Data Flows, Artificial Intelligence and International Trade: impacts and prospects for the value chains of the future



European Parliament

Policy issues

Our discussion suggests that the latest developments in digitisation, although affecting both trade in manufactured goods and trade in services, is having and will have even more in the future its greatest impact on trade in services. Hence, we share the view of Baldwin and Forslid (2019) that globalisation is entering a new phase, driven by digitally-delivered trade in services. We also share the view of van der Marel (2020) that ‘globalisation is not in decline, but simply changing’.

During the previous phase of globalisation, which was and is still largely driven by GVC trade in manufactures, a growing number of industrial activities were outsourced to countries with much lower labour costs than Europe (and within Europe from western to eastern or south-eastern countries), with goods then exported from these countries to various destinations, including Europe. During this phase, industrial employment in Europe and in other advanced economies declined substantially, although the value of industrial production continued to increase. This came about as companies concentrated on high value-added activities, outsourcing lower value-added ones and replacing manual labour by robots or other machines. But overall employment did not decrease. It simply shifted to services but with significant socio-economic consequences, including in terms of the organisation of work, female participation in the labour force and income distribution.

The new phase of globalisation, which is only now starting, will now also transform employment in services, at least in those activities that were hitherto non-tradable (or little tradable), which will now become not only potentially deliverable digitally but actually digitally delivered. This will provide new employment opportunities for some European workers, but for others who have been sheltered from international competition, it could mean that their jobs will be outsourced to other parts of the world where there is an abundant well-educated labour supply. Whether or not total employment opportunities will remain unchanged and only job composition will change is obviously impossible to predict. During earlier phases of technological transformation and globalisation, there was more change in the composition of jobs than in the number of jobs, though there was also a reduction in the number of hours worked per person and a welcome increase in leisure.

What role can and should policy play to accompany such transformation? We see two different areas: domestic policies and trade policy.

The main relevant domestic policies are education, training and retraining, and other social policies aimed at equipping people to master digital technologies and adapt to change. More than ever, societies with flexi-security policies, like the Nordic countries, which combine high quality education and people rather than job security, will be best prepared to manage the digital transformation. But these policies are expensive, so they require states to be able to raise sufficient resources, including by taxing digital activities.

As far as trade policy is concerned, the European Union has an interest in improving its access to markets where the level of restrictiveness on digital services trade is high. According to Ferencz (2019), the OECD digital services trade restrictiveness index (DSTRI) for 2018 was equal to 0.2 or less in all EU countries (except Latvia and Poland) but nearly 0.4 or more in countries like Brazil, China and India 8 . If successful, the on-going WTO plurilateral negotiations on e-commerce – defined by the WTO as ‘the production, distribution, marketing, sale or delivery of goods and services by electronic means’ (and therefore similar to the notion of digital services used by the OECD and in this briefing) – may produce a reduction in trade barriers. However, we share the viewpoint of Hufbauer and Lu (2019) that multilateral disciplines in digital services will need to be complemented by bilateral and/or regional agreements to deliver significant improvements in market access.

We close by reflecting on the consequences of COVID-19 for the digital transformation and digital trade. Before the crisis, the trends we discussed in this briefing were already clear. What was not clear, however, was the pace at which the transformation would take place. There is no doubt that the crisis has accelerated this pace. Teleworking has become a reality for large segments of the population and is here to stay, although not at the level that it reached at the peak of lock downs. And with teleworking becoming ubiquitous, telemigration, which was still considered not long ago as belonging to the distant future, is sure to soon follow. More generally, we should now expect that the new phase of globalisation driven by digitally-delivered trade in services will unfold more rapidly than we had anticipated. We should be prepared for it.

To read the full analysis, please click here.

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