The shift in financial transactions in global trade from a 'physical form' to 'internet mode' is no longer news. With the increase in the number of digitisable products, a considerable value of global trade has moved from the traditional forms to internet-based or digital channels. Can the conventional method of gathering trade statistics - which tracks shipment data generated in the Customs department - capture the magnitude of these digital trade flows? Doubtful, it seems, as there has been a sharp fall in the trade of digitisable products captured through such traditional or existing channels. Since trade statistics is a key determinant in global trade negotiations between countries and trade blocs (free trade agreements, regional trade agreements etc), it is important to develop a system that captures the changing dynamics in global trade.
Growing digitisation of physical/real trade through the platform-based e-commerce companies like Amazon, Ali Baba, Flipkart and others is a reality. While the existing harmonised commodity description and coding (HS) based system of tracking the volume and value of global trade was fine in merchandise trade, digitisation has necessitated an expansion of data collection process by tasking not only various national customs departments but also involving the Central Banks by seeking to share the data on payment bank transaction records. The latter will also need to be categorised in order to segregate industry-level trade flows as in the case of HS system or standard international trade classification (SITC). And it has to be at a global level as otherwise, it can have disastrous effect on developing countries as it can hide the real impact of liberalised global trade under WTO and various free trade agreements with countries and regions.
While sharing of information on non-tariff measures (NTMs) and financial flows linked to online transactions have become essential, analysing the linkage between investment and trade liberalisation under a particular trade agreement has also become very important. There is a growing need to analyse the regional value chains which get created as a direct outcome of goods liberalisation under the FTAs with investment flows to FTA partners. While so far, traditional goods trade information of partners has been available for analysis, it is difficult to carry out a corresponding analysis on investment flows. It is evident that in order to make a complete assessment of regional value chains and impact of trade agreements, investment data at the firm level by the FTA partners becomes essential, similar to the way the RBI provides data in the case of outward foreign direct investments (OFDI) and the Department of Industrial Promotion and Policy (DIPP), Ministry of Commerce gives for inward foreign direct investments.
There is a need to address the change in the modes of trade flows and the inadequacies and concerns with regards to NTMs in order to do any policy-relevant research. This calls for a complete revision with respect to the collection of trade flow statistics by national authorities as now we are aware that it happens in two forms - physically (normally through the customs) and the digital mode (through the online transactions and the payment banking system). It is crucial to address the emergence of 'artificial data gap' as a direct outcome of increasing digitisation and growing use of NTMs. All these also call for [re]negotiation of all the existing and future FTAs by India - most significantly the regional comprehensive economic partnership (RCEP) which is still in the negotiation stage.
India needs to re-evalute its market access possibilities within the RCEP negotiations given this new evidence, as we are at a critical stage in the negotiations with a greater focus on market access for goods, investments, and services. Furthermore, in order to analyse India's net gains from trade and investments under an FTA, there is a need to re-negotiate sharing of data on product-level NTMs, payment bank transactions, as well as firm-level investment details. It is therefore crucial that such statistics should be collected by creating legally binding agreements at the time of signing any new trade agreement. Towards this, there is a need to create a concordance between the harmonised system and the broad investment sectors matching up with manufacturing activities.
Market access is currently being negotiated and analysed primarily based on two steps - detailed initial desktop research based on trade flow data, and later on, assessments are done based on stakeholder consultations. Trade flow data has therefore been the foundation for market access analysis. Even though some aspects can never be predicted/modelled because of the dynamism in entrepreneurs' response to domestic or external changes, others can be still predicted based on trade data analysis.
However, under the GATT/WTO, trade analysis has been limited to exploring a country's tariff commitments under tariff line. Thus tariff overhang (the difference between the WTO bound commitment and the MFN applied tariffs) has been used to identify the sectors having policy space. The same is made more credible by using trade-weighted tariffs at the disaggregate level, wherein the imported values are used along with the MFN applied tariffs. Such analyses for market access were dependable and therefore countries have used them under the WTO as well as under regional and bilateral trade agreements. The conventional methods of market access analysis using traditional trade analysis are, however, increasingly becoming insufficient for making a complete market access assessment as trade transactions have witnessed some significant irreversible changes. Therefore, trade analysis using conventional frameworks and trade flow data are unable to capture the global realities.
The answer to the questions of why and what have changed in the twenty-first century lies in the manner in which information on trade flow is available for the analysis. Conventionally, we get the trade flow data from the national or multilateral sources. However, the information gaps and asymmetry in these trade flow data sources have significantly increased owing to two major changes.
The changes that seem to have happened are two: firstly trade barriers have moved from the border (tariff) to behind-the-border (non-tariff trade regulations); and secondly, the channels used for trade flows are different. Digital revolution (whether one considers them as under the 4th industrial revolution or the 5th technological revolution) has led to a change in the mode of trade flows from physical to electronic, which are difficult to capture under the conventional method. For making any assessment on market access, it is, therefore, essential to consider the impact of NTMs and electronic transactions along with tariffs.
The second important reason why the negotiators are increasingly caught on the wrong foot is because products impacted by the digital revolution have moved from one platform to another. The global trade flow under the influence of digital revolution indicates that we are required to make adjustments to capture the missing data, which has changed the channel of flow.
Global trade in all merchandise goods and 29 digitisable products are analysed for the period 1988-2017. It shows that total imports have seen a secular increase from $1.7 billion to a peak level of $16.1 billion in 2008. After that imports slowed, but reached a second peak of $18.0 billion in 2011 and continued the upward trend to touch $18.5 billion in 2014. Total global import decreases in absolute value to $16 billion in 2017. The trends in digitisable products were almost similar up to 2008. Imports of digitisable products increased from $15.7 million to $82.2 million. This value slid by more than half after that to $ 36.4 million in 2017.
It is evident that while total global trade showed an increase, trade flows in digitisable products (captured through the current data flow channels) have decreased both in terms of value as well as share in total global trade. The critical aspect is to interpret why global trade in digitisable products have been falling since 2008. The trade in digitisable products cannot be expected to fall in an otherwise growing global trade scenario. Let us consider one of the 29 digitisable products, for example, the "published books". This is an industry whose global revenues are on the rise. For example, the revenue from the global book publishing market is forecast to slightly increase in the coming years, growing from around $113 billion in 2015 to about $123 billion by 2020. British company Pearson is the largest publishing house in the world as of 2015. Besides Pearson, Thomson Reuters, RELX Group, Wolters Kluwer and Penguin Random House are also leading book publishers in the world. The US has by far the largest publishing industry, followed by China and Germany. The trading has shifted away from the 'physical forms' to 'internet modes' beginning from 2006 or even earlier in the 29 digitisable products individually. Digitisable products are therefore leading to a scenario wherein a considerable value of the global trade is shifting away from the general merchandise form to the internet-based form/the digital channel. The conventional method of gathering trade statistics, which is often taken for granted does not capture these trade flows and therefore, we observe a sharp fall in the trade of digitisable products captured through this traditional/existing channel.
While this may be at a preliminary stage, this trend is bound to get accentuated with the increased digitalisation happening across sectors and industries.
A major concern is the growing digitisation of physical/real trade through the platform-based e-commerce companies like Amazon, Ali Baba, Flipkart and others. With the growth in digitisation, exchanging information by the central banks is increasingly becoming important as trade in more and more sectors is moving from merchandised trade to the digital mode through the payment banks.
It is evident that there is a need for expanding the manner of data collection by tasking not only the various national customs departments but also involving the Central Banks by seeking to share the data on payment bank transaction records. The latter will need to be categorised in order to segregate industry-level trade flows as in the case of HS system or SITC.
It may be already too late; and there is an urgent need for newer mechanisms to address such concerns under the the WTO and the FTAs. Otherwise, it could have a disastrous impact on financial and fiscal needs of developing countries.
(Author is a professor at the Centre for WTO Studies, CRIT, Indian Institute of Foreign Trade, New Delhi)