The intricacies, impact and opportunities of e-commerce for trade and development
The world is increasingly going digital. This creates both opportunities and challenges, calling for changes to existing policies and adoption of new policies in many areas. Many countries are poorly prepared.
One striking way that digitalization is impacting our economies is through growth in e-commerce. According to UNCTAD’s latest estimates, global e-commerce sales in 2018 amounted to $25.6 trillion, up 8% over 2017.
A growing share of e-commerce involves cross-border sales and therefore contributes to international trade. For example, the share of the 1.45 billion online shoppers worldwide that made cross-border purchases rose from 17% in 2016 to 23% in 2018.
The value of e-commerce and contactless payments has been accentuated by the current COVID-19 crisis, provoking actions by governments.
Much of this digital innovation is taking place in Africa. In Senegal, the Ministry of Trade and SMEs is partnering with the private sector to facilitate delivery of essential goods and services through e-commerce. In Uganda, the Ministry of ICT has made a call to develop digital solutions in the fight against COVID-19 to support health systems and public service delivery.
Platforms have also been put in place, linking informal operators to established marketplaces and helping out-of-reach households access market vendors, using local transport solutions.
Central banks and regulators, such as the Central Bank of West African States, have taken measures aimed at reducing transactions costs of electronic payments, boosting uptake of cashless e-government solutions, for example, for the provision of monetary transfers to the most vulnerable groups.
Digital solutions help reduce the spread of the virus by minimizing the need for face-to-face interactions, and at the same time keeping some businesses from closing shop. And the digital world has served as a welcome palliative amidst prolonged physical distancing and self-isolation during the crisis.
This deepening in the digital shift has wide implications for trade and development. It is influencing the behavior of people, businesses and governments, helping drive an unprecedented transformation of how goods and services are developed, produced, sold, distributed and consumed.
As more and more companies and consumers go online to find the products they are looking for, sellers need increasingly to have a presence on the internet. Otherwise they become invisible in the market.
Related: Trade in the Digital Economy: a tralac collection
Digital realities are reshaping trade patterns
The impact of digitalization on trade is seen in trade statistics. Information and communications technology (ICT) goods play a crucial role in enabling the digitalization of our economies.
In 2017, ICT goods exports amounted to almost $2 trillion. This trade is highly concentrated. In fact the top 10 exporters – mainly from East Asia and some developed economies – account for more than 99% of all exports.
Exports of ICT services, which comprise both telecommunications, information and computer services, have grown faster than services’ trade in general and amounted to $568 billion in 2017.
Meanwhile, digitalization has made more services tradable by enabling their delivery over ICT networks. The value of the exports of services that are digitally deliverable amounted to some $2.9 trillion in 2018, or about half of all services exports.
Such exports increased substantially across all regions during the period 2005-2018, with the highest growth rate in developing countries, especially in Asia. In Africa and other developing regions, exports of such services have been growing as well but from a lower level.
Platforms and data
Digitalization affects most productive processes and activities in an economy, involving products in all sectors, from agriculture to services. Today is only the early stages of this digital transition.
The market’s invisible hand seems set to become a digital one, increasingly managed by major digital platforms. E-commerce and other aspects of the digital economy are driven by two main factors: digital data and digital platforms.
Digital data have become a new economic resource for creating and capturing value. Control over data is strategically important to be able to transform them into digital intelligence.
In virtually every value chain, the ability to collect, store, analyze and transform data brings added power and competitive advantages. They are core to all fast-emerging digital technologies, such as data analytics, AI, blockchain, IoT, cloud computing and all internet-based services.
Data are also intrinsic to e-commerce. These platforms can use the data they collect from buyers and sellers to offer better services. Unsurprisingly, data-centric business models are being adopted not only by digital platforms, but also, increasingly, by lead companies across various sectors.
Digital platforms are increasingly important in the world economy. Some global digital platforms have achieved very strong market positions in certain areas.
For example, Google has some 90% of the market for Internet searches. Facebook accounts for two thirds of the global social media market and is the top social media platform in more than 90% of the world’s economies. Amazon boasts about 40% share of the world’s online retail activity, and its Amazon Web Services accounts for a similar share of the global cloud infrastructure services market.
In China, WeChat (owned by Tencent) has more than 1 billion active users and, together with Alipay (Alibaba), its payment solution has captured virtually the entire Chinese market for mobile payments. Meanwhile, Alibaba has been estimated to have close to 60% of the Chinese e-commerce market.
Local firms in developing countries can benefit from being able to use services offered by global platforms. E-commerce platforms may, for example, provide export opportunities to small firms, enabling them to reach beyond small domestic markets. Using existing payment and e-commerce platforms can enable them to boost their sales, especially if they cater to certain niche markets.
In some cases, local knowledge of search habits, traffic conditions and cultural nuances may also give an advantage to locally rooted digital platforms, enabling them to offer services tailored to local users. However, developing-country platforms that are trying to scale typically face an uphill battle due to weaknesses in the e-commerce ecosystem.
Quality of e-commerce ecosystems affects trade effects
While all parts of the world are affected by the shift towards online commerce, many developing countries are still held back by limited digital readiness. While the majority of the populations of developed countries now shop online, that is not yet the case in most developing countries.
In sub-Saharan Africa, for example, Kenya, Mauritius, Namibia and South Africa are the only countries where this share exceeds 8%. And in most other sub-Saharan African countries it is below 5%.
As shown by the eTrade Readiness Assessments conducted by UNCTAD in 27 least developed countries, gaps and barriers are found in several policy areas, ranging from ICT infrastructure and payment solutions to skills and legal framework.
For example, there is a need to strengthen the protection of users and consumers to boost trust in online commerce. Efforts to strengthen cyber security are equally important. On the supply side, constraints often include a lack of familiarity with e-commerce of many SMEs and persisting challenges in transport and logistics.
Due to such weaknesses in the local ecosystem and low technological capacity of customers and employees, digital platforms in developing countries have to employ a range of business-model innovations to be viable.
They may need to have a person to function as the customer’s interface with the digital platform, to facilitate data entry, allowing cash payments on delivery, building up local call-centre capacity for quick call-backs, etc.
Platforms often need to establish physical supply-chain and logistics services, such as distribution centres, payment points, warehouses, drivers and delivery vehicles. There is similarly often a need to invest in management, IT and entrepreneurial skills.
Overcoming these challenges requires proactive government policies, worked out in close dialogue with the private sector. Stakeholders consulted in UNCTAD eTrade Readiness Assessments have stressed the need for inclusive and comprehensive e-commerce national development strategies as a priority to organize policy and regulatory reforms, cooperate with the private sector and help secure more support from development partners.
How to bridge the divides and make cross-border e-commerce more inclusive
Technology is not deterministic. It is up to governments, in close dialogue with other stakeholders, to shape e-commerce and the digital economy by defining the rules of the game. This is a huge challenge that will involve adapting existing policies, laws and regulations, and/or adopting new ones in many areas.
For most countries, the digital economy remains relatively unchartered territory, and policies and regulations are failing to keep up with the rapid digital transformations taking place.
National policies play a vital role in preparing countries to take advantage of online commerce. In view of the cross-sectoral nature of digitalization, a whole-of-government response is important to the formulation and implementation of policies aimed at securing benefits and dealing with challenges associated with e-commerce.
Ensuring affordable and reliable connectivity remains a major challenge in many African economies, especially in rural and remote areas, and requires attention.
Another challenge concerns border obstacles. Many trade facilitation measures require collaboration among neighboring countries.
In order to promote the consolidation of e-commerce shipments and the use of land rather than air transport for e-commerce within Africa and African regional economic communities, ambitious regional programmes need to be encouraged to harmonize trade procedures, transit regimes and trade facilitation monitoring tools.
Increased interoperability among e-payment platforms is also greatly needed. Mobile payments and cashless solutions must be easy to use. Payment solutions should reduce operating costs for businesses and platforms.
Enhanced interoperability both within countries and across borders will reduce friction in e-commerce transactions, increase ease of use for consumers and reduce costs for platform operators.
The adoption of the pan-African payment and settlement system as one of the five key instruments of the operational phase of the African Continental Free Trade Area (AfCFTA) is a milestone towards greater integration of digital financial services.
Taxation is one area that needs additional attention. Observers have noted a mismatch between where profits are taxed and where and how value is created.
As developing countries are mainly markets for global digital platforms, and users in these countries contribute significantly to the generation of value and profits, tax authorities should have the right to tax such platforms.
As the tax landscape evolves, it is essential to ensure wide and more inclusive participation of developing countries in international discussions on taxation in the digital economy.
In Africa, much attention has been given to taxation of internet and mobile money users. Countries that are imposing taxes on internet applications or services include Kenya, Uganda, Tanzania and Zambia. While this may be attractive to governments, it can be counterproductive if it results in a decline in economic activity by reducing the number of active internet users.
There is a need for speed, flexibility and international support
Digital divides, differences in readiness and the high concentration of market power all point to the need for policies and regulations that will help create a fairer distribution of gains from the ongoing process of digital transformation and increased reliance on e-commerce.
Digitalization affects different countries in different ways, and individual governments require policy space to regulate the digital economy in order to fulfil various legitimate public policy objectives.
At the same time, several policy challenges may be more effectively addressed at the regional or international level. This applies, for example, to data protection and security, taxation and trade.
Finding adequate solutions requires greater international collaboration and policy dialogue, with the full involvement of developing countries. Any consensus will need to incorporate significant flexibilities to enable all countries to participate.
The inclusion of e-commerce on the agenda of the AfCFTA should pave the way for African countries to set rules that can facilitate more regional, cross-border e-commerce. As of today, most e-commerce in Africa is either domestic in nature or involves trade with non-African countries.
AfCFTA offers an opportunity for consolidating e-commerce rules and regulations across the continent and openly discussing disagreements. This is an opportunity for Africa to become a global player in trade and have the voice of the continent heard.
Mukhisa Kituyi is Secretary-General of UNCTAD.