COVER STORY • Digital Technology Will Create a New World After the Global Spread of Covid-19 • 7

Progress of Digital Trade& the Current Status of
Rule-Making

By Jota Ishikawa

Developments in the information, communication and technology(ICT) revolution which began in the 1980s have contributed to therapid expansion of so-called “digital trade”. Although there is noclear definition of digital trade, normally it is thought to address all
forms of cross-border transactions which utilize ICT. Cross-borderelectronic commerce (EC) is certainly included, as well as crossborder movement of electronic information such as data. While theenvironment which surrounds international trade has seen drasticchanges with advancement in digital technology, rule-making for
digital trade has lacked uniformity, and its current status is that it has
not been able to respond to the rapid changes. This article will
provide an overview of the progress in digital trade, and discuss
what the current situation looks like for rule-making on digital trade.

Cross-Border EC
Let us first look at cross-border EC. The OECD defines EC as
follows:“An e-commerce transaction is the sale or purchase of goods orservices, conducted over computer networks by methods specificallydesigned for the purpose of receiving or placing of orders. The
goods or services are ordered by those methods, but the payment
and the ultimate delivery of the goods or services do not have to be
conducted online. An e-commerce transaction can be between
enterprises, households, individuals, governments, and other public
or private organisations. To be included are orders made over theweb, extranet or electronic data interchange. The type is defined by
the method of placing the order. To be excluded are orders made by
telephone calls, facsimile or manually typed e-mail.”
According to the “E-Commerce Market Survey” published by the
Ministry of Economy, Trade and Industry, the market size of global
cross-border EC was $236 billion in 2014, and it is estimated to befour times that at $994 billion in 2020. The number of users is also
expected to increase from around 300 million to exceed 900 million
for the same time period. The increase is especially significant in the
Asia-Pacific region and it is expected to increase nearly seven times
from $71 billion in 2014 to $476 billion in 2020. In addition, thepercentage share of the Asia-Pacific region in the global crossborder EC market is estimated to be around 50%. As shown in theChart, according to the 2018 estimation results, Japanese purchases
in cross-border business to consumer (B2C) EC totaled $250.4
billion and $26.1 billion from the United States and China
30 Japan SPOTLIGHT • May / June 2020

Author Jota Ishikawa

respectively, and Japanese cross-border B2C-EC sales to the US andChina were $823.8 billion and $1.5345 trillion respectively. Purchaseamounts by Japan, the US and China increased by more than 7%,15%, and 18% respectively.
According to the OECD’s definition of EC, while ordering of goods
and services is conducted over computer networks, payments anddeliveries do not have to be conducted over computer networks to beconsidered EC. However, services that are provided electronicallysuch as streaming services of music and videos, electronic books
and online games can not only be ordered online on computer
networks, but the content itself can also be offered electronically
across borders, and these are sometimes narrowly defined as crossborder EC. These contents are also termed digital products. Digitalproducts that are transmitted electronically do not go throughcustoms, and thus it is extremely difficult to impose custom duties
compared to trade in goods. From the perspective of promoting
cross-border EC, the World Trade Organization (WTO) came to a
provisional agreement at the second WTO Ministerial Conference in1998 not to impose tariffs on electronic transmissions. Since then,tariff exemption measures continue to be in place.
Regarding cross-border EC rules, it was recognized as a newchallenge at the WTO Ministerial Conference in 2015, anddiscussions around rule-making commenced. Later in December
2017, Japan, Australia and Singapore launched the WTO Meeting for
the Exploratory Work on Electronic Commerce with the aim ofholding discussions on rule-making around the trade dimensions of
EC. The meeting has been convening since March 2018, and at theInformal Ministerial Meeting, which convened on Jan. 25, 2019 inDoha, a joint statement was released acknowledging the aim forhigh-level rule-making amongst as many WTO members as possible,
and the intention of beginning negotiations at the WTO, which 78
member nations signed (as of March 2020, 83 member nations aretaking part in this meeting).

Cross-Border Movement of Data
Next, let us look at cross-border movement of data. Rapid
development of ICT enabled subdividing production process(so-called “fragmentation”) and its global location (so-called“offshoring”), and the world economy is fast globalizing. In otherwords, with the global diffusion of ICT, the formation of global value
chains (GVC) has progressed. Most recently, progress in data
https://www.jef.or.jp/journal/

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CHARTSize of cross-border EC between Japan, China & theUS (2018)
Country A

1.5345 trillion yen(18.2%)Country B

Consumers in Country A
purchase from Country B

Japanese PurchaseAmount(in parentheses: year-on-year growth)276.5 billion yen

823.8 billion yen(7.6%)(15.6%)

26.1 billion yen(7.4%)

250.4 billion yen(7.6%)

1.72 trillion yen(18.5%)

1.3921 trillion yen

Chinese Purchase Amount(15.3%)

3.2623 trillion yen(18.4%)

US Purchase Amount

568.3 billion yen(15.0%)

Source: “FY 2018 Survey on Establishing Evaluation Model for Blockchain (E-Commerce Market Survey)”, Ministry of Economy, Tradeand Industry

analysis technology and development of artificial intelligence (AI)and robotics have enabled further progress in global competition
over data accumulation and digitalization of the production process,as well as further globalization of production and development hubs,
and the environment surrounding the global economy is greatlychanging.
In such an environment, cross-border movement of data issoaring. According to the White Paper on Information andCommunications in Japan published by the Ministry of Internal
Affairs and Communications in 2017, around 40% of Japanese firms
provide data to overseas. Also, according to Jacques Bughin and
Susan Lund (https://voxeu.org/article/ascendancy-international-dataflows), the movement of global data increased by around 45 times in
the 10 years between 2005 and 2014. Moreover, the amount of
movement is estimated to be around nine times that of 2014 by
2021. Cross-border movement of goods is also increasing, but its
speed falls far below that of data movement.
Underlying this situation is thought to be not only a reduction indata transmission costs, but also because Big Data that have been
digitalized and collected have become more important as an input of
production activities. In other words, there has been a movement toimprove productivity by digitalizing the production process which
utilizes Big Data such as the Internet of Things (IoT), AI, androbotics. This implies that digitalization of economic activities suchas movement and utilization of massive amounts of data is having agreater impact on the shape of international division of labor. It is
now not too much to say that the global movement of data and its
utilization is the key to not only the progress of globalization of theworld economy, but also to the growth of the world economy.
Prime Minister Shinzo Abe proposed “Data Free Flow with Trust”
at the January 2019 World Economic Forum in Davos. The Japanese
government has stated that “liberalization of cross-bordertransactions” and “restriction on data localization” are important
rules for data free flow, while “banning disclosure requests on
blueprints for software such as source codes” and “banning of
disclosure of encryptions” are important for its credibility.
On rule-making for cross-border data, there is a need to be
mindful of the differences in thinking by country or region. For
example, European countries are highly concerned about privacy andpersonal information, and place importance on protection of
personal data. With the aim of preventing illegal collection, illegal use
and outflow of personal data via the Internet and other means, theJapan SPOTLIGHT • May / June 2020

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General Data Protection Regulation (GDPR) was enacted by
European Union member nations and also Iceland, Norway and
Liechtenstein in May 2018. Under the GDPR, firms are required toobtain individual consents to obtain personal information. Japanesebusinesses will also be subject to the GDPR if subsidiaries orbranches are located within the EU, if products and services areoffered within the EU, or if they are commissioned to process
personal data from the EU. Transfer of personal data outside the blocis only permitted when the country concerned has in place a dataprotection rule equivalent to that of the EU, but data transfer to Japanis not restricted.
China is attempting to enclose data, which is the source ofcompetitiveness in the digital economy, with the government playing
a central role in collecting and managing it. For this purpose, China
enacted its Cyber Security Law in June 2017 with the aim ofachieving leadership and security in cyberspace. In particular,
personal information and data collected and generated within China
is required to be stored in China, and data transfer to outside of
China is generally prohibited.

Platform Businesses
The so-called mega platform businesses such as Google, Apple,
Facebook, and Amazon (GAFA) or Big Tech (GAFA+Microsoft) have ahuge presence in digital trade. Platform firms are businesses thatoffer systems and various services using IT. Google offers various
web services such as email and video distribution with its searchengines as the core of its business. Apple also provides a cloudservice in addition to online sales of applications and contents.
Facebook operates a vast social networking website and obtains
advertising revenue. The core business of Amazon is operating an EC
website. Microsoft develops and sells software such as Windows.
These firms have massive numbers of users and clients throughout
the world, and through their operations they acquire and accumulate
huge amounts of information, such as transaction information andpersonal data.
China’s Baidu, Alibaba and Tencent (BAT) are also mega platformbusinesses. Baidu operates or provides search engines, Alibaba EC,
and Tencent social networking services. However, there is a majordifference between BAT and GAFA. BAT grew rapidly with strong
protection from the Chinese government. The majority of BAT
businesses are domestic, but because the Chinese market is huge,they grew to become mega platform firms. It is worth noting that thepercentage China occupies in the world market of B2C-EC exceeds
50%. But at the moment, the role BAT plays in cross-border digitaltrade is small compared to GAFA since its main business is
32 Japan SPOTLIGHT • May / June 2020

transactions for the domestic market. However, overseas businesses
have begun, including in Japan, and as the Belt and Road Initiative
progresses, the international presence of BAT is expected toincrease.
Platform businesses have brought great benefits to their users.
For example, by using an EC platform, buyers can instantly searchfor products that are offered around the world, increasing
exponentially the variety from which they can choose. In addition,
the rating system of transactions is useful in resolving information
asymmetry on the quality of products or the reliability of thetransaction partners. In particular, information on prices has spreadwidely, allowing flexibility around price changes, and this has
promoted competition among vendors.
For sellers, although competition will become more heated as theusage of EC platforms progresses, it has the merit of an expanding
market. When the market expands, producers are able to enjoy
benefits of scale economies. When firms export, fixed costs forcultivating overseas markets (for example, information-gathering
expenses and costs of cultivating sales channels) are incurred inaddition to transportation costs and tariffs, but by using EC
platforms, reductions in these fixed costs are expected. Professor
Marc J. Melitz of Harvard University has demonstrated through firmlevel data that the percentage of firms engaging in exports is small,and due to the existence of trade costs, firms that are exporting arelarge-scale firms with high productivity. However, digitalization of theeconomy can increase the productivity of small and medium-sized
firms, and EC platforms are thought to promote their exports. In
essence, platform businesses can bring down costs to allow a better
match between sellers and buyers, thereby benefiting both sides.
On the other hand, there are concerns about platform businesses
further increasing in size where their competitive advantage has
become fixed and oligopolistic. In particular, the market share of Big
Tech in the digital industry is extremely high. According to
StatCounter, Google, for example, has around 92% of the global
market share for search engines, while Facebook has more than 60%of the global market share in social media. For operating systems,
Google, Microsoft and Apple make up almost 100% of the world
market share.
In short, there is a possibility that competition is not promoted
and that users are at a disadvantage when market power is
exercised. For example, it has been pointed out that platformbusinesses allow customers to use only payment methods they offer
and manipulate information by enforcing their contracts that prohibit
letting others know of the content of the contract (non-disclosureagreement), so that customers are corralled. It will become vital tooperate competition policies properly to ensure fairness andCOVER STORY 7transparency.
Moreover, digital economies facilitate transactions and transfers ofintangible assets such as patents, software, and trademarks. By
conducting cross-border transfer of intangible assets to tax havens,multinational corporations, including big platform firms, areattempting to ease tax burdens. In other words, they are shifting
profits to tax havens by manipulating intra-firm transaction prices(so-called transfer pricing) when conducting cross-border intra-firmtransactions such as for intangible assets. In order to curb excessive
tax-burden easing by manipulating transfer prices, the OECD
introduced the “arm’s length” principle. This principle asks for intrafirm transaction prices with overseas affiliates to be at the same levelof pricing as with an independent third-party transaction. The G20
and OECD are also leading work to put together a new rule forinternational taxation corresponding to the digitalization of theeconomy by the end of 2020.

Digital Trade Rule-Making
At the G20 Osaka Summit in June 2019, a “Leaders’ Special Eventon Digital Economy” was convened. Leaders from 27 nations
including US President Donald Trump, European Commission
President (at that time) Jean-Claude Juncker, and President Xi
Jinping of China, with 78 member nations taking part in the WTO
Exploratory Work on Electronic Commerce, announced the “Osaka
Declaration on Digital Economy” to launch the “Osaka Track” whichaims to work on international rule-making around the digital
economy, especially around data flows and EC. With regard to the
WTO negotiations, an agreement was also reached to achieve
substantial progress by the Twelfth Ministerial Meeting to be held in
June 2020.
However, India, Indonesia and South Africa which are G20
members are reluctant about international rule-making for digitaltrade and have not joined the “Osaka Declaration on Digital
Economy”. There are concerns among the newly developed countries
and developing countries that most of the gains from digital trade
will be scooped off by the multinational corporations, including the
Big Tech, with rules for digital trade being decided by developed
countries. Thus, it is thought that agreeing on multilateral digitaltrade rules at the WTO, which has adopted the consensus method in
its decision making, will be extremely difficult. In order to overcome
that, just as an enabling clause was introduced for developing
countries to the WTO rule on regional trade agreements, there may
be a need to set some sort of exception clause for developing
countries in digital trade.
While digital trade rule-making at the WTO has been slow, rule-making is progressing in regional trade agreements. In addition to its
promotion of IT industries, the US is home to mega platform firms
such as GAFA, and the US is thus aggressively promoting
liberalization of digital trade. In order to gain global leadership indigital trade rule-making, the US is actively trying to include clauses
on digital trade in Free Trade Agreements. Included in the agreement
text for the United States-Mexico-Canada Agreement (USMCA),
which was signed in November 2018, was the digital trade chapter(Chapter 19). Rules in this chapter were developed from theelectronic commerce chapter (Chapter 14) in the Trans-PacificPartnership (TPP) Agreement. The Japan-US Digital Trade
Agreement which became effective in January 2020 can be described
as being based on the rules of USMCA. An overview of the Japan-US
Digital Trade Agreement is as shown in the Table. In one sentence,
the rules promote liberalization of digital trade once smooth digitaltrade and its reliability is secured.
In the Japan-EU Economic Partnership Agreement (EPA) whichcame into effect in February 2019, rules such as “banning tariffs onelectronic transmissions” and “banning disclosure request on source
codes and algorithms” (Chapter 8) are also included. But whether
rules on free transactions of data should be included in theagreement will be re-evaluated within three years of its enforcement.
In January 2020, Singapore, New Zealand and Chile came to a
substantial agreement on the Digital Economy Partnership
Agreement (DEPA), the negotiations on which began in May 2019.
DEPA includes rules on use of electronic books in cross-borderbusinesses, protection of personal information, digital IDs, financial
technology, AI, transfer of cross-border Big Data, and opportunities
on trade and investments for small and medium-sized firms.
Singapore also came to an agreement on the scope of negotiations
for the Digital Economy Agreement with Australia in October 2019.
Similar rules to which Singapore agreed with New Zealand and Chile
are thought to be the target of negotiations with Australia.
In addition to developed countries, rule-making on digital trade isalso under way in developing countries such as the ASEAN
members. The Framework on Digital Data Governance was adopted
in December 2018, and then in March 2019, the ASEAN Agreement
on Electronic Commerce which consists of 19 articles on EC was
signed.

Conclusion
This article has given an overview of the sharp increase in digitaltrade with the rapid development of ICT, and the situation on theformulation of digital trade rules. There are considerable differencesin perspectives on digital trade, in particular on cross-borderJapan SPOTLIGHT • May / June 2020

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TABLE

Key points of the Japan-US Digital Trade
Agreement
Prohibition of application ofcustoms duties

Customs duties shall not be applied to digital products
distributed electronically between the two countries

Non-discriminatory treatment
of digital products

The two countries shall not discriminate against eachother’s digital products compared with domestic
products.

Liberalization of cross-bordertransfer of information byelectronic means

Cross-border transfer of information, including personal
information, by electronic means shall not be prohibitedor restricted.

Restriction on data localization

The two countries shall not require companies operatingin their local territories to use local computer equipment
or install such equipment locally as a condition for doing
business locally.

Online consumer protection

The two countries shall develop laws and regulations
regarding the protection of consumers in relation toonline commercial activities.

Personal information
protection

A legal framework prescribing the protection of personal
information shall be adopted.

Prohibition of forced
disclosure of source code

The two countries shall not require companies totransfer software source code and/or algorithms as acondition for importing and/or selling products locally.

Prohibition of forced
disclosure of encryption keys

The two countries shall not require manufacturers of
information and communication technology products totransfer information on encryption keys as a condition
for importing and /or selling products locally.

Source: Prepared based on reference materials released by the Japanese government

movement of data, and even on free transactions and movement
perspectives vary widely by country and region. In such a situation,
if rules on digital trade become excessive, varying by country andregion, it could obstruct digital trade. On the other hand, multilateralrule-making on digital trade led by the WTO, although it has begun,
has been slow and we are likely to continue seeing twists and turns.
It is likely true that newly developed countries and developing
countries are cautious about the rule-making process being led bydeveloped countries. However, the world has fixed its attention on asmall country and newly developed nation, Estonia, which has
transformed itself into an electronic nation and offers electronic
services such as “e-residency” not only domestically but also tooverseas. Singapore is also aggressively digitalizing and is trying toaggressively promote liberalization of not only trade in goods, butalso digital trade. Digitalization of the economy and promotion ofdigital trade can be described as being an effective means for a
newly developed country or a small country to leap forward in the
34 Japan SPOTLIGHT • May / June 2020

global economy.
Regardless of the situation, there is an urgent need for basic
minimum multilateral rule-making for digital trade so that all nations
can benefit from the digital economy with equal opportunities. Eying
multilateral rule-making, the Japanese government is expected tocontinue demonstrating its leadership, as it did with the WTO
Exploratory Work on Electronic Commerce or starting the Osaka
Track.

Dr. Jota Ishikawa is professor of International Economics at the Graduate
School of Economics at Hitotsubashi University.