New Government Report Confirms Benefits of Digital Trade

The digital economy has been a major boon to U.S. domestic and international trade, as is documented by a new report by the United States International Trade Commission entitled Digital Trade in the U.S. and Global Economies (summary here). And even though the report shows important benefits from digital trade, those benefits are likely understated. This is because the report limited its analysis to “digitally intensive” sectors, which means that its numbers exclude contributions from firms that only use digital trade as a smaller part of their business.

Still, digital trade has made quite an impact: the report estimates that digital trade has raised real U.S. GDP by $517.1-$710.7 billion (3.4−4.8 percent) by increasing productivity and lowering the costs of trade. By raising GDP, digital trade increased average wages, and the increased wages likely contributed to increased employment by as much as 2.4 million jobs.

Within digitally intensive industries (and likely within many non-digitally intensive industries, although the report focused on the former), the internet has come to play a major role in everyday commerce. Firms in these industries sell nearly a trillion dollars’ worth of goods and services yearly via the internet, 30 percent of which are digital-only goods. They also do a large amount of purchasing (e.g. B2B transactions) online.

Digital trade isn’t just benefiting large companies like Amazon or Google, either. Small and medium sized enterprises (SMEs) make up a quarter of digital trade sales and fully a third of digital trade purchases. In other words, digital purchasing has been widely adopted particularly by smaller businesses.

Despite these encouraging statistics, the report’s survey data and model estimates make clear that the benefits of digital trade could be much larger. Digital trade, particularly international digital trade, has been held back because many countries have not done enough to create the right policy environment for it to flourish. Non-tariff trade barriers such as localization requirements, market access limits, and even data privacy and protection requirements can make it difficult for U.S. firms to compete with local ones. The lack of regulation or regulatory enforcement can also make digital trade difficult, as intellectual property rights and clear systems of liability are paramount for a well-functioning digital trade regime.

Although the idea that digital trade benefits the economy is not exactly revolutionary, the ITC report does a good job of summing up those benefits and also provides a number of interesting insights into how firms are using the internet to improve and expand their business. U.S. firms have many strengths, but they are facing increasingly strong competition. It is imperative that the competition is fair and that we continue to support the ongoing transition of U.S. businesses into the digital economy.

(photo courtesy of tweakfest)