Software is eating trade, digital platforms replacing agreements

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K. Yatish Rajawat | 19 Nov, 2019
Since India rejected RCEP (Regional Comprehensive Economic Partnership) with ASEAN and six other countries, most commentators have focused on reasons for exit. The government has reiterated that it was a decision in the interest of the country. Impact on farmers due to agri-imports impact is one of the dominant reason. There are more powerful forces at play shaping the structure of global trade that India needs to account for in any trade negotiation going forward.

Digitization of global trade converts physical goods into bytes it allows delivery and creation of services. It also creates a set of digital goods which are globally transferable through platforms.
Platte fourme of trade

The term "platform" comes from French plateform or platte fourme, which means "flat form." The word refers to a specific physical artifact: a raised level surface. Global trade in services has been flat much before a NYT columnist popularized the term. Now, in this flat world digital platform are seizing control of global trade. These platform with their global supply chains have become omnipotent and omniscient.

Amazon, JingDing, Alibaba, Rakuten, B2W Copahina Digital are some of the largest E-commerce platform controlling flow of global goods. These powerful brands are known as consumer brands and their impact is seen only on the retail sector. The sectoral myopia obfuscates their impact on global trade. In a way now software is eating trade agreements countries need to wake up to this realization.

Global e-commerce sales grew 13 per cent in 2017, touching $29 trillion, according to data released by United Nations Conference on Trade and Development (UNCTAD) in March 2019. The number of online shoppers, jumped by 12 per cent and stood at 1.3 billion people, or one quarter of the world's population. Though most internet buyers purchased goods and services from domestic vendors, the share of those buying from abroad rose from 15 per cent in 2015 to 21 per cent in 2017. As a result, cross-border business-to-consumer (B2C) sales reached an estimated $412 billion, accounting for almost 11 per cent of total B2C e-commerce, as per UCTAD. These are estimates based on statistics collected by countries and are indicative of the shift of trade through global digital platform. Experts believe that their impact is much larger and growing much faster than the numbers shown by UNCTAD.

Governments cannot fully capture the data of global trade taking place through E-commerce platforms as their systems are not designed to track single package shipments. The American Association of exporters and importers made up of shipping companies estimates that global cross border B2C E-commerce sales will hit $1 trillion by 2020. Most of this growth will come in Asia-Pacific and India is the largest consumer market.

Since the recession of 2008, global trade has remained flat while e-commerce has increased 20% per year. Government everywhere including India is clueless about the impact of these digital platforms. Government's control system for trade like custom duties are focused on large shipments and cannot track or levy duties on single shipments. This is also referred as ‘de minimis provisions' basically the threshold below which no customs duties are collected.

Earlier this year in March 2019, Organization for Economic Co-operation and Development (OECD) set up a working group to measure the impact of digital global trade. Besides, physical goods it includes services and digital goods which are being transferred through these platforms. Digital trade is defined as product that digital ordered and digital delivered.

Movies used to be consumed locally in a cinema and tracked and taxed through ticket sales. Now it is digital ordered and delivered on Netflix. This creates a new category of digital trade is not tracked or monitored by government as a trade item. Airbnb selling hotel services is not captured under global trade, Uber selling taxi services locally but booking revenues globally does not get recognized as an import of service by national statistician tracking trade.

Another complication of digital trade through platform is when the buyer pays it in crypto-currency or from an international bank account or global wallet. Such transaction may not be completed in the country where the consumer or consumption happens.

Similarly, services being rendered by individuals on a global platform are very difficult to track. Their impact on trade is not measured and not taken into account for the purpose of negotiation in FTAs.

As global trade moves to bytes using digital infrastructure like cloud services and E-commerce platforms. The physical intermediaries between buyer and producer vanish as a result identification of taxation and duties become difficult. It also means that digital information of goods can jump several borders before the physical good finally lands in the buyer hands. This creates issues around the origin of the product, sale, profit and resulting transfer pricing norms. The digital data trail of the transaction is crucial in establishing the origin, consumption and taxation. This is not envisaged as part of trade agreements.

Hence, the flow of data on such transactions has to be established. Even to prevent dumping from China through global platforms it is data that will determine the origin of products. Allowing discovery of such data is important for the future of trade.

India has been trying to bring E-commerce under the WTO rules. It also needs to clearly establish guidelines for its usage under the FTAs with ASEAN or any other country.

It is important that data flows be free within countries and conflict resolution on transaction be defined under sovereign laws. A free market defining transaction data in the digital world is the most important consideration in every FTA going forward. Digital transaction has to be linked product origin rules to ensure that there is no dumping happening using electronic platforms. Currently, Chinese companies are dumping in India using FTA, DTAA and E-commerce platforms. This causes enormous harm to India's labor intensive industry.

A crucial inclusion in every FTAs has to be recognition of sovereignty of transaction data. Transactions are rapidly moving from the real world to the digital world. As digital transaction become the norm, taxation and economic growth will be determined by data. It is important that future FTAs acknowledge the source and origin of transactions and India demand sovereign rights over such data. This will prevent conflict around taxation and duties and create a much more conducive environment around trade.