Impact of Digital Technologies and The Fourth Industrial Revolution on Trade in Services

09/16/2020

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JANE DRAKE-BROCKMAN, INGO BORCHERT, NIGEL CORY, ZIYANG FAN, CHRISTOPHER FINDLAY, FUKUNARI KIMURA, HILDEGUNN KYVIK-NORDÅS, MAGNUS LODEFALK, SHIN-YI PENG, HEIN ROELFSEMA, YOSE RIZAL DAMURI, SHERRY STEPHENSON, TU XINQUAN, ERIK VAN DER MAREL, MUSTAFA YAGCI | Think 20

The increasingly rapid uptake of digital technologies, like 3D printing (3DP), artificial intelligence, cloud computing, 5G, and the Internet-of-Things, is launching the global economy into the “Fourth Industrial Revolution” and the next wave of globalization.

As new global supply chains are being constructed, this time for services, tasks are being divided more finely, opening new entry points for poorer countries’ services exports. Digitally enabled services are stabilizing global production networks, helping offset the reshoring thrust, and rejuvenating traditional exports across agriculture, fisheries, handicrafts, and tourism, including through better matching of sellers and buyers and finance access provision. New trade opportunities are emerging for developing and advanced economies alike.

Digitally enabled trade (henceforth “e-commerce”) has become the major global trade growth story. As the digital age takes hold, services (already dominant in most domestic economies) are growing in importance in international trade, both in their own right and as a support to trade in goods. Digitalization renders an ever-increasing range of services tradable across borders via digital networks1; roughly 50% of traded services are digitally enabled compared with 15% of traded goods.

Trade in digitally enabled services, in turn, depends crucially on cross-border data flows, which are growing exponentially and now contribute more to global GDP growth than trade in goods and services. The development of international rules on cross-border data flows and Internet-based activities is becoming critical to firm-level competitiveness, including for small and medium-sized enterprises (SMEs). These developments raise major new challenges for digital-age trade, investment, innovation, and industry policy settings. Harnessing the gains from digital technology in the realm of trade, especially in services, requires multilateral governance and regulatory frameworks geared for the 21st century.

The Group of Twenty (G20) must address these challenges and ensure the potential growth in international trade flows, so that consequent global gains in economic growth and development are facilitated rather than stymied.

As highlighted in the Appendix, the COVID-19 pandemic has impacted domestic economic activity and global value chains in both goods and services industries. Its most important short-run effect has been an intensive push toward digitalization. The adverse effects of widespread social distancing measures have been mitigated through a range of digital technologies and cross-border services (from online education to e-signatures and new modes of communication); many activities that would otherwise have been shut down have stayed afloat. While recent reliance on online interactions exposes new privacy threats that need to be addressed, the benefits of digitally enabled services, which rely on unimpeded cross-border data flows, for ensuring business continuity and agility, have been clearly proved. A push for international standards and disciplines regarding cross-border data flows would lock these benefits in and provide the ground for ongoing growth of digitized services.

Managing this transition to digital trade and fully realizing its benefits in a mutually beneficial way requires policy decisions that allow trade to flourish while achieving domestic public policy objectives. G20 members should assume leadership by implementing a best-practice policy and establishing interoperable regulatory settings so that every economy can reap the digital age’s productivity gains.

The following section presents our policy recommendations, which address challenges in the transition to digital trade and propose concerted action by the G20 on eight fronts.

To download the full report, please click here.

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