Digital trade is rising in Africa and throughout the world. How can it be managed to deliver development outcomes? This article appraises the challenges and opportunities related to digital trade for African countries, as well as the scope for national and international solutions.

When it comes to the digital economy in Africa, there has been a polarised debate between its cheerleaders and sceptics. This article takes the middle road, arguing that while the rise of digital trade brings with it many challenges for developing countries, it can clearly be a tool for development. What matters, then, is how the tool of digital trade is used. So the question becomes: How exactly can it be handled such that it delivers development in Africa?

Why worry?

Developing countries, including many in Africa, stand on the precipice of a digital divide from which it can be difficult to contemplate the beneficiaries of digital trade as being any other than the most developed countries.

Firstly, there is fear of the distributional implications between countries. Digital trade is perceived as amounting to skill-biased technological change: that which favours skilled over unskilled labour. Developing countries lack skilled workers relative to developed countries, and based on this, there is concern that digital trade will benefit the latter at the expense of the former.

Secondly, there are concerns that digital trade embodies network effects that can lead to market concentration and in turn lead to anti-competition issues. For instance, large e-commerce platforms such as Amazon – which accounts for half of all online expenditure in the US – collect vast amounts of increasingly valuable data on their customers. This data can then be used to outcompete smaller rivals which lack access to such data.[1] This can lead not only to serious anticompetitive threats, but also to high market concentration in developed countries.

Thirdly, there is concern that digital trade may better allow international companies to distort their taxable income through transfer pricing. For instance, if the intellectual property and operating expertise behind cross-border e-commerce is located abroad, then the cost of this may be deducted from locally generated sales to reduce taxable income in a given country.

Finally, what does the growth of the digital economy imply for the export-oriented industrialisation strategy that has historically fuelled many countries’ development? New technologies, like 3D printing and increased automation, reduce demand for labour-intensive manufacturing. Some worry that these technologies will reduce the incentives for businesses to invest in manufacturing in low-labour cost developing countries – a phenomenon traditionally at the heart of many countries’ industrialisation.

But digital trade also presents clear opportunities

Digital trade is of particular benefit to micro, small, and medium-sized enterprises (MSMEs), and more than 80 percent of enterprises in Africa are MSMEs.[2] It can help them connect with purchasers abroad for cross-border orders and provide the supportive services necessary to facilitate their exports, including simplified payments and logistics.

For instance, firms in developing countries such as Chile, Jordan, Peru, or South Africa can advertise and sell their products to foreign markets through eBay and other e-commerce platforms.[3] Beyond goods, professional service platforms such as Freelancer.com and Upwork.com connect professionals in developing countries to freelance opportunities around the world. Here, digital trade provides an unrivalled service for the MSMEs of African and other developing countries.

Digital trade can also be a tool for boosting intra-regional trade, as demonstrated by MercadoLibre – the largest online marketplace in Latin America –, which helps foster intra-regional trade by connecting buyers and sellers in this region, and providing online payment services for the regional businesses that do not have bank accounts.[4]

On the other side of the equation, digital trade is of considerable benefit to consumer welfare. It provides new possibilities for more effectively searching for, paying for, and receiving delivery of traditional goods and services, as well as access to wholly new digital products.

But perhaps most significantly, digital trade is largely inevitable. There is relatively little that can be done in terms of digital protectionism that does not impose significant economic costs. For example, data localisation requirements, which require data to be stored or processed locally, are estimated to have implied substantial negative effects on the GDP of Brazil (-0.8 percent), the EU (-1.1 percent), India (-0.8  percent), Indonesia (-0.7 percent), and the Republic of Korea (-1.1 percent), with even stronger negative implications for investments and welfare.[5] The solution is to craft a system of governance that addresses the challenges of digital trade while seizing its opportunities.

National governance

Having considered the benefits and challenges of e-commerce, and its inevitability, policymakers must seek to integrate digital trade into their development planning.

Some African countries are actively involved in UNCTAD’s “eTrade for All” initiative. This is a platform through which policymakers can deepen their understanding of the opportunities, challenges, and solutions relating to leveraging digital trade for development. Others, such as Cote d’Ivoire, have utilised the resources of the International Trade Centre to develop e-strategies. Doing so can help ensure that digital trade is, rather than a threat to African industrialisation, used for its breadth of opportunities.

On the particular challenges of market concentration, anti-competition, and taxation of cross-border digital trade enterprises, countries must develop the appropriate measures of regulatory governance. For instance, policies such as mandatory data-sharing can make data available to local competitors such that it does not pose an anti-competitive challenge. One example of such a regulation is the EU’s General Data Protection Regulation, which will apply from May 2018, requiring online service suppliers to make it easy for customers to transfer their information to other providers and even competitors.

Another approach is to devise better competition regulations to treat large e-commerce platforms like the traditional natural monopolies to which they bear resemblance.[6] E-commerce platforms operate similarly to utilities, providing critical marketing, payment, and delivery services to the businesses that operate on them. New approaches to competition policy can account for this. Similarly, new approaches to taxation can address the new business models of the digital trade era.

If the abovementioned threats can be managed, digital trade can be harnessed for its many developmental benefits. However, some of these challenges spread across borders, and will thus require international cooperation to design and implement appropriate solutions.

International governance

Digital trade is global in nature, and so international solutions are also necessary. These can relate to consumer confidence enhancing measures, like frameworks for cross-border consumer protection, data privacy, or cyber security that help consumers feel safe when shopping online, as well as measures, such as those proposed at the WTO, for ensuring cross-border data flows, supporting e-payments, ensuring the validity of e-signatures and e-authorisations, or promoting electronic single windows.

At the WTO’s Eleventh Ministerial Conference (MC11) in December 2017, trade ministers failed to agree to even a ministerial declaration. There was a failure, too, to advance on any of the so-called “new issues”, including e-commerce. The most likely pathway ahead is that of plurilateral deals. Already by the end of MC11, a joint ministerial statement on e-commerce had been issued by 71 members of the WTO, including Nigeria. This group will “initiate exploratory work together toward future WTO negotiations on trade-related aspects of electronic commerce.” Such an approach ostensibly allows willing countries to move ahead on issues in which they find agreement and conclude plurilateral agreements, which other countries could subsequently join when ready. However, it risks establishing as international norms rules that are inappropriate for the countries which are not party to the negotiations. The WTO may, furthermore, not be the ideal platform for negotiations on these issues, which encompass aspects that extend far beyond the traditional trade issues that comprise its mandate.

If progress is impossible at the multilateral level, negotiations on e-commerce can move at the regional level. A regional approach is a reformulation of the plurilateral way forward posited above, but through which countries can build upon their regional similarities and existing regional infrastructure to more easily find agreement.

African countries are aware that their small and fragmented domestic markets will impede the long-term development of their own e-commerce enterprises. They understand that as a regional grouping, they also stand on a more even footing when it comes to e-commerce capability than when they stand by the full spectrum of WTO members. They have more similar appetites for particular digital trade rules. Perhaps most pertinently though, they have already at hand the ideal platform: as negotiations for the first phase of the African Continental Free Trade Area come to a close, negotiators are now looking to phase two issues, including investment, intellectual property, competition, and potentially also e-commerce.

Regional approaches work. The ASEAN region has achieved much success in cooperating over issues of digital trade facilitation, infrastructure gaps, access to payment solutions, and online security through a Coordinating Committee on E-Commerce. The EU has prioritised the creation of a “Digital Single Market” to harmonise policies for a more effective digital marketplace. In Africa, the African Continental Free Trade Area could serve as a basis.

Conclusions

Digital trade presents a number of challenges for African and other developing countries, but these should not dissuade such countries from pursing the clear benefits that it can bring. Instead, the solution is to design a system of governance that would both tackle the challenges associated with digital trade and capitalise on the opportunities it offers. Doing so will require governance measures at the national level, including through development planning that integrates digital trade to e-strategies, as well as regulations appropriate for the new challenges of the digital trade era. Digital trade being fundamentally global, international solutions must also be crafted. While agreement at the multilateral level seems as yet far off, regional approaches offer promising opportunities. For Africa, this includes using the African Continental Free Trade Area as a platform for cooperating over digital trade issues and creating an improved digital market in Africa.

Jamie MacLeod is Trade Policy Fellow, African Trade Policy Centre (ATPC) at the UN Economic Commission for Africa.

This article is published under Bridges Africa, Volume 7 - Number 2, by the ICTSD.

---

[1] LaVecchia O & S Mitchell. “Amazon’s Stranglehold: How the Company’s Tightening Grip Is Stifling Competition, Eroding Jobs, and Threatening Communities.” Institute for Local Self-Reliance, 2016.

[2] World Finance. “SME growth key to Africa’s future, says African Guarantee Fund.” 18 November 2014.

[3] World Bank. World Development Report 2016: Digital Dividends. Washington, DC: World Bank Group, 2016.

[4] Ibid.

[5] Bauer, Matthias, et al. “The Costs of Data Localisation: Friendly Fire on Economic Recovery.” ECIPE Occasional Paper 3. Brussels: ECIPE, 2014.

[6] Khan, Lina. “Amazon’s antitrust paradox.” The Yale Law Journal 126, no. 3 (2017).