to capture resources.

 

This post summarises a recent book chapter: ‘Making Sense of Digital Disintermediation and Development: The Case of the Mombasa Tea Auction’ by Chris Foster, Mark Graham and Timothy Mwolo Waema.

The chapter is part of the new MIT Press book ‘Digital Economies at Global Margins’. The book is available as an open-access PDF from the IDRC website

 

 

Notes:

[1] A good example is the World Development Report (2016) on ‘Digital Dividends’, but many other projects often uncritically assume similar concepts.

[2] In economics, disintermediation is often associated with transaction costs, and an analysis of how digital technologies change aspects of transactions costs: information costs (gathering information about transactions) and coordination cost (co-ordinating the exchange of goods) (e.g. Wigand 1997).

[3] The study of transaction costs can be split into two differing perspectives. The “neoclassical approach” focussing on the mechanics of transactions such as coordination and information costs, and “property rights approaches” which explore wider aspects of transactions such as rules, regulations and externalities (Allen 1999). We suggest that digital disintermediation has been too focussed on narrow “neoclassical” perspectives to date.

[4] Contemporary institutional analysis often explores political power and settlements in shaping institutions. We also stress this aspect here, highlighting the importance of power in shaping institutions, and in turn the outcomes of digital disintermediation.

 

 

References:

Allen, D.W. (1999) Transaction Costs, in Encyclopedia of Law and Economics, B. Bouckaert & G. De Geest (eds), Edward Elgar, Cheltenham, UK, pp. 893–926.

Wigand, R.T. (1997) Electronic Commerce: Definition, Theory, and Context. The Information Society, 13(1), pp. 1–16.

World Bank (2016) World Development Report 2016: Digital Dividends, World Bank, Washington, D.C.