The Digital Trade Paradox
Can Better Measurement Solve The Productivity Puzzle?
While growth in global trade overall has flattened since the 2008 financial crisis, digital trade has exploded. It is today easier than at any time in history to access education, information, goods or services from any corner of the world.
After several decades of exponential growth at the end of 20thcentury, global trade has shifted into a flattened growth path since the 2008 financial crisis. However, far from declining, the globalisation process, bolstered by digitalization, appears to be thriving. It is today increasingly easier for anyone to access education, information, goods or services from any corner of the world.
These two opposing trends are particularly surprising as trade itself is deeply affected by digitalisation. The lowered cross-border transaction and communication costs increased the market of potential customers for both bigger and smaller companies. International market competition is stronger and both companies and customers benefit from more efficient value chains, more competitive prices and a broader choice of goods. New digital technologies have further triggered a tremendous increase in the international flow of data and ideas.
From the rising number of internet users to the flourishing digital platforms and the growing number of cross-border companies, witnesses of the growing scope of new technologies are numerous. But, although the size and prominence of digital transformation appears undeniable, its effects on trade remain a concerning puzzle for economists. If growing digitalization is widely affecting trade, why is global trade not growing? Why is production not exceeding pre-crisis figures? What share of international trade is data and digital dependant? And, what is hindering the positive impact of digitalisation on production?
The Digital Trade Paradox
The mismatch between a growing new technology and productivity gains is somewhat reminiscent of the Solow productivity paradox that was raised in the 70s and 80s. At that time, despite the growing development of information technologies and the popularisation of computers, the American economy experienced a slowdown in productivity growth. Solow stated surprised: “You can see the computer age everywhere but in the productivity statistics.” The same paradox pattern isrelevant to understanding today’s situation. As the so-called “digital revolution” rises, trade and productivity figures falter.
The Solow paradox of twenty years ago could provide surprisingly helpful hints to understanding the impact of the digital revolution.
- The first argument proposed by Brynjolfsson (Brynjolfsson, 1993) to explain this paradox is the mismeasurement issue. The technological revolution makes the old measurement models unsuitable for new trade structure and transactions. And indeed, the concept of digital trade, although commonly used by experts, policy makers and entrepreneurs appears today much more unclear than it actually is. What should be considered digital trade and what should not be?
Defining and Classifying Digital Trade
Digital trade is polymorphic and omnipresent and de facto extremely difficult to define. Drawing a line between digital and non-digital goods or services is a real puzzle. If a digital book is a digital product, is a physical book ordered online digital? This question calls for the classification of goods, however it not only concerns the product itself but the whole trade system from order to delivery through production. Digitalisation impacts every aspect of trade: it increases the efficiency of the product delivery, it catalyses physical production and value chains, it connects products and consumers internationally and it enables data flows that are, even if non-monetary, creating resources and monetary outcomes.
Embracing and measuring such large modifications and evolutions in trade is naturally a challenge. This challenge starts with setting a definition and a classification of what is and what is not digital trade.
Starting in 2012 with the initiative of the United States International Trade Commission (USITC), further developed by governmental and international organisations (IO), a common definition framework for digital trade, that has been coalescing in recent years, was set. In 2016, the framework setting took a step further as Germany at the Presidency of the G20, set digital trade high on their task list and as OECD, WTO and other IO developed a common collaborative working strategy and intensified their research efforts on the topic of digital trade in general and on its related statistics in particular.
The first definitions to be set were by USITC in 2012 and the US Bureau of Economic Analysis in 2013. If the first one stated that digital trade excludes physical goods with digital counterparts such as books or CDs, the second one included any trade from a “digitally enabled” industry. Unfortunately, from these two first definitions, one could obtain tremendously different results regarding digital trade. The USITC concluded that digital trade has an effect on real GDP ranging between 0.0% and 0.3% (Williamson, 2013) and the US Bureau of Economic Analysis found that digital trade accounted for 56% of service imports and 61% of service exports in 2010, or a surplus of 116 billion dollars (U.S Department of Commerce, 2012).
This example highlights both the difficulty of setting a definition and above all the tremendous gap that can come from the measurement based on different definitions. This lack of a global base framework harms good measurement of digital trade and the resulting research and policy development.
A framework that stands out in recent researches from the OECD, WTO and UNCTAD is the unbundling methodology which enables a good understanding of the diversity in digital trade. This classification is made as followed:
These two frameworks recently set as part of this research group present a first step toward codifying the measurement of digital trade and making the trade policy environment fit properly each kind of transaction. We will see that despite a clearer and more precise definition, the measurement issue has in itself also different challenges to overcome.
Measuring Digital Trade
Like defining digital trade, measuring it is far from straightforward. A non-negligible part of digital trade easily slips through the measurement net. It is also often difficult to pinpoint the exact impact of digital technology on industry and trade.
Once a framework is established, the first issue that comes up in the measurement process is the identification and classification of transactions. In the specified framework, many transactions remain hard to classify. Should a 3D printing transaction be considered trading goods or trading services? Or in the case of ride-sharing platform such as Uber which connects clients and drivers, should the transaction be considered a business or a transport service?
The rising number of under-the-radar and hardly measurable transactions also hinders the good measurement of digital trade. Among those, non-monetary transactions and the exchange of intangible goods can be particularly difficult to measure. A typical non-monetary transaction would be the use of a social media website for free that provides companies, such as Google or Facebook with data that can be used or traded with monetary value. The use of internet has also enabled any digital good to be copied and sent multiple times. And, as these digital goods are often only sold once, they create unaccounted value.
Moreover, digital technologies are catalysts of physical trade flows. “Digital Wrappers” as they are called, enable an increase in productivity by providing valuable information on value chains, production or transportand hence optimize value creation. Such improvementsare however hard to measure and one can ask, to what extent do these digital tools improve productivity and to what extent could industry develop itself without these digital technologies. What is the real value added from digital technologies on physical trade?
Obviouisly, accounting for the net impact of digitalization in trade is a puzzle. The line between what was enabled by digital tools and what could have been done without it is very blurry. Hence, different methods are used in order to assess accurately the impact of digitalization on trade. One is for example to use a proxy such as data flow or e-commerce data (McKinsey, 2016). If this proxy delivers interesting results on digitally enabled trade, it rather poorly captures the increase in productivity enabled by digitalization. On the other hand, as the studyon digital trade proposed by GED project (Bertelsmann, 2016), one can study to what extent sectors are digital-intensive and assess the impact of digitalization on trade depending on the sector. But once again, exhaustive and precise quantification of digital transactions is nearly impossible.
Conclusion: A better and Deeper Understanding of Digital Trade is Essential
Pointing out the challenge in measuring digital trade is the first step in tackling the digital trade issue. Indeed, if this mismeasurement can partly explain the low productivity that our western economies are currently facing, it would be too simplistic to stop there.
In his paper about the Solow paradox, in addition to the measurement issue, Brynjolfsson evokes the learning and adjustment lags of individuals and companies to new technology, as well as, the uneven redistribution of technologies’ benefits and the management challenges. Such explanations are particularly relevant in our situation and must also be addressed.
Digitaltrade raises numerous challenges, but also opportunities for our economy. It is only by first dealing with the measurement issue that sound policies can be developed to regulate digital trade, to protect and benefit all citizens through trade agreements, digital literacy programs, infrastructure development or security and privacy policies.
“the delivery of products and services over either fixed-line or wireless digital networks. This definition includes U.S. domestic commercial activity as well as international trade. It excludes commerce in most physical goods, such as goods ordered online and physical goods that have a digital counterpart such as books and software, music, and movies sold on CDs or DVDs.”
Bertelsmann, S. (2016). Boosting Trade in Services in the Digitalisation Era.Gütersloh: Bertelsmann Stiftung.
Brynjolfsson, E. (1993). “The productivity paradox of information technology. Communications of the ACM., 66–77.
López González, J. a. (2017). Digital Trade: Developing a Framework for Analysis.OECD Trade Policy Papers №205. Paris: OECD Publishing.
McKinsey. (2016).Digital Globalization: The new era for global flows.Mc Kinsey Global Institut.
U.S Department of Commerce. (2012). Trends in Digitally-Enabled Trade in Services.Burea of Economic Analysis.
Williamson, I. a. (2013). Digital Trade in the U.S. and Global Economies.Washington: USITC Publication 4415.