Electronic Commerce: Trade Policy in a Borderless World

Jul 29, 1999

Speech by Charlene Barshefsky

I want to thank Lee Hamilton very much for inviting me to speak with you today, on this most interesting of subjects.

Our topic today is by no means a simple one. Electronic commerce, and the broader consequences of the development of information technologies, telecommunications and the Internet, are in their infancy. They are developing with great speed and unpredictable consequences, and are already forcing governments to think differently about many issues.

Today, I will outline for you first the implications we see in these early years of electronic commerce for trade and U.S. interests; and then turning to the policy framework we have developed in response.

The Information Revolution

To begin with, let me simply note a few of the practical consequences we can already see as a result of the information revolution.

In health, telemedicine is transforming rural health care as family doctors consult on-line with the NIH and the Centers for Disease Control. In science, virtual reality guides microscopic cameras through blood vessels and robots across the landscape of Mars.

In travel, the Global Positioning Service safeguards shipping and makes family vacations easier and safer through immediate warnings of bad weather or traffic jams ahead.

And in public life, democracy is strengthened as Web sites and e-mail give students and citizens access to news, information and debate; which of course has its darker side, in giving hate groups and criminal organizations instant access as well.

Electronic Commerce

The same revolution is changing business and trade.

Global electronic commerce – the use of the Internet and other forms of electronic transmissions to buy and sell – will make companies more efficient, as computers allow them to cut inventories, provide better and more timely customer service, and meet consumer demand more efficiently. To give a concrete example, estimates are that when you go to a bank, your transaction with the teller costs about a dollar; when you use an ATM, it's about fifty cents; when you use the Internet, it drops to thirteen cents.

Internationally, the Internet will allow businesses and customers to find one another more rapidly, reduce the complexity of finding and filling out paperwork, and erase borders completely for products available in digital form. Especially interesting and exciting is the potential of electronic commerce to spur entrepreneurialism in disadvantaged areas: the Internet allows small businesses, and individuals in poor countries or remote areas to enter markets at low cost, find customers easily, and cope with paperwork and regulations far more efficiently.

For consumers, electronic commerce will raise living standards and create tremendous new sources of leverage over companies. It will give consumers new power to compare price and quality among vendors all over the world. And it will make buying more convenient, as consumers bypass department stores and use computers to order products from downloaded music and film to home appliances delivered directly to the home from any international source.

But electronic commerce also, of course, raises some more troubling questions. Governments must reflect on the ways to adapt national trade and crime-fighting policies to a borderless world. Consumers -- and businesses too -- know that together with rising living standards and better prices come questions about Internet scam artists, abuse of credit cards, collection of personal data about purchases, visits to Web sites, and other privacy issues.

The Policy Challenge

And so our immediate challenge emerges. Consumers should get the maximum benefits of new technologies. Our companies, our national economy, and our trade partners should be able to use them to the best effect. And we should maintain high standards of public safety, privacy and consumer protection that help define the quality of life.

When we apply these questions to trade policy, we must add another novel challenge. For fifty years the United States has followed a policy of opening markets and reducing trade barriers, which generally although not always appear at national borders. The trade policy questions raised by the Internet, however, demand a policy that is in many ways the opposite of this approach: cyberspace is a world with no natural borders, and as yet no trade barriers either.

This is a complex challenge, made more so by the rapid growth of the Internet and electronic commerce. The Internet, with three million users in 1995, now has 140 million worldwide, with 52,000 new Americans logging on each day; by 2005 it may reach a billion people around the world. Electronic commerce, totalling about $200 billion last year, may reach $1.3 trillion in the United States alone by 2003 -- and many other countries are expanding just as quickly, with e-commerce in Thailand likely to quintuple this year, and e-commerce in India will grow by perhaps $15 billion within two years.

Looking more closely at individual industries, the possibilities are even greater. In some fields -- notably industries like software, entertainment, health and education – electronic commerce opens up the possibility of instantaneous delivery of services anywhere in the world, bypassing ports, customs and transport. And new products and services develop every moment.

U.S. Principles

That said, neither in trade policy nor in other policy fields do we necessarily face utterly new and alien concepts. Electronic commerce and the Internet are technological innovations -- but also logical developments of earlier innovations in communications and information technology, dating to telegraphs and telephones 100 years ago and more.

So while we must adapt our thinking and policies in certain important ways, our traditional principles remain valid. We have generally believed that government policies should be in the form of self-regulation where possible, rather than attempts to control the development of industries and technologies.

Where this does not succeed, of course, the government has an obligation to protect citizens, especially those most vulnerable, through impartial means. And in either case, we have maintained an open and non-discriminatory market, believing that trade generally creates positive competitive pressures and raises living standards. These principles, we believe, will be valid in electronic commerce as well:

* It will be very difficult to predict precisely how an electronic marketplace will develop, and which goods, services and technologies will be most successful. So we do not propose to try; rather, we will wherever possible leave this to the private sector and the market.
* Further, while government action to fight crime, protect children and protect privacy in electronic commerce and the Internet will be necessary, evaluating the need for new regulations will be a very complex task. Unless the decisions we ultimately make rest on a strong consensus among the private sector and consumers as well as government, the most likely result will be a set of regulations that are both burdensome for businesses and consumers, and ineffective in their primary objective.
* And finally, as there are no natural borders to cyberspace, the development of policies and solutions must, as much as possible, be a worldwide effort.

Since 1995, we have been developing an institutional infrastructure for electronic commerce to give businesses and consumers the confidence and predictability we enjoy in traditional form of commerce. The issues involved range from managing domain names, establishing standards and a legal framework for digital signatures, ensuring adequate privacy protection, and addressing the tax implications of electronic commerce. All these issues are extremely important to the future of electronic commerce, and our colleagues in other agencies are addressing them through international talks and in our domestic agenda.

In trade policy, we are developing our broader principles through specific objectives at the WTO, and through advisory committees in our regional and bilateral trade initiatives. These goals fall into three major categories: unimpeded development of electronic commerce; enforcement of existing regulations to protect consumers, fight crime and so forth; and extending access to the electronic marketplace. And let me now review our objectives in each area.

Objective One: Unimpeded Development of Electronic Commerce

First, we want to ensure unimpeded development of electronic commerce. Here we have several specific objectives: duty-free cyberspace; technological neutrality; and ensuring the most liberal treatment of products carried on electronic transmissions.

1. Duty-Free Cyberspace
Most immediate is our initiative to keep cyber-space duty-free -- that is, to prevent the imposition of tariffs on electronic transmissions. To impose customs duties for electronic transmissions would be a burden on the development of this technology lightened only by the extraordinary difficulty of collecting the charges. It would both slow the growth of electronic commerce, and encourage that growth to take place outside the law.

Today, fortunately, no member of the WTO considers electronic transmissions as imports subject to duties for customs purposes. There are no customs duties on cross-border telephone calls, fax messages or computer data links, and this duty-free treatment should include the Internet. We have thus spent a great deal of energy in preventing their emergence, and so far with success. We secured a temporary "standstill"on application of tariffs in this area at the WTO last year, and will seek consensus on an extension of it as the WTO Ministerial Conference in Seattle this November approaches.

2. Technological neutrality
At the same time, through the longer-term WTO work program we seek consensus on a broader principle of "technological neutrality," to ensure that products delivered electronically are protected by the trade principles of the WTO.
New technologies and telecommunications services make possible a vast range of new activities. Whether it is call centers in Nebraska, Internet radio out of Texas, software production in India, or inventory monitoring in Ireland, a cheap, powerful global network now brings services to the area in which they are carried out most efficiently.
We can predict neither the new activities of the next decade, nor the methods which will deliver them most cheaply and easily. Neither, in fact, can technical experts – if you recall that Alan Turing, one of the inventors of the computer, thought in the 1940s that one of its major uses would be "calculating range tables for artillery fire." But what we can predict is that, with freedom to develop new ideas and technologies, we will find better and easier ways to conduct business all the time. Technology neutrality, in the trade perspective, means that countries should not deny firms and consumers the benefits of newer or cheaper goods and services simply because they are delivered electronically, and their trade commitments should reflect that. Otherwise, countries would choke off innovation before it begins.

3. Digital products
And we believe the world should keep an open mind as to classification of the types of products delivered over the Internet. It may be that our traditional distinction between "goods" and "services," which are treated differently under the WTO agreements, is becoming somewhat outdated. We have and should keep an open mind as to the appropriate classification; and as a starting point we endorse Japan's proposal to ensure that digital products receive the most liberal treatment possible under the existing WTO agreements.

4. Intellectual property rights
Fourth, protection of intellectual property rights is essential if electronic commerce is to reach its full potential. This raises a special challenge, as music, film, and other copyright products will very soon be available over the Internet as easily through stores, cinemas or video rental shops. And this in turn also raises at least the possibility of an explosion in on-line piracy. Our principal vehicle for preventing this from occurring is our support for wide ratification of recent World Intellectual Property Organization (WIPO) Treaties addressing Internet piracy. And of course, we support establishing in parallel with ratification rules that outline the liability of networks and manufacturers.

5. The E-Commerce infrastructure
And finally, we are promoting a set of principles that create the most effective possible infrastructure for electronic commerce.
E-commerce flourishes where telecommunications is cost-effective and innovative. The U.S. is now the E-commerce hub of the world because we have such an infrastructure: we have embraced competitive provision of telecom services, spawning the greatest capacity, the lowest prices, and the most innovative offerings in the world. The result: American use their telecom network, by minutes of use, three times more than the Japanese.
We have begun to export that model to the rest of the world through the success of the WTO Basic Telecom Agreement. The case for this model is now more compelling than ever. Not only is competition clearly the best way to stimulate growth and consumer welfare for traditional telecom services, but it provides the platform for the exponential growth of electronic commerce. This is a virtuous circle in which low communications costs stimulate new services, which in turn stimulates more investment in the underlying infrastructure. Supporting more competition in telecom markets globally is one of the single most important things we can do to ensure the growth of electronic commerce.

Objective Two: Consumer Protection

Together with, and fundamental to, unimpeded development of e-commerce is ensuring high standards of consumer protection: our second policy goal.

This is a fundamental American principle and a consensus policy goal. Consumers of course do not want to be cheated or exploited. And businesses who see part of their future in electronic commerce do not want the Internet to gain a reputation as rife with frauds and scams, or to gain a reputation for themselves as abusers of privacy.

Thus, in most cases we believe businesses can police themselves and one another. Many businesses already have voluntary privacy programs, backed up by good enforcement, allowing consumers who visit Web-sites to choose whether to offer information about themselves to the site operator. Those who refuse to adopt these programs will likely see business drop off.

At times -- especially with respect to children -- voluntary programs will likely need to be accompanied by government regulation and enforcement. As consumer protection regimes develop, governments should apply basic WTO principles like transparency and non-discrimination, and ensure that their regulatory processes are fair and open to advice from businesses and civil society groups. If not, the resulting policies will most likely impose burdens on consumers and businesses while failing in their primary tasks.

The specific issues we will face are often highly complex, and also rapidly changing with technology. Thus, our initial action has been not to regulate, but encourage discussions toward the solution acceptable to the broadest group of people -- in the view that the decision most acceptable to businesses, consumers and governments will also be the easiest to implement. These discussions are going on in, or in association with, our bilateral trade negotiations and each of our major regional trade initiatives:

* We have endorsed joint statements of principles, including such issues as duty-free cyberspace and consumer protection, with Japan, the EU, Ireland, France, the Netherlands, Korea and Australia.
* The Free Trade Area of the Americas negotiations, which began last September, have an Electronic Commerce Expert Committee which is exploring these issues with the intent of advising the other FTAA groups; the Committee includes representatives of business, academia and NGOs.
* Our Transatlantic Economic Partnership talks with the European Union make electronic commerce the focus of one of the seven areas of concentration. We also encourage and participate in discussions of electronic commerce issues in the Trans-Atlantic Consumer and Business dialogues.
* The Asia-Pacific Economic Cooperation Forum likewise has an E-commerce Steering Committee, which concentrates on a set of important technical issues.

In all these arenas, we act on the principle that the best way to reach our goals is transparency and close collaboration between government and the private sector. These are the kinds of good practices which embody key principles of the WTO, designed to foster trade and, ultimately, enhance consumer welfare.

Objective Three: Global Access

And this leads me to the third policy goal: everyone, here and overseas, should have access to the electronic marketplace.

One of the most profound and exciting implications of electronic commerce is its potential to speed development in poorer nations and disadvantaged regions at home. Rural areas, Indian Nations, small towns, and entrepreneurial associations in developing nations are all finding that Internet access requires little capital, helps entrepreneurs find customers and suppliers quickly, and eases technical and paperwork burdens that can slow participation in trade.

Thus, electronic commerce is ideally suited for developing countries and people with a good idea but little capital. We can already see this in action in India, for example, which is becoming a world leader in software. We also stress these opportunities in our African trade initiative, together with technical assistance programs to help create competitive, private-sector driven electronic commerce markets.

Together with this, of course, must come decisions in other fields – notably participation in efforts to remove barriers to information technology products and telecommunications services. A study group in the Philippines, for example, has noted high potential for electronic commerce; but only assuming that tariffs on information technology products and barriers to telecommunications continue to come down. So technical assistance cannot do it alone. But but together with commitment by developing country governments, it can help create a seamless, worldwide network which allows developing countries to enter trade quickly, spurring development and technological advance.


And that in turn is a means to a broader goal: a world economy which offers people greater opportunities to become entrepreneurs, raises living standards for families, and gives the next generation more than the present.

For these countries, and for us as well, electronic commerce is in its infancy. We have the luxury of being present at the creation of a very new phenomenon; and that gives us a great responsibility.

If we act today -- cautiously and sensibly, but with a vision of what the future can bring -- in the years ahead electronic commerce can develop into an extraordinary force for consumer benefits, economic growth, and creativity.

That is the goal we have set; and we will take the time to get it right.