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Canada’s Trade in a Digital World—Page 3

by Danielle Goldfarb | April 2011

What Governments Can Do

In his January 2011 State of the Union address, U.S. President Barack Obama told the American people that “the world has changed.” In response, the President said that America must “out-invest, out-educate, and out-build” the rest of the world.

This is a good summary of the challenge Canada faces: How can Canada best take advantage of the global trade and investment opportunities digitization represents when our businesses face both opportunities and competitive pressures next door and around the world?

As already noted, Canada was once a global leader in setting out a strategy for a knowledge-based economy and investing in broadband. Since then, other countries have overtaken our lead, and technology has advanced rapidly. Many countries—particularly in Europe and Asia—have launched their own digital economy strategies, as Wolfe and Bramwell’s report (PDF) summarized.37

Canada has not yet responded with a clear, leading-edge digital economy strategy. Moreover, while some businesses are taking full advantage of digital tools to become more efficient, access global markets, and design digital content, Canadian businesses as a whole have been slow to adopt leading-edge practices.

Fortunately, as this briefing has also discussed, Canada has many areas of relative global strength in both digital-producing and digital-using businesses. In addition, Ottawa has an opportunity to redefine Canadian leadership with a new digital economy strategy, assuming the government elected in May 2011 releases such a strategy.

A New Digital Trade and Investment Strategy

The issues raised in this briefing point to Canadian governments taking the following actions at a minimum, as part of a new “digital trade and investment strategy.”

Policies at Home

  • Invest in digital infrastructure: Countries that have quality electronic infrastructures export and import more. According to one analysis, improved Internet infrastructure is associated with a greater trade increase than reduced tariffs are.38 Relative to leaders in Asia and Northern Europe, Canada has fallen behind in Internet infrastructure investment. We must invest in the next generation of Internet and mobile infrastructure.
  • Invest in skills and education: Investments in the best infrastructure will be useless or even counterproductive if Canadians do not have the skills to use that infrastructure well. Increased technology access without corresponding skills can actually worsen outcomes. One study (PDF) associated greater access to home computers with significant and persistent declines in math and reading test scores.39 Digital literacy, computer science, critical thinking, and creative thinking skills are all important foundations for developing and using digital technologies.
  • Develop a clear regulatory framework: Policies need to build confidence in the accessibility, reliability, security, and privacy of digital technologies and related networks. Canadian governments must ensure a competitive marketplace both for technologies themselves and for the networks that allow the technologies to interact. Canada also needs to have a broader and deeper discussion about the best policies to ensure continued innovation and competition in a more digitized world.
  • Broaden the country’s digital economy strategy: Canada’s digital economy consultation paper (PDF) focused most of its attention on developing Canada’s digital-producing industries.40 But virtually all Canadian businesses need digital technologies to succeed in the global economy, whether they are competing in resource industries, services sales, global value chains for manufacturers, or digital media industries. For Canada to take full advantage of the benefits digital tools offer, the country’s strategy must recognize the potential of businesses across all sectors to benefit from digital tools. The same applies to digital economy strategies being contemplated by provincial governments, such as Quebec’s.41 A broader strategy should also promote Canadian leadership in global policies in this area, as discussed in the next section of this briefing.

Policies Abroad

  • Rethink trade policies in a digital world: While digitization allows companies to get around some barriers to accessing global markets, it also raises the relative importance of other barriers, such as barriers to information and traded services. Ottawa needs to determine how much weight it should give to various trade barriers in a digital world. Moreover, policy-makers have to address the increasingly blurred distinctions between goods and services that are a result of digital technologies—a complex task, given that these distinctions form the foundation for existing trade rules.
  • Show leadership on digital trade: Canada’s digital economy consultation paper (PDF) focused on actions at home.42 The strategy should be broadened to promote Canadian leadership in setting global standards that affect all forms of digital trade. Since many countries are reconsidering policies relating to digital trade, there may be a window of opportunity to influence global policy-setting. With thoughtful and forward-thinking policies, Canada could have an impact on emerging policy in this area, shaping it to support greater confidence in digital technologies and trade, while balancing other public interest goals such as privacy and security.
  • Reduce barriers to information flows: Governments and researchers analyzing trade barriers have traditionally focused on tariff and other barriers to traded goods rather than on barriers to data flows. But, as this briefing discusses, data barriers can have a widespread trade impact. As long as governments retain the scope to meet reasonable security and privacy needs and other public interest goals, and balance these against any negative trade impacts, Canada should aim for the broadest flows of information across borders. Canada should spell this out as clearly as possible in its free trade agreements. (See “Clarifying Electronic Transmissions.”)
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    Clarifying Electronic Transmissions

    World Trade Organization members have agreed not to impose tariffs on “electronic transmissions,” and many bilateral or regional free trade agreements contain similar statements. Unfortunately, such statements have created a lot of uncertainty. Do they include only tariffs, or do they also cover non‑tariff barriers? Can authorities treat software or music shipped on CDs differently than the same content downloaded online? Do “electronic transmissions” refer to the transport of the product or the product itself?

    To partly address this issue on a smaller scale, Canada’s recent bilateral free trade agreements have replaced the term “electronic transmissions” with references to a “(digital) product delivered electronically.” This should make it clearer that trade barriers relate to the digital product being delivered rather than to the means of transport.

  • Reduce barriers flows of people: As digital tools make it increasingly possible to trade in services, negotiators should place greater importance on opening up markets to traded services. This means raising the profile of barriers to traded services, which include restrictions on  movements of people, such as visa rules. As part of its free trade negotiations with the EU, Canada is already negotiating to improve movements of people. Ottawa has also made an ambitious offer on temporary movements of people in the current round of multilateral trade talks.
  • Reduce barriers to flows of investment: As digital tools help companies coordinate global value chains and boost services trade, the role of investment becomes more critical. Canada needs to both address its own barriers to investment and advocate more open access in other markets.
  • Continue to eliminate tariffs and non-tariff barriers: Digitization allows companies to break their value chains down into smaller components and coordinate globally. Trade barriers penalize these inputs at each border crossing, so eliminating remaining tariffs and non-tariff barriers on goods remains an important goal.
  • Eliminate barriers on digital technologies: Digital products and services face barriers such as tariffs and regulations that restrict Canadians’ ability to both adopt them and sell them in global markets. As an earlier section of this briefing highlighted, past attempts to eliminate such barriers have been limited to tariffs on existing technology products. To be able to stand up in the face of rapid technological advances, future policies should be principles based rather than based on identifying specific products to include.
    As the EU study (PDF) noted,43 the EU has proposed an “international digital economy agreement” that would eliminate tariffs and non-tariff barriers on all information and communications technologies. Canada should support such an initiative. Moreover, in advocating for no barriers on digital technologies, Canada should push for what trade negotiators call a “negative list” approach—that is, everything is included unless explicitly excluded—to ensure coverage extends to future technologies.
  • Use digital tools to facilitate trade: Digital technologies can help streamline trade and address border barriers. Electronic reporting has become the new reality at the Canada–U.S. border. It can help governments pre-screen shipments to address security concerns, allowing them to fast-track legitimate trade.
  • Define and move to international standards: Global standards, such as those related to data flows, can help simplify and create more certainty in international trade. They can be particularly helpful for a small economy like Canada’s, particularly for smaller Canadian companies. Bringing countries that ban digital information flows into standard-setting discussions might also influence them to remove such barriers. As one academic has noted, it may not be realistic to develop a single global standard in all areas, so the focus should be on “ensuring the widest application of common norms.”44
  • Recognize the limits of trade policy: In some cases—for example, in countries that require a local corporate presence or ban information flows, and where negotiation is unlikely to succeed—technological advances may allow people to get around such barriers. For example, Egyptians and those around the world supplying them with technology found myriad ways to circumvent the government shutdown of Internet and cellphone networks in the face of anti-government protests in early 2011.45 Of course, governments need to put sufficient safeguards in place to prevent people from using digital technologies for illegitimate activities (such as trade in illegal drugs), while encouraging people to use them for legitimate trade and investment.
    In the future, technological advances may make trade barriers on physical goods less relevant, as the 3D printing of physical goods illustrates. Tariff and non‑tariff barriers on inputs or final products may not matter if one can send blueprints digitally anywhere in the world and then print out the related goods where they are needed.

In short, Canadian governments need to invest in leading-edge infrastructure and skills; rethink and reduce barriers to flows of information, people, services, goods, technologies, and investment; increase confidence in the digital economy; and recognize where technology might eliminate the need for policy action. With global policies in flux, Canada has a window to advance these ideas internationally.

What Businesses Can Do

While policy can provide a strong environment, ultimately, businesses will have to take the lead in using and developing digital tools to help them succeed in global markets. Among other actions, businesses must do the following:

  • adopt leading-edge digital technologies to increase their efficiency, improve their access to global markets, and keep pace with—or surpass—their competitors (for example, companies can move away from paper-based finance to e-payments and e-invoicing, or invest in digital technologies to track inputs throughout their supply chains so that they can fast-track their goods across borders);
  • build on areas of relative strength, both in digital activities and in areas where they can leverage digital technologies to access global markets;
  • determine the best place to position themselves in global value chains in a digitized world;
  • assure governments in countries where they operate that they will respect rules to protect security and data privacy, in return for certain market access; and
  • become more agile in response to rapidly changing global conditions and technologies.

Businesses that fail to act are likely to lose ground to their competitors, and may have difficulty integrating themselves in global or regional value chains.

Conclusion

While the world will never be completely flat, the ability to digitize information opens up new global trade and investment possibilities, changes the nature of existing trade, and poses new challenges for Canadian businesses of all sizes.

With policy-makers around the world wrestling with these changes, Canada has a window of opportunity to lead, both in actions it takes at home and in negotiations with others. To boost Canadian prosperity and help Canadian companies benefit from globalization, Canada needs to invest in infrastructure and skills, and broaden the range of trade and investment barriers its policies address, while recognizing the limits of some policies in the face of technological advances.

For their part, businesses in both digital-producing and digital-using industries must identify their relative strengths, adopt digital technologies, and consider how digitization changes—or does not change—the way they and their competitors trade in global markets.

In short, to best position the country as a leader in using digital technologies to succeed in the global economy, both Canadian businesses and governments will need to out-innovate, out-educate, and out-build the rest of the world.

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Acknowledgements

This briefing is published by The Conference Board of Canada’s International Trade and Investment Centre. The Conference Board is grateful to the Centre’s champion and lead members, which support the Centre’s research program through their membership. These organizations do not necessarily endorse the research conclusions of this briefing.

This briefing was originally written as a series of blog posts using Google Docs, a web-based application, allowing identified reviewers to simultaneously view and comment on the most up-to-date version in real time. During this phase, the author benefited from comments on specific posts by André Downs, Eileen Fischer, Avi Goldfarb, Glen Hodgson, Becky Reuber, Daniel Schwanen, Don Stephenson, Louis Thériault, and David Wolfe.

The series was then published as a series of Conference Board blog posts.46 This allowed the author to benefit from the insights of others who identified themselves as interested in this topic—in other words, to use “crowd sourcing.” The final briefing took into account a range of insights from those who commented on the posts, and the author thanks those who contributed. Thank you also to Shauna Brail, Avi Pollock, and Gale Moore, who provided feedback at an early stage of the project.

37  Wolfe and Bramwell, Growing the ICT Industry in Canada.

38  John S. Wilson, Catherine L. Mann, and Tsunehiro Otsuki, “Assessing the Benefits of Trade Facilitation: A Global Perspective,” The World Economy 28, 6 (2005), 841–87.

39  Charles T. Clotfelter, Helen F. Ladd, and Jacob L. Vigdor, Scaling the Digital Divide: Home Computer Technology and Student Achievement (PDF) (Durham, N.C.: Duke University, July 29, 2008).

40  Industry Canada, Improving Canada’s Digital Advantage: Strategies for Sustainable Prosperity (PDF), consultation paper (Ottawa: Industry Canada, 2010).

41  Government of Quebec, “A Plan to Position Quebec in the New Global Economy,” news release. March 17, 2011.

42  Industry Canada, Improving Canada’s Digital Advantage (PDF).

43  EU Trade Policy Study Group, A Modern Trade Policy for the European Union.

44  Mann, International Trade in the Digital Age, 5.

45  Larry Magid, “Google Helps Egyptians Tweet Via Landline,” The Huffington Post, January 31, 2011.

46   Danielle Goldfarb, “Trading Digitally,” The Conference Board of Canada, February 2011.

Danielle Goldfarb Danielle Goldfarb
Associate Director
International Trade and Investment Centre

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