DDG Ellard: The future of globalization is services, digital technology

Delivering a keynote speech at the Georgetown University Global Trade Academy in Washington DC on 28 March, Deputy Director-General Angela Ellard said the future of globalisation will be determined by services and digitization. We need to make sure, therefore, we have adequate rules regulating services and the digital economy at the global level, she added. The full text of her speech is below.

Thank you for the invitation from Georgetown Law School’s Institute of International Economic Law’s Global Trade Academy.  I’m so glad to see how much this event has grown over the years since I first participated.  It is a real pleasure to be here with you today, even more so in person, after a few years of virtual events.

What springs to your mind when you think about international trade? Is it the nuts and bolts of trade, such as large container ships at the port of Shanghai, Los Angeles, or Rotterdam? Or is it trade disputes, such as US — Steel and Aluminium, US — Washers,  or the Large Civil Aircraft disputes, which all concern trade in goods?

Or maybe it’s semiconductor chips, which preoccupy many policymakers these days?

Those are all good answers. But international trade today is increasingly more about intangibles — things that we cannot see or touch, but which represent a major share of GDP in many countries. For example, in 2021, almost 78% of the U.S. GDP was generated by services.  In a similar vein, around half of India’s and China’s GDPs come from services.

In 2021, global services exports were valued at US$6 trillion, representing just over one-fifth of total world trade in both goods and services, and we estimate that the share of services in world trade could reach one-third by 2040.  And this is not even the full picture because it does not account for all the different ways in which services may be traded. For example, Mode 3, commercial presence, is not included in this estimate.

A significant part of this increase is due to technological developments, which have made services deliverable remotely. It is now commonplace for us to stream music on Spotify, take a language course on Babbel, or sweat through a fitness class remotely with a trainer from abroad.  Exports of digitally delivered services have more than tripled since 2005. Between 2005 and 2019, the average annual growth rate of digitally delivered services exceeded 7%. By contrast, other services exports grew only by less than 6%, and goods by less than 5%.  This trend accelerated further during the pandemic — exports of digitally delivered services leapt up by 30% in 2021 compared to 2019.

For years we have been hearing about the end of globalization (or de-globalization).  But such a demise has been greatly exaggerated, to borrow from Samuel Clemens.  Instead, the nature of globalization is changing, and trade in intangibles, such as services, plays an increasingly important role.  Trade in services will continue to increase as we enter the era of “the intangible globalization”, a term coined by Norwegian officials. We also see potential in the digitization of trade through innovations like digital finance, customs e‑declarations, and AI-assisted supply management tools, which can cut total trade costs by 6%.

However, to fully realize all of this potential for digital trade and the value and growth it brings, we need to do a couple of things.  First, we have to bridge the digital divide between developed and developing countries — more on that in a moment.  Second, we also have to address the many existing impediments to trade in services, such as barriers to cross-border payments and data flows, commercial presence requirements to supply services, and restrictions on foreign investment and on the ability of people to move abroad to supply services. In that regard, I note the important work carried out jointly by the WTO and the World Bank to survey and quantify services trade policies in about 130 economies, including information on all these types of policies. This information is publicly available on the WTO website.

The current WTO framework regulating trade in services and technology was put in place in 1995, which is light years ago in technology terms.  WTO Members are working to improve the existing tools and developing new ones to reflect the changing nature of trade.

Let me elaborate on some of that work.

Moratorium on e-commerce and work programme

I’ll start with the work WTO Members have been doing at the multilateral level.

At our 12th Ministerial Conference (MC12) last June, WTO Members agreed by consensus to extend until our next Ministerial Conference the longstanding moratorium on customs duties on electronic transmissions, which has been periodically renewed since 1998.  This issue does not get much limelight with the public at large, but many businesses view it as tremendously important because it preserves a trade policy environment that is supportive of e-commerce in general, not just regarding duties, but also non-tariff barriers and red tape.

The main point of disagreement between those who support the extension of the moratorium and those who do not relates to its scope and potential economic effects.  On the one hand, some developing countries see the moratorium as detrimental to raising customs revenue.  Some studies estimate the amount of lost revenue between $280 million and $10 billion per year.  On the other hand, developed and many developing countries argue that any extra tariff revenue would be outweighed by negative economic consequences that country would see in the form of higher prices and reduced consumption, which would slow down GDP growth and shrink tax revenues.

The extension of the moratorium will be one of the issues trade Ministers will have to address at our 13th Ministerial Conference in Abu Dhabi next February. So, discussions will continue in the coming months to address the gap between these two positions.

At MC12, Ministers also agreed to reinvigorate work under the work programme on electronic commerce, a longstanding framework for Members’ deliberation on all trade-related issues relating to global e-commerce.  Development-related issues feature prominently in this work.  In particular, Members have been discussing the digital divide in terms of digital infrastructure, connectivity, affordability, and capacity building.

Our joint research with the World Bank suggests that improved access to technology would be particularly beneficial for women and MSMEs (38% of which are female-owned).  According to the International Telecommunication Union, in 2022, only 19% of women in least developed countries (LDCs) and 50% in developing countries use the Internet, compared to 86% in the developed world.​ Access to a smartphone, the Internet, and relevant digital skills can help women gain access to finance, start a business, sell products in new markets, and obtain or provide health and educational services.  And that in turn benefits their families and communities. Better Internet access has a multiplier effect on development, particularly as it enables leapfrogging other technologies already becoming obsolete.

Plurilateral initiatives

Efforts to update WTO rules on services and digital economy also take place through joint initiatives among groups of Members, or “coalitions of the willing”, instead of multilateral negotiations.  Negotiators are pursuing this initially plurilateral approach because they seek a depth and breadth of coverage that has proven elusive at the multilateral level, although participants hope that all Members would eventually participate.

Before I describe these initiatives, I must note that some WTO Members do not support such arrangements or even negotiations because they consider that the WTO should be engaged only in multilateral initiatives.  At the same time, however, supporters point to our founding documents to demonstrate that plurilateral agreements form part of the WTO architecture, they are often the only way forward on some issues, and they can lead to multilateral agreements in the future when the rest of the membership is ready.

There are three joint initiatives at the WTO aimed at developing new disciplines on services, digital trade, and investment.

First, in 2021, 70 WTO Members representing 92.5% of global services trade concluded negotiations on Services Domestic Regulation, and they are currently in the process of implementing the deal. Many services sectors are for good reason highly regulation-intensive and require service providers to obtain licenses, certifications, or permits to demonstrate their ability to supply the services in accordance with these regulations. Think of financial services, for example. But the administration of such regulations can be complex and non-transparent, making it difficult for foreign service providers to navigate the regulatory landscape.

The purpose of this initiative is to simplify authorization processes, cut red tape, and increase transparency and predictability for service providers, including Micro, Small and Medium-Sized Enterprises (MSMEs).  It is expected that these new rules will help reduce the costs of global services trade by more than $150 billion per year.

The initiative also marks the first time in the WTO’s history that a gender equality provision was included into the text of a WTO outcome.  Specifically, Members have committed to non-discrimination between men and women in their services regulations, paving the way for women’s economic empowerment through participation in services trade. We are particularly proud of this outcome.

I note that implementation of the domestic regulation agreement has been complicated by an objection by India and South Africa to the submission of the updated services schedules, relating to the question of whether plurilateral initiatives are appropriate for WTO negotiations, as I mentioned earlier.  The Members are engaged in consultations, and we hope it will be resolved quickly.

A second area of work in the WTO that has gained considerable attention these days is the ongoing plurilateral joint initiative on e-commerce.  Eighty-eight WTO Members, including many developing countries and a few LDCs, participate in this effort to develop baseline rules governing the global digital economy.  Participants are seeking to establish common disciplines to facilitate remote transactions and strengthen trust in digital markets. The disciplines discussed address both trade facilitative issues, such as e-signatures, on-line consumer protection, and paperless trade, as well as trade restrictive measures in the digital sphere, such as cross-border data flows and data localisation.  Participants are aiming to substantially conclude these negotiations by the end of the year.

It is noteworthy that Members participating in the initiative recognize the significance of ensuring that digital trade is inclusive as well as addressing the obstacles faced by developing and least developed countries seeking to benefit from the digital economy.  In this regard, the ‘E-commerce Capacity Building Framework’ launched by Australia, Japan, Singapore, and Switzerland is a key step to strengthen digital inclusion and to help harness the opportunities of digital trade.  The Framework will offer a wide range of technical assistance, training, and capacity building to support the participation of developing countries in the e-commerce negotiations.

In our third WTO initiative, more than 110 (or more than 2/3) WTO Members have been working hard to reach an agreement on Investment Facilitation for Development, which would help, particularly developing Members, improve their investment climate and attract, retain, and expand foreign direct investment. The pandemic and the war in Ukraine have weakened global FDI flows, and the expectation is that this agreement will help countries attract new investments, including in the areas of services and digital economy. To achieve this goal, the agreement aims at enhancing transparency and predictability of investment measures; speeding-up and streamlining investment-related authorization procedures; improving international cooperation and information sharing; and promoting sustainable investment. The agreement also has a strong development component. For example, in parallel to the negotiations, participating Members are working on Needs Assessments to help developing and LDC Members identify their implementation gaps as well as technical assistance and capacity building needs to implement the agreement. Preliminary estimates show that the Investment Facilitation for Development agreement could increase global welfare by between 0.56 and 1.74%, depending on the depth of a potential deal, with the highest welfare increase for low and middle income countries. We might have a deal on the text quite soon as participating Members aim to finalize the text negotiations by mid-2023.

In addition to these three initiatives, some industry associations are pushing to expand the coverage of the WTO Information Technology Agreement (ITA), a series of two plurilateral agreements that slash duties on IT products.  During the pandemic, dozens of products covered under the ITA2, such as pulse oximeters, played a key role in saving lives.  Furthermore, access to IT products and information and telecommunications infrastructure is paramount for the engagement of small businesses in e-commerce.  In other words, extending the scope of the ITA would also spur trade in services.

In addition to these initiatives, our Members are engaging in discussions regarding technology-related issues in various specialized committees.  For example, Members have been increasingly notifying the WTO’s Committee on Technical Barriers to Trade about their measures affecting digital products, e-commerce, and cybersecurity.  The level of interest to these topics is so high that, during its next meeting in June, the Committee will hold thematic sessions on current challenges and best practices in some of these areas.

Technology and Green Transition

Let me now say a couple of words about the role of technology in the green transition. 

Trade is often seen as a contributor to climate change through emissions caused by the production and transportation of goods.  But this view is incomplete because international trade — and the WTO as the guardian of multilateral trade rules — can be part of the solution to help achieve climate goals.

To transition to a low-carbon economy, countries need affordable access to advanced technologies.  And open trade plays a vital role in providing such access. Lowering barriers to trade in environmental goods and services would help facilitate the transfer and deployment of climate change mitigation and adaptation technologies. Wind turbines, solar panels, water heaters, hydropower turbines, and equipment for biogas production have to move across borders as freely as possible if we want to achieve our climate goals.

Our WTO analysis suggests that eliminating tariffs and reducing non-tariff measures on some energy-related environmental goods and environmentally preferable products could increase global exports in these products by 5% and 14%, respectively, by 2030.  This boost in the use of climate-friendly technologies could lead to a reduction of net carbon emissions by 0.6 %.

Trade in environmental goods goes hand in hand with environmental services. Installation and operation of clean technology is often complex and requires specific skills that can be difficult to source domestically. Removing barriers on environmental services, such as environmental consulting and engineering or soil conservation services, can also help reduce costs of projects that lower emissions.

Market opening in these sectors can also be a powerful tool for economic development by generating economic growth and employment.  For example, the rooftop installation cost of photovoltaic modules accounts for approximately 60% of the total cost — so we create a broad range of jobs through tariff liberalization.  A growing number of jobs, especially in Africa, are being created in off-grid decentralized renewables, which also boosts employment in other sectors such as agro‑processing, health care, communications, and local commerce.

Given the WTO’s broad membership, which includes countries with different political systems and levels of development, we offer a unique forum for discussions on reducing barriers to environmental goods and services and facilitating international cooperation, which is crucial for the green transition.

But all is not rosy in the world of trade and technology.  In fact, my final point is that technology is also the source of many trade tensions today.  For many countries, technology is at the heart of foreign policy, national and economic security, and geopolitical frictions, and they stresses are becoming more profound.

In the last couple of years, we have witnessed attempts to “onshore”, “nearshore”, or “friend-shore” supply chains for sensitive technology, which has fuelled the de-globalization narrative.  Given the strains put on global supply chains first by the pandemic and then the war in Ukraine, the temptation to do business only with “friends” (however those are defined) is understandable, even if it increases costs a little — or even a lot.  But the consequences of taking this too far will be counterproductive — less resilience, more vulnerabilities, and greater exposure to shocks.  This is especially true given increasingly frequent and more intense natural and man-made disasters — such as extreme weather events and climate change, pandemic, and armed conflicts.

The simple fact is that not one single country or even a few countries can produce everything — or even most things — domestically.  The key to supply chain resilience is therefore more international cooperation and more diverse supply chains, not less.

Moreover, consider other unintended consequences of isolationism: our research at the WTO shows that decoupling of the global economy into two blocs as opposed to further liberalization would slash real income at the global level on average by 8.7%.  And the number is higher for developing countries and LDCs — 10.1% and 11.3%, respectively.  The high cost of fragmentation shows that the pull toward globalization cannot, and should not, be ignored, despite pressures to become more isolationist and self-sufficient, particularly in the area of technology.

To conclude, let me reiterate that the future of globalisation will be determined by services and digitization, leaping from an arithmetic increase in technology to an exponential one.  To make sure we reap the benefits of this second surge of globalization, we need to make sure we have adequate rules regulating services and digital economy at the global level.  And that’s where the WTO comes in.

Thank you for your attention.

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