By John Murphy
Burgeoning export opportunities for U.S. small businesses and service industries are endangered by the proliferation of data localization measures and other forms of digital protectionism in foreign markets. The best defense against this trend is a good offense: The United States must act swiftly to strengthen international rules by forging a digital trade agreement with willing partners in the Asia-Pacific and beyond.
The impact of the digital revolution on international trade is just beginning. Digital trade is creating substantial new opportunities for American companies of all sizes and diverse sectors — and not just firms traditionally seen as “internet companies.” As a result, American businesses and the workers they employ are able to reach millions of new customers abroad more easily, inexpensively, and rapidly than ever before.
However, these global opportunities may be put at risk if a rising tide of digital protectionism overseas isn’t contained. It is imperative that the United States act now to frame new rules of the road for digital trade so that American companies and workers can seize the opportunities presented by the digital revolution to boost American exports and create more good jobs at home.
The Opportunity: U.S. Small and Medium-Sized Businesses
Perhaps no other sector stands to benefit more from digital trade than America’s small business exporters. While U.S. small and medium-sized businesses generate about two-thirds of all new U.S. jobs, it’s often overlooked that 98% of the nearly 300,000 American companies that export are small and medium-sized businesses. These firms account for about one-third of U.S. merchandise exports, according to data from the U.S. Department of Commerce.
However, only about one in every 100 of America’s 30 million small businesses exports. In countries such as Germany and Switzerland, the share of small or medium-sized firms that sell their products abroad is approximately five to ten times larger on a per capita or per firm basis.
In this context, the digital trade revolution offers impressive new opportunities for America’s small businesses. New digital technologies have the potential to overcome longstanding hurdles facing small exporters.
The U.S. Chamber recently issued a report, Growing Small Business Exports: How Technology Strengthens American Trade, and it uncovered some surprising findings. Based on a national survey of more than 3,800 small businesses and a related economic analysis, the report produced a new estimate that 9% of U.S. small businesses currently export goods or services, a figure considerably higher than indicated by official statistics. The report estimated that small business exports generated $541 billion in output in 2017 and supported more than 6 million U.S. jobs. Small businesses that export have been expanding the overseas markets they serve, the report found, from an average of seven countries in 2016 to 10 countries in 2018.
These larger-than-the-official-statistics results indicate that digital trade is already contributing to the expansion of U.S. small business exports and job creation. The Chamber’s study found digital trade’s boost to small business exporters is especially pronounced in the following three areas:
First, digital advertising plays an overlooked but critical role in allowing U.S. small businesses to economically reach potential foreign customers in a targeted fashion. Small businesses simply had no such tools in the pre-internet era: Print advertising in newspapers or direct mail were never feasible options for U.S. small businesses trying to tap even nearby and familiar markets such as Canada or Europe.
Second, modern digital tools are revolutionizing payment collection, cited by small business exporters as a top challenge. Uncertainty around international payment collection was a principal brake on small business exports even a few years ago, but such risks and foreign exchange complexities can now be managed in a cost-effective manner by digital payment services.
Third, international shipment firms, including express delivery companies, today provide comprehensive services that handle customs clearance procedures and costs for small business owners who lack the expertise and time to tackle the minutiae of such matters. The evidence supports the view that online channels reduce transaction costs associated with international trade significantly.
One takeaway from the paper is that digital trade allows small business exporters and larger firms to prosper together. Some of the services mentioned above in areas such as digital advertising (e.g., Google’s Market Finder) are fostering new trade ecosystems of mutual benefit.
The cumulative effect of these digital technologies is that more small business exporters are able to reach more international markets. The Chamber’s findings are supported by an earlier study which found that 94% of the smallest 10% of commercial sellers on eBay engage in exporting, not far behind the largest 10% (99%), Only 5% of commercial sellers in that study were single country exporters, with a remarkable 81% selling to five or more foreign countries.
The Chamber report found that the digital trade revolution nonetheless remains a work in progress for U.S. small business exporters. While 92% of small businesses that export use digital tools, a large majority flagged ongoing concerns. Small businesses surveyed noted the challenge posed by foreign regulations such as data localization requirements, privacy rules, and liability risks, as well as taxes. However, with further progress on these fronts and further steps to take advantage of digital trade, the small businesses surveyed projected a 14% increase in sales, which would increase U.S. economic output by $81 billion and add 900,000 jobs.
The Opportunity: The U.S. Services Sector
Most U.S. small business exporters are manufacturers or other merchandise exporters, but digital trade affords huge opportunities for firms in the U.S. services sector as well.
Services dominate the U.S. economy today, but it was long thought in the 20th Century that international trade would bypass America’s services sectors. However, this is no longer the case. The digital revolution is opening the door to global opportunities for the gigantic U.S. professional and business services sector. This shift holds great promise for the American middle class.
It’s critical to understand the size and importance of America’s professional and business services supersector to the U.S. economy writ large. These industries employ 20.8 million Americans, a total representing nearly 70% more Americans than those employed in manufacturing. Earnings in these industries are 20% higher on average than those in manufacturing (average hourly earnings of $36 versus $30, according to BLS data).
Exactly what sectors are these? Professional and business services include computer, software, and other ICT services; architectural, engineering, project management, and specialized design services; accounting, bookkeeping, auditing, and payroll services; legal services; consulting; research services; advertising; audiovisual and photographic services; banking, insurance, and other financial services; travel arrangement and reservation services; and waste management. The United States is home to world-beating firms in all of these growing industries.
Professional and business services are increasingly tradeable thanks to digital technologies. According to a report issued by the U.S. International Trade Commission, 63% of all U.S. services exports now have the potential to be delivered to customers abroad digitally. Partly as a result, global trade in services increased twice as fast as merchandise trade (by around 50%) between 2010 and 2019, according to a report by Oxford Economics.
While the United States is already the world’s largest exporter of services according to official statistics ($875 billion in 2019), the trade potential for these services sectors is almost untapped. One in four U.S. manufacturers exports, but just one in every 20 providers of business services does so; and just 3% of U.S. services output is exported, according to research by J. Bradford Jensen of the Peterson Institute for International Economics.
All told, these trends are hugely positive news for the U.S. economy. Millions of highly-compensated American jobs are already supported by international services trade, and digital trade provides exciting prospects for further growth in overseas sales by firms in these highly competitive U.S. industries.
The Challenge: Rising Digital Protectionism
However, amid these significant opportunities for American workers and companies, the outlook for their ability to continue to tap overseas markets is uncertain. Unfortunately, many countries around the globe have erected barriers to digital trade, and these barriers are proliferating. Mercantilist policies designed to limit data flows, compel localization of data, impede foreign firms from taking advantage of market opportunities, and in some cases target American firms, are threatening to raise new barriers to U.S. exporters. Left unchecked, this trend threatens to deprive American workers and companies of the potential benefits of digital trade.
To illustrate the extent of digital trade barriers, the European Centre for International Political Economy published several years ago its Digital Trade Restrictiveness Index (DTRI), which “measures how 64 countries in the world restrict digital trade.” The index “reveals that many leading economies put significant restrictions on digital trade. These restrictions drive up costs for businesses as well as for consumers.”
This index indicates that China maintains the most restrictive digital trade policies, followed by Russia, India, Indonesia, Vietnam, Brazil, and Turkey. The appearance on this list of large emerging markets of significant commercial interest to American business underscores the significant scope of the harm digital protectionism can inflict.
Unfortunately, these digital trade barriers are proliferating. A recent study by the Information Technology & Innovation Foundation, How Barriers to Cross-Border Data Flows Are Spreading Globally, What They Cost, and How to Address Them, found that “the number of data-localization measures in force around the world has more than doubled in four years. In 2017, 35 countries had implemented 67 such barriers. Now, 62 countries have imposed 144 restrictions—and dozens more are under consideration.” The experience of Chamber member companies affirms this trend and its widespread nature.
Not only does the proliferation of digital trade barriers threaten to block the opportunities described above, it threatens to consign economies to a low-productivity path of slower growth. The ITIF study found that “a 1 point increase in a nation’s data restrictiveness cuts its gross trade output 7 percent, slows its productivity 2.9 percent, and hikes downstream prices 1.5 percent over five years.” The result is that the economic prospects of major emerging markets will be dampened even in areas not directly touched by digital trade.
The Solution: A Digital Trade Agreement
While these challenges are formidable, the Chamber and its members are convinced that the best defense against this trend is a good offense: The United States must act swiftly to strengthen international rules for digital trade. This should include rules to guarantee the ability to move data across international borders, prohibit forced localization of data, and bar customs duties on electronic transmissions, among other objectives.
The WTO Joint Statement Initiative on E-commerce is a multilateral effort to lay the foundation for trade rules to safeguard digital trade flows. Some 80 countries are now engaged in this negotiation. However, this agreement is unlikely to be completed in the near term, notably due to the participation in the negotiations of several countries that do not share the goals cited above.
While the United States must remain a leader within these WTO negotiations, the Chamber believes it is important to advance a digital trade agreement with a coalition of like-minded countries that share U.S. ambitions. Building on the model set out in the digital trade chapter of the United States-Mexico-Canada Agreement (USMCA) and the U.S.-Japan Digital Trade Agreement, the United States should launch negotiations for a high-standard plurilateral digital trade agreement with other economies that share this vision.
The Asia-Pacific region is home to a number of economies that are already showing interest in such an initiative. In addition to Canada, Mexico, and Japan, the members of the CPTPP have already agreed to relatively strong disciplines in this area. Several regional economies have inked a “Digital Economy Partnership Agreement,” though its provisions fall short of the high standards of the USMCA’s digital trade chapters in some areas. In any event, interest in the undertaking from a number of countries is substantial.
The architecture for the agreement should be open, leaving room for countries to join later if they can demonstrate they are willing and able to make robust commitments to join even if they are from other world regions (e.g., the UK). There is precedent from plurilateral agreements within the WTO winning new accessions over time, so devising a path for new parties to join later is important.
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In sum, the United States finds itself at a moment of promise and peril on digital trade. Export opportunities for U.S. small businesses and service industries are expanding rapidly, and the United States is well positioned to build on its formidable advantages in these areas. However, these opportunities are endangered by the spread of digital protectionism and the accumulation of discriminatory digital rules that often target American firms.
To forestall these threats, the United States must act now to push forward a vision for a digital trade agreement that can secure these opportunities for American workers, small businesses, services industries, and others. The case for American leadership on digital trade is strong: It is time for the United States to move forward on this important initiative.