Can the Internet Change the Economics and Politics of International Trade?

International trade has traditionally been the bastion of large multinational companies (MNCs) secretly negotiating esoteric treaties in far-off international locations.  The optics of this — coupled with classic public choice theory — are largely what explains the domestic political pushback against these agreements.

So, why is trade viewed as the exclusive playground of large MNCs?  Well, for a time, it was:  the huge operational and logistical costs of operating in global markets meant that those corporations that benefited from free trade the most were large MNCs who could leverage their significant resources to build global supply chains and create massive economies of scale.  The losers of trade, on the other hand, tended to be smaller domestic industry and labor that faced downward pricing pressure from being exposed to more efficient global competition.  Although society at large benefitted, those harmed by free trade would organize into a powerful political free trade blocking force.  As two prominent trade scholars point out:

“Small and medium sized enterprises (SMEs) and NGOs of various kinds generally play much less a role in national trade debates.  This started to change in the 1990s. One reason for the increased activism was a perception that ‘big business’ dominated the process, reducing the perceived legitimacy of the trading system” (Hoekman & Koestecki 638).

So even though the concept of “freer trade is good” (in aggregate at least) is one of the few things that economists agree on en masse, actual free trade agreements proved extraordinarily difficult to negotiate in practice because the losers were able to mount effective domestic resistance campaigns.  Their resistance was aided by the fact that domestic industries that were harmed were generally more sympathetic than the large MNCs that would benefit at their expense.

However, there is hope that the politics of trade will smooth out as the Internet has made international commerce more equitable.  Although big MNCs were the first major commercial beneficiaries of globalization (besides consumers who benefit from lower prices, more choice and better quality), the increased spread of the Internet has expanded the number of exporters that benefit from international commerce.

Back in November, economist Marcelo Olarreaga wrote a post on the World Bank’s blog about a study that he and his colleagues released illustrating that eBay reduces the effect of distance on trade by 65% compared to the physical world.  This is incredibly significant for small- and medium-sized businesses, as they were precisely the ones who have the most difficult time overcoming the “friction” created by distance in international trade.  (For the study, Olarreaga and his team were granted access to a proprietary database of statistics relating to eBay transactions across 62 countries and 40 product categories over a 3 year period from 2004-2007.)

The study provided empirical substantiation to a thesis proposed more than a decade ago: that the the Internet will lead to the “Death of Distance” (or, less hyperbolically, the drastic minimization of the effect of distance).  Although intuitive, the empirical evidence for this hypothesis until now has been less than solid, partially because studies of this kind were difficult without the type of granular data that Olarreaga and colleagues were given access to.

Unfortunately, the international trade apparatus has been slow to embrace the Internet or evangelize the democratizing potential it has on international trade (in the sense it greatly expands the number of exporters who can successfully trade across borders).  Specifically, the WTO has done a relatively good job internally mapping issues related to the digital trade in goods and services, but “the progress made in terms of converting the thinking into action has been slow.”  That is to say that the WTO can point to few examples of Internet issues being addressed in binding commitments.

Currently, the WTO is looking for a raison d’être.  Doha, the last big trade round, broke down (and is largely seen as dead) because developing countries saw the Western world as failing to address their needs after major developing world concessions on intellectual property and investment (viewed as major Western country goals) in prior rounds.  The North/South split has even extended to the rhetoric surrounding liberalizing trade in digital goods and services.  Because most of the world’s major Internet companies are located in the Western world (particularly the U.S.), many have branded Internet trade issues as Western country priorities that should not be addressed until the politically sensitive negotiations surrounding agriculture are resolved (a very unlikely event in the short to medium term).

This framing is a huge mistake and risks jeopardizing real gains that can be made by all countries.  Unlike traditional tariff negotiations where each side agrees to harm a protected sector of its economy for commitments from others to do the same in order to help their export sectors (and better consumers the world over), promoting the free flow of information online is a net win for all.  As one recent McKinsey study illustrated, nearly three-quarters of the benefits of the Internet accrue to “traditional sectors” (so, not just gains for Internet companies) who can lower their costs, increase their productivity and reach a much wider market of potential buyers.  In practical terms, blocking Internet platforms like eBay, Facebook or YouTube harms more than just the companies whose platforms are blocked.  It significantly harms domestic sellers of goods, content or expertise who use the Internet platforms to distribute their content and market their services.

In fact, according to the study, increased Internet access and reliance can actually benefit developing countries more than developed countries.  Although this might sound backwards, it actually makes quite a bit of sense.  Internet platforms are largely substitutes for much more expensive physical infrastructure and institutions traditionally required to engage in international trade–infrastructure that is more readily available in developed countries.  A website (or online platform like eBay or Etsy) is much easier to set up and use than a foreign subsidiary.  Paypal worldwide is much easier to use than conducting international money transfers through a series of potentially unreliable domestic banks, and international marketing is much easier and cheaper to utilize on Google, Bing or Facebook than it is in the physical world.  In fact, some of the world’s brightest entrepreneurs are using technology and Internet access for this exact purpose already.  One particularly telling example involves the rapid growth mobile phone payments in India, where the widespread availability of cellphones is helping overcome the fact that many poor and rural Indians do not have access to sufficient banking services.

Not surprisingly, the original progenitor of the “Death of Distance” phrase made a similar observation more than a decade ago when the Internet was still in its infancy.

Among the winners, developing countries will be especially important, for they will enjoy new freedoms: a way around overpriced international telephone and postal services, for instance, and a short-cut to information that may not be available locally, such as scientific articles and uncensored local news.

Once it has true global reach, the Internet may become the main platform for international contact. It provides a shop window in which a company can display its wares to a world market. It offers a chance for people from different countries to swap information and ideas. It provides the means for people who are cut off from the world by censors and oppressive governments to tell their stories. No other innovation has ever had quite such earth-shrinking potential.

Therefore it is not surprising that first major international study of hard data in electronic commerce found that this was in fact the case.  According to Olarreaga:

The gains from the adoption of eBay are larger in those areas of the world where they are most needed – in remote countries with bad institutions. Thus, e-commerce can become a development tool by helping remote sellers from instable countries integrate into world markets. Export promotion agencies in these countries should probably redirect part of their effort towards connecting producers to online markets.

Instead of focusing exclusively on where trade negotiations have currently stalled, the WTO should redouble its efforts on rebranding and expanding its focus on lowering the barriers to online commerce and the free flow of information.  If developing countries want to craft an international trade regime that betters their domestic economies, they should aggressively support liberalizing online commerce and data flows.  Perhaps, they could even push for greater developed country support for their domestic Internet infrastructure in the name of trade facilitation (which was the least controversial topic in the Doha negotiations).