PAST: Rethinking Services Trade in a Digital World

TKE Partners, Frontier Economics and the UK Trade Policy Observatory co-hosted a working session on “Rethinking Services Trade in a Digital World”, at the World Trade Organisation’s 2019 Public Forum in Geneva.

The session was chaired by Professor L. Alan Winters (Sussex University), and featured presentations by Cosmina Dorobantu (Alan Turing Institute), Ingo Borchert (Sussex University), and Amar Breckenridge (Frontier Economics).

Speakers looked at four key clusters of issues:

1. How digitisation reduces trade costs in services,
2. How we can write trade rules that reflect the digital economy,
3. What digitisation offers SMEs in services trade,
4. Across all these dimensions, what is at stake for developing countries specifically.

A full audio recording of the event is available here.

Digitisation has had fundamental effects on trade, primarily through changes to the way in which production is organised by firms, between firms and across sectors. The main trends we have seen over the last two decades are:

• A breakdown in the distinction between goods and services. This is partly due to the emergence of new technologies, such as 3D printing and streaming, as well as the emergence of product bundles combining goods and services offerings when firms take advantage of economies of scope.
• In services trade specifically, the distinction between traditional modes of supply has been blurred, while, particularly in B2B services trade, supply chains have lengthened because the falling costs of data storage and processing have increased the gains from specialisation.
• Data are the fulcrum of digital trade, as they are both trade-enabling and tradable commodities. Data also raise deep issues of regulation because of their interaction with security and privacy matters.
• Market power and concentration effects in digital platforms reflect economies of scale, scope and the existence of network effects. These effects raise issues of competition policy and taxation that are generally outside the scope of trade rules, but are necessary complements to trade policy discussions.
• Digitisation has lowered the fixed costs of market entry, making it easier for smaller firms to trade. It has also contributed to eroding the effects of distance on trade.
• Empirically, trade costs for services have fallen, consistent with the notion that digitisation has led to greater cross-border tradability of services
• A greater awareness of the effects of bounded rationality on the part of consumers, whose preferences are to some degree endogenous to information and subject to manipulation.

The current architecture of services trade under the GATS reflects a series of pragmatic choices embedded in the political economy of services trade in the 1980s and 1990s. It was already clear then that further work on that architecture was necessary. Digitisation has only increased that need to the point that a redesign, rather than an incremental change, is required.

One of the core difficulties is the selective application of non-discrimination (specifically national treatment provisions) on a selective basis by sector and modes of supply. Because digitisation is breaking down these distinctions (witness the heated debates in competition policy and regulatory spheres on precisely how one should characterise services provided by Uber or Amazon), at best, commitments are hard to read, and, worse, they lead to attempts at regulatory arbitrage by business and governments. Moreover, in a world where technological developments are hard to predict even a year in advance, a general commitment to non-discrimination would provide a much cleaner default option.

An overhaul along these lines would require that we look much more closely at how regulation is addressed under services trade rules. General principles, such as those found in goods trade, that are consistent with good regulatory practice seem an obvious starting point.  The complexity of the trade-regulatory interface should not be underestimated, however. An increasing number of jurisdictions  are regulating matters such as protection and access to data. The issue of source codes has found its way into trade disciplines. And there is considerable debate about whether and, if so, how far platforms should be regulated, on matters ranging from market power and whether, for example, to enforce access to data as a way of mitigating this, to their degree of responsibility for content.

Given all this, what is  required is a way for partners to cooperate on the development of regulation. Regulation fits in less well with the traditional bartering approach to concessions that allowed the “OId GATT magic” to work and deliver trade liberalisation in tariffs. There is no presumption that less regulation is better, and good regulation is context-specific. This calls for an approach to building institutions, based on cooperation and peer-review, rather than an adversarial approach backed up with the treat of litigation.