Canada’s Trade in a Digital World
In This Briefing
Trading in a Digital World
The ability to digitize information has opened up new global trade possibilities and challenges. Let us start with what some might consider an extreme example—trade in virtual worlds. For example, say that you are considering an image makeover. For a fraction of the price of a real-world makeover, you can try out multiple new looks in a virtual world. You might join the virtual world Second Life and create your own digital avatar. You could then use real U.S. dollars to buy Linden dollars (the Second Life currency). With those virtual dollars, you could go on a global shopping spree, buying your avatar some new “virtual” clothes, glasses, and shoes within minutes. It will likely not matter to you whether you are buying clothing and accessories created in Canada, the U.S., Europe, Asia, or elsewhere. Regardless, you are engaging in global trade. And this represents a new global trade possibility—people spending real dollars on global goods and services that exist only in the virtual world.
While not everyone trades in virtual worlds, it is no longer a marginal economic activity. Some 25 million girls use Cartoondollemporium.com, “a virtual world for girls,” in which they can buy clothes for their avatar dolls, for example.1 And market intelligence company In-Stat estimates that over US$7 billion was spent globally on “virtual goods” in 2010; that number is expected to double by 2014.2
In fact, trading virtual goods is only one of many new and enhanced global trade opportunities made possible by the ability to digitize information. Digitizing information means converting it into strings of zeros and ones. We are now able to translate all kinds of real-world information into digital form and send it anywhere in the world—instantly. This ability has not only created opportunities to trade in new kinds of products and services, it has also changed the way we trade in the same parts, products, and services that we have been trading in for decades.
Digitization allows companies to break down activities into specific tasks more easily, so that each task or input can be sourced or provided from the most efficient location. Research In Motion’s BlackBerry, for example, is made up of hundreds of components sourced from around the world. In turn, that BlackBerry and other digital technologies have made it possible and attractive to sell services globally. For example, individuals can digitize and send engineering or architectural blueprints anywhere in the world. Translation and x-ray services can also be provided remotely. And instead of going to the bookstore to buy a physical book, or ordering it online and waiting for it to be delivered, we can now instantly download books.
The ability to digitize information has created opportunities for global trade in both new and already traded products and services, and it has at the same time created a host of new global trade challenges.
Digital technologies have opened up not just trade possibilities, but also related investment possibilities. For example, the ability to coordinate globally has made it easier for Canadian banks and insurance companies to expand their global operations by selling services via local affiliates in Europe, Asia, and Latin America (in person, online, and by mobile phone). Canadian companies that want to source cheaper parts from other parts of the world, or access technologies or talents only available elsewhere, can invest directly in those markets—a task made vastly easier by the ability to coordinate and share data with headquarters. The reverse also holds true: global companies can more easily invest in Canada and coordinate with their headquarters elsewhere.
In short, digital technologies are now fundamental to every kind of international trade and investment—not just trade in virtual worlds or digital products. This means such technologies are fundamental to Canadian companies’ global success. But the focus of most Canadian research, media, and policy-makers has been on more traditional trade facilitators and barriers. Issues such as ensuring the smooth flow of physical trade across the Canada–U.S. border, improving the state of port infrastructure, and eliminating tariffs with our trading partners have dominated traditional Canadian trade research and policy activities, and media attention.
To be sure, such issues remain important. In fact, they have strong links to digital technologies. However, it is time we paid more attention to the ways in which digital technologies are changing—or, in some cases, not changing—Canada’s global opportunities across all types of trade and investment. We also need to discuss how, in light of these changes, government and business leaders can best position the country to take full advantage of digital tools to succeed in the global economy, with the ultimate goal of boosting prosperity at home.
To the author’s knowledge, there are no existing studies of Canada’s global trade in a digital world. To take a first step in addressing this gap, this “concept” briefing raises a number of questions, concerns, and issues, including the following:
This briefing does not set out to answer all of these questions in their entirety. Instead, it aims to raise topics for leaders to reflect on, to propose recommendations for leaders, and to set the stage for more specific future research on trading in a digital economy from The Conference Board of Canada’s International Trade and Investment Centre.
Digitization and the Nature of Canada’s Global Trade
In 1997 Francis Caincross, a senior editor of The Economist, predicted that information and communications technologies would mean the “death of distance.”3 New York Times columnist Thomas Friedman argued in 2005 that a confluence of forces, including information technology (IT), had made the world “flat.”4 Common wisdom holds that mobile phones, the Internet, and cloud computing (where software and data are accessed over the Internet) make for a borderless world.
People Still Prefer to Buy Locally
Despite this common wisdom, and despite technological advances that make it possible to trade an increasing array of products and services globally, people often still prefer to trade locally. For example, one Canadian study found that people are willing to pay four times more for service providers within 100 kilometres than for service providers approximately 10,000 kilometres away.5 A University of Toronto study found that even for products downloaded over the Internet (such as music, games, and pornography), where in theory distance should not matter, it still does.6 That study found that every 1 per cent increase in distance from the U.S. reduced the number of visits an American would make to a particular website by 3.25 per cent.
Common wisdom holds that digitization creates a borderless world, but in fact borders do still matter to governments, businesses, and individuals.
Further, a 2011 study from the Martin Prosperity Institute found that local social networks drive the use of digitally downloaded products such as apps, even more than they drive the choice of which movie to watch in a theatre.7 And, despite technological advances, there is a limit to what goods and services can truly be purchased on global markets. Humorist A.J. Jacobs ran up against that limit when he tried to outsource to an assistant in India not only administrative and research tasks, but also the tasks of resolving disagreements with his wife and making phone calls to his relatives.8
It seems that, even in a theoretically borderless world linked via digital technologies, borders still matter. This pattern is likely due to networks, relationships, culture, and habits formed early in life—what The Economist9 calls the “Marmite effect”—as well as trade and investment barriers.
Digitization Raises New Possibilities and Challenges
While preferences for buying locally may still dominate, there is no question that the ability to digitize information has changed the nature of global trade, as well as the possibilities and challenges it raises. Distance may still matter, but it matters much less than it once did, as a study in the European Economic Review confirmed.10
For one thing, digitization has opened up all kinds of new trading possibilities for Canadian businesses and their global counterparts. These include the following:
- Trade in virtual markets: Individuals and businesses can now buy and sell in virtual markets, spending real money on “virtual goods.”
- Trade in services: Services not previously considered internationally tradable—such as research, accounting, consulting, and medical diagnostic services—can now be provided remotely or coordinated across borders more easily. Services trade is growing rapidly. Trade in global IT services, for example, grew 150 per cent between 2000 and 2009, compared with about 30 per cent for trade in goods, according to an analysis prepared for a subcommittee of the U.S. Senate Committee on Finance.11
- Trade in smaller tasks or inputs: The ability to send information almost instantly across international borders has made it much easier to coordinate across regional or global value chains. Companies now break down their supply chains into smaller tasks or inputs than in the past. Each task is performed, or each component is bought, in the location that can provide it most efficiently. Trade in tasks—a term coined by economists Gene Grossman and Esteban Rossi-Hansberg12 in their 2008 study—has been growing rapidly. One indicator of this growth is that trade in intermediate goods grew by 15 per cent annually on average (compounded) over the past two decades, according to Conference Board calculations. Another indicator is global foreign direct investment, which grew by 10 per cent annually on average (compounded) over the past decade, according to Conference Board calculations based on United Nations Conference on Trade and Development (UNCTAD) data.13 Direct investment allows companies to locate different parts of their production processes in different countries.
- Trade in digital products: Companies can now more efficiently develop and sell digital products globally. Video games are a prime example. Canadian producers include companies such as Ubisoft (Montréal), Digital Extremes (London, Ontario), and Huge Monster (Toronto), all of which make games for global markets.
- Trade in digital products delivered electronically: Many digital products can now also be “shipped” via digital transfer, rather than physically. Products or services that were previously traded only in physical form—such as music, software, or video games on CDs—can now be downloaded instantly, regardless of their origin. This essentially eliminates the financial, time, and uncertainty costs of physical transport.
- Trade in physical products delivered electronically: Physical products are already being delivered electronically. Specialized printers can “print” physical parts and products from a digital design, as highlighted in a recent article in The Economist.14 These printers can create products such as car parts and bicycle frames from a series of digital slices. This technology makes it possible to e-mail a digital design of a product to be “3D printed” close to its final destination. It changes the economics of making customized parts and of manufacturing in general—and could have huge ramifications for the places where companies make or buy global inputs and products.
Digitization Increases Efficiency and Creates Opportunities for New Players
Digitization also opens up global trade possibilities to a whole new array of actors, including smaller businesses and individuals, and people in parts of the developing world where mobile phone use is widespread.
With the spread of Internet and mobile access to almost every corner of the world, barriers to selling goods and services in global markets have fallen dramatically. In theory, nearly anyone can now go global instantly without first selling in local markets. Traditionally, business literature and Canadian government programs have emphasized succeeding locally as a precursor to trading in global markets, followed by succeeding in the U.S. market and then, finally, succeeding globally. However, as more recent business literature recognizes, it is increasingly possible—and, in fact, can be advantageous—to be “born global.” One example of such a firm is Canada’s Sound Selecta, which makes applications (including Nursery Jam, aimed at toddlers) that allow non-musicians to easily make music. The company aimed its apps at the global market from the start. The rationale is that margins on digital products are relatively low, so the company needs access to a much larger market to succeed. Sound Selecta sells its applications via Apple’s app store, which in turn sells them to customers in North America, Europe, Asia, and beyond.15
The ability of individuals or small businesses to access the larger global market from the start, either via an existing multinational or on their own, may be particularly significant for Canada, given the relative importance of smaller businesses in this economy. (A forthcoming Conference Board report will look specifically at best practices for small and medium-sized enterprises using digital technologies to sell in international markets.)
Canadian companies will need to re-examine the way they do business and even the structure of their company, if they want to keep pace with or surpass their competitors.
By using digital technologies, companies also can reap large efficiency gains, which will help them to sell in global markets. A survey by the Organisation for Economic Co-operation and Development (OECD) found that, overall, such technologies strongly boost productivity.16 Cheaper communications technologies cut costs and increase efficiency for companies selling services or digital video games. Cloud computing—in which people share software and collaborate on files through the Internet—makes it increasingly possible for large and small companies to employ efficiency-enhancing technologies. Digital technologies can also help companies track and transport physical and electronic goods more efficiently. Moreover, trading in digital technologies reduces costs. In turn, this makes digital tools even more affordable and, therefore, more available throughout the Canadian and global economies.
Digitization Also Means Intense Competition and Raises New Issues for Businesses
While digitization opens up greater trade possibilities and markets to a wider array of businesses, and boosts productivity, it also means competition for trade in both goods and services can now be fierce. Customers and businesses have cheap access to comparative information and are no longer confined to local options. They can instantly compare prices, and new technologies, products, and content can “go viral.” The implications for business strategy are enormous. Companies will need to figure out how to be agile enough to respond to the speed of change.
Canadian companies that intend to compete globally—or even locally—now need to think about a host of new or intensified issues. These issues could include establishing and protecting their digital identities and reputations, safeguarding their private information (as discussed in a recent article in The Economist17), and protecting their intellectual property. Leaders will need to consider whether traditional forms of organization are agile enough to allow them to compete effectively in a more digitized world. They will also need to think carefully about how they can best use digital technologies, including electronic payment systems, to become more efficient and to keep pace with—or surpass—their competitors.
In addition, leaders should re-examine their economic assumptions. For example, as The Economist noted in February 2011, 3D printing makes it as cheap to create single items as to produce thousands, undermining assumptions regarding economies of scale in manufactured goods.18 As they determine how best to position themselves, companies also need to determine how digitization will change the locations where value is added in global value chains, as well as where power and control lie in those value chains.
Companies should also ensure their strategies reflect what has not changed. For example, physical social networks continue to influence how companies and individuals choose both physical and digital goods and services, as the Martin Prosperity Institute study showed.19
So, has digitization changed the nature of Canada’s global trade? Technological advances are unlikely to ever erase national borders completely. Culture and in-person networks mean that the world will never be completely flat, but distance matters less than it once did. And, over time, it may matter even less, as governments establish greater confidence in the digital marketplace and reduce barriers to digital trade, and as more consumers and businesses open their eyes to new possibilities. The result will be many more opportunities and many more challenges for Canadian businesses and individuals in the global marketplace.
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