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TWN Info Service on WTO and Trade Issues (Apr19/10)
17 April 2019
Third World Network


Digital platforms generate opportunities and challenges

Published in SUNS #8880 dated 3 April 2019

Geneva, 2 Apr (Kanaga Raja) – Digital platforms can create new opportunities for companies of all sizes to engage in trade, but the gains are not automatic and economic policies and regulations will need to maximize the benefits while minimizing the costs.

This is one of the main conclusions highlighted by the United Nations Conference on Trade and Development (UNCTAD) in its latest Policy Brief (No. 73).

In the Brief, UNCTAD highlighted growing concerns over the rising market power of certain platforms and the related implications for competition, da ta protection and ownership, consumer protection and taxation and employment policies.

The UNCTAD document comes just as the fifth edition of UNCTAD’s eCommerce Week got underway here from 1 to 5 April. The theme for this year ‘s edition is “From Digitalization to Development.”

Ahead of eCommerce Week, UNCTAD released its latest statistics that showed that global e-commerce sales grew 13% in 2017, hitting an estimated $29 trillion.

A similar surge was seen in the number of online shoppers, which jumped by 12% and stood at 1.3 billion people, or one quarter of the world’s population.

Though most internet buyers purchased goods and services from domestic vendors, the share of those buying from abroad rose from 15% in 2015 to 21% in 2017, with the growth being driven mainly by an increase in the United Stat es.

As a result, said UNCTAD, cross-border business-to-consumer (B2C) sales reached an estimated $412 billion, accounting for almost 11% of total B2C e-commerce — a 4% hike on the previous year’s numbers.

DATA A VALUABLE RESOURCE

According to the UNCTAD Policy Brief, digital platforms are key in the evol ving electronic commerce (e-commerce) and digital economy landscape.

Their main characteristics include the provision of infrastructure to inter mediate between different users; the reliance on network effects, as more users beg et more users, leading to monopolistic trends; and the use of cross-subsidization.

The most important value of such platforms stems from the data extracted from users that can be further analysed, used and monetized.

“Data have become a valuable extractable resource in the digital economy,” said UNCTAD.

By reducing transaction and search costs, digital platforms enable those offering assets or services to connect more easily with those wishing to use or consume them.

“This has created potential opportunities for new trade types (in digitally traded products, services and tasks) and for more traditional trade using e-commerce and other online platforms to better match buyers and sellers and to make products more visible,” said UNCTAD.

It noted that many platforms provide access to free or paid services via Internet to connect users, buyers and sellers, such as services related to logistics, payments, market research, trade compliance, market intelligence data, advertising, refunds and dispute resolution.

Digital platforms can allow for a more efficient utilization of physical assets and time. Often accessed through mobile applications, they aggregate and bring together supply and demand in ways that were not possible before.

Digital platforms can also help to empower women entrepreneurs, said UNCTAD.

There are different ways for micro-enterprises and small and medium-sized enterprises to gain an online presence to market their goods and services t o potential buyers in their own country or in foreign markets.

Participation in online platforms may be more useful for smaller firms that compete in specific, well-defined market segments, such as niche trading in tourism and in value added food products.

Different options vary in terms of resource requirements, flexibility and the need for in-house skills and capabilities.

One option is to use third-party online marketplaces. The primary focus of these marketplaces may be business- to-business, business-to-consumer or consumer-to-consumer.

They often specialize in certain types of products, such as physical goods, digital products or information and communications technology-enabled services.

Another option is to set up a stand-alone e-commerce site, said UNCTAD.

This can be done, for example, by adding an e-commerce function to an enterprise’s existing website, by using a software-as-a-service e-commerce solution with a package of what is needed to operate e-commerce or by building a customized e-commerce site.

According to UNCTAD, benefiting from economies of scale and network effects, a few major online market-places have captured significant parts of the overall market.

Leading e-commerce platforms include the Alibaba Group, Amazon, eBay and Rakuten.

The development of a local e-commerce industry can provide convenience for residents through shorter shipping times, flexible payment options, relevant products and local language interfaces.

Other potential advantages domestically may include more linkages with local industries, reduced reliance on imports and greater openness to support exports.

E-commerce platforms that have emerged in developing economies include Jumia in Africa; Flipkart, Lazada and Souq in Asia; and MercadoLibre in Latin America.

DIVISION BETWEEN LOCAL AND FOREIGN PLATFORMS

UNCTAD pointed out that the division between local and foreign platforms is becoming increasingly blurred.

Many domestic platforms may be unable to compete with international platforms. In addition, once domestic e-commerce platforms achieve a certain scale, they often become targets for acquisition by global players.

For example, recently, Walmart has acquired Flipkart, Alibaba has acquired Lazada and Amazon has acquired Souq.

Due to the existence of network effects, local platforms may not become profitable until they reach a critical mass.

If only 2-3 per cent of consumers in a country buy online, it may not be worthwhile to invest in digital platforms.

“Companies may need to wait until the market exhibits some growth. However, with fast market growth expectations, some firms may temporarily accept low or negative profitability to reap first-mover advantages.”

In some developing countries, the absence of global platform providers creates scope for local players.

For example, in sub-Saharan Africa, various e-commerce solutions have been developed to facilitate commerce over feature phones.

There are thousands of e-commerce start-ups throughout the continent, but only a few have reached significant scale.

Many new e-commerce payment gateways have also cropped up. In various low-income developing economies, new e-commerce sites are targeting the domestic market, enabling consumers to browse and order goods or services online.

“More research is required to understand the income and employment effects of local e-commerce platforms,” said UNCTAD.

SOME POLICY IMPLICATIONS

According to UNCTAD, the growing use of digital platforms has economic, social and political impacts.

It said policymakers face challenges in different policy areas, including competition and consumer protection; data protection and privacy; taxation; and employment and working conditions.

According to the Policy Brief, winner-takes-all dynamics are typical in platform-based economies, where network effects can generate major benefits to first movers.

Whoever controls the platform also controls the distribution channel, giving the dominant platform (and data) owner considerable market power.

Digital platforms are transforming markets and competition. If they evade some of the regulatory requirements that traditional businesses need to meet, they may be perceived as providing unfair competition.

The digital platform environment may lend itself to potential anti-competitive practices, said UNCTAD.

As a result of network effects, platforms may gain market power and could abuse their dominant position, for example, by imposing exclusivity arrangements on their providers or carrying out predatory pricing against competitors.

In some competition cases involving platforms, they were not considered to hold dominance over the relevant market.

By contrast, the European Commission recently fined Google EUR 4.34 billion for breaching European Union anti-trust rules.

Finding the appropriate responses to deal with possible anti-competitive practices in the digital economy will become increasingly important, said UNCTAD.

Consumers have benefited from digital platforms through new and better-suited offers, lower prices and more pertinent information.

Yet the lack of face-to-face transactions entails greater risks regarding disclosure and transparency, data protection and the applicable laws and responsibilities of platforms and peer providers.

The digital economy relies increasingly on the generation, storage, processing and transfer of data, both within and across national boundaries.

Data access and analysis are becoming strategically important for the competitiveness of companies.

With regard to the use of digital platforms, there are concerns over how to harness data flows while addressing concerns related to privacy and security.

Policymakers need to strike a balance between the need for companies to collect and analyse data for innovation and efficiency gains and the concerns of ot her stakeholders with regard to security, privacy and the movement and ownership of data.

The current system for data protection is fragmented, and national data pol icy and legislation has not yet been developed in many developing countries. Efforts to promote convergence and ensure compatibility between different international initiatives are needed.

Policymakers in both developing and developed countries face the challenge of taxation with regard to the digital economy.

Reliance on digital platforms may weaken the international tax concept that allocates jurisdictional tax claims over profits of multinational companies based on physical presence.

It raises issues such as enforcement, where to tax non-resident e-commerce businesses, how to assess intragroup transactions, how to classify digital goods, how to identify taxpayers and where and how to collect consumption tax.

Moreover, the digital economy could enable more tax planning and erosion, which reduce the availability of domestic resources for development. Finding ways to address related concerns are of relevance to all countries.

Digital platforms, in a context of closer international tax cooperation, could facilitate enforcement, by reducing the number of actors involved in taxable transactions and facilitating monitoring and traceability.

The evolving digital economy has been accompanied by the rise of trade in tasks mediated by online labour platforms.

This is creating new income-generating opportunities for people in developing countries who have adequate connectivity and relevant skills.

Such platforms enable many professionals to sell their services to clients abroad. Annually, some 40 million people access such platforms, looking for jobs or talent.

“At the same time, the fragmentation of the production process and a large oversupply of jobseekers on such platforms may weaken their bargaining power and accentuate tendencies towards a race to the bottom in terms of compensation and other working conditions.”

Policies and regulations need to be designed to enable this expanding segment of the economy to ensure the provision of quality and decent jobs, said UNCTAD.

Digital platforms match tasks across the entire skills spectrum. They typically favour certain types of contracts (freelance and contract work rather than regular employment).

Workers with high levels of social protection may find themselves in competition with workers in the domestic market or abroad with lower levels of social protection.

This has implications for how benefits, health care and pensions are organized, and for the provision of training and education.

Moreover, as net benefits from the reliance on digital platforms can be unevenly distributed, the role of re-distribution policies should be explored.

ADDRESSING THESE POLICY CHALLENGES

According to UNCTAD, in order to address these policy challenges and maximie the development effects of digital platforms, relevant policies and regulations may need to be adapted to the new digital context.

Economic activities online should, to the greatest possible extent, be regulated in a manner consistent with a fair trading environment that is not biased towards or against any modality of trade and that provides equivalent protection to the rights of all parties involved.

Finding the best development-oriented policy solutions in specific areas will require more dialogue between member States.

It will also require more capacity-building in multiple areas in those countries that are the least prepared for the digital era.

A notable illustration of the need for increased dialogue is the UNCTAD eCommerce Week, which has become a leading forum to discuss the development challenges and opportunities brought about by the digital economy, said UNCTAD.

UNCTAD noted that the first regional version of this forum, Africa eCommerc e Week – organized jointly with the African Union, the European Union and partners of the eTrade for All initiative, and held from 10 to 14 December 2018 – examined ways of enhancing the readiness of countries in Africa to trade on line and digitize their economies.

According to UNCTAD, the Nairobi Manifesto on the Digital Economy and Inclusive Development in Africa charts a course for countries in Africa, with policy recommendations in the following nine critical areas: e-commerce readiness assessment and strategy formulation; information and telecommunications technology infrastructure and services; payment solution s; trade logistics – transport and trade facilitation; legal and regulatory frameworks; e-commerce skills development; access to financing; e-commerce and women’s empowerment; and measuring e-commerce and the digital economy. (See also SUNS #8821 dated 20 December 2019).

 


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