Digital Delivery of Services: Considerations for 21 st Century Policy Development

1. Digital Delivery of Services: Considerations for 21st Century Policy Development PECC-ADBI Services Task Force – Workshop for the APEC Group on Services Sherry Stephenson Organization of American States (OAS) Kazan, Russia May 25th 2012

2. Main Points • Factors driving the growing digital delivery of services; gains from this trade • Defining digital delivery: statistical challenges • Major threats to digital exchange • Policy responses to challenges to digital trade expansion • Renegotiating the ITU Treaty

3. What Factors are driving the Digital Delivery of Services? • Strong decrease in price for IT (information, communication technology) services • Higher labor productivity for digitally-enabled services • Increase in scope for tradable services: nearly all services can be considered as potentially “exportable” in today’s modern economies • Cross-border services trade now account for 27% of global exports (as measured); much of this is digitally enabled; plus “embodied” cross-border services represent much higher percentage of trade

4. Gains to be had from Digital, Cross-Border Trade • It is estimated that a 10% increase in Broadband availability equals a 1% increase in economic growth in developing countries • Jobs associated with “exportable” services are higher skilled and better paying than other jobs in national economies • For example, in U.S. value of exports per job in services is higher than that in manufactures ($230 vs. $164 per job), and labor productivity is also higher Highest value activities in services export area are: financial and insurance; film/ television distribution; business and professional services [Note: business services fastest growing component of world trade and important export for many APEC member economies]

5. Gains to be had from Digital, Cross-Border Trade • Electronic trade enables SMEs to compete and grow • Allows them to reach customers by leveraging ICT tools (e.g. cloud computing, web hosting and social networking tools) • Allows SMEs to serve regional or global customers via e-commerce platforms, or to manage their sales via online services (based in data centers in any location) • Ensures access to advanced technology and services as inputs for other productive activities – both manufacturing and services – thus making the entire economy more productive • Increases competition in advanced services and digital products, reducing costs and helping innovation • Creates new export opportunities for ICT-enabled services and digital products

6. Defining Digital Delivery -Services UNCTAD has produced a broad definition that is generally used - However, difficult to know what this actually covers in statistical terms • Data inadequacy in services area is enormous; this can lead to wrong policy decisions • Need to define digitally enabled services better in order to get more accurate grip on Mode 1, which is a very important form of service delivery for developing countries • Some digits in digital trade also contain content

7. Modal Neutrality • Most services delivery is of a mixed mode: a combination of Modes 1, 3, 4 • This underlines the importance of allowing service providers to choose the mode of supply most efficient and convenient for them, or the combination, to serve a given market • Combination can change over time • Concept of “MODAL NEUTRALITY”

8. Cyber Crime Data Retention requirements Hacker Attacks Data Privacy Security Issues Note: These are all legitimate concerns. But governments can choose to regulate in such a way that the regulations become restrictions to trade. Caution: Protective measures can very easily become protectionist measures. Major Threats to Digital Trade in Services

9. Another Challenge to Formulating Digital Trade Policy: GVCs New structure of world trade in form of global value chains Digitally enabled trade through cross-border services is KEY to operation of these GVCs But not captured in trade statistics at present so not well appreciated East Asian is region with greatest participation in GVCs Asia’s share in world exports of intermediate goods trade has grown the fastest - from 26% to 35% between 1995 and 2009 WTO-JETRO Study on: Trade patterns and global value chains in East Asia (2011)

10. Examples of Regulatory Measures that can Block Digital Trade • Requirements for in-country processing of financial or other types of data • Data protection requirements (Excessive EU standards?) • US Patriot Act, requiring use of US servers • Blocking of search engines in several countries • Regulations on IT; requirements for the use of local servers, among others – forced localization requirements • Cross-border disciplines are lacking in most trade agreements to deal with the above • in statistical source of service trade - IMF BOP Manual 6 - lists only 12 categories vs. 6,000 items for goods trade • OECD Statistics on International Trade: 34 OECD members adopted the EBOPS 10 categories reporting on 58 sub-sectors

11. Barriers to Services Trade… • Not in the familiar form of ad valorem tariffs • Often take the form of lump-sum costs to enter a market • Quantitative research to date has focused on estimating tariff equivalents for an amalgam of service barriers • To more traditional barriers (licensing, etc.) must now add regulatory measures that impede cross-border, digital trade

12. Barriers to Services Trade… • WB has data base of services restrictive measures to be released soon • Data base includes 105 countries; 5 sectors; for 3 of these sectors, both modes 1 and 3 • Only measures of explicit discrimination are included: Many measures affecting digital trade are not explicitly discriminatory BUT can have a ‘de facto’ discriminatory effect • This makes such measures difficult to identify and important to discipline

14. Another challenge to the operation of Digital Trade: new ITU Treaty • ITU Treaty will be re-negotiated in December 2012 in Dubai • Treaty governs operation of telecommunications and defines international telecom policy • Present treaty in effect since 1988; world of telecom / internet has changed dramatically since then • Some proposals on table would regulate operation of internet ; goals here must be carefully examined so that the new ITU Treaty does not impede digital trade and its growth potential for world economy, especially developing countries – excessively rigid regulations would have negative effect

15. Possible Policy Responses to Challenges to Digital Trade • First, better understanding of operation of Global Value Chains is necessary • Second, inclusion of disciplines in trade agreements that address digital trade What could such disciplines be? 1. Attaching the right to move data to a service activity carried out through either Mode 1 or Mode 3 for any service (and investment) included in the agreement 2. Including right to put data centers / computing facilities in any location, without specific location requirements 3. For privacy and security objectives, including the right to regulate on a reasonable basis, without impeding the movement of data • Dialogue with industry can help government better understand what its needs are

16. Balance must be sought • Balance must be sought by policy officials between creating accountable regulatory regimes, allowing for the operation of GVCs and providing enough domestic policy freedom • Caution: the more narrow the rules developed for digital trade, the greater danger that something will fall outside their scope- • Many benefits to be gained through allowing for growth of digitally enabled trade – way of the future – and facilitating the operation of GVCs

17. PECC-ADBI Services Task Force sstephenson@oas.org Thank You