Fact of the Week: A 10 Percent Increase in Digital Connectivity Reduces Trade Costs by 2 Percent
Source: Chiara Bellucci, Stela Rubínová, and Roberta Piermartini, “Better together: How digital connectivity and regulation reduce trade costs,” WTO Staff Working Papers, World Trade Organization (WTO), No. ERSD-2023-07 (November 2023).
Commentary: A November 2023 working paper by Chiara Bellucci, Stela Rubínová, and Roberta Piermartini analyzed the effect that digital connectivity, and its associated regulation, has on trade costs. The data on trade costs came from the OECD’s Inter-Country Input-Output tables. Using data from the International Telecommunication Union, the authors measured digital connectivity as the number of broadband subscriptions per capita. The study looked at 61 countries across 34 sectors between 2014 and 2018.
Overall, the authors found that a 10 percent increase in digital connectivity reduced trade costs by about 1.5–2 percent. This was the case for goods, services, and digitally deliverable services. The authors also suggest that the reduction in cost could in turn increase overall trade flows by around 6–7 percent. Similar cost reductions occurred even for countries already in a customs union or in a regional trade agreement. The researchers suggest multiple causes for these cost reductions. These include reductions in transactions costs from electronic payment systems, reductions in language barriers arising from translation software, and from new efficiencies in logistics management.
The authors then analyzed how a country’s digital trade regulations affect the impact of digital connectivity. Using data for the OECD’s Digital Services Trade Restrictiveness Index, they found that reducing the regulatory burden to the median level could increase the impact of digital connectivity by 60 percent. Additionally, they found that further reducing regulation from the median level could increase the impact of digital connectivity by 80 percent in the case of digitally deliverable services.
