How to ensure that emerging digital regulations enable developing countries’ trade and ecommerce?

August 2, 2021

By Kati Suominen, Founder and CEO, Nextrade Group and Techical Director, eTrade Alliance

Ecommerce – the sale and purchase of goods and services online – is booming in developing countries and their export markets, opening new opportunities for developing country micro, small, and medium-sized enterprises (MSMEs) to grow their sales, export, diversify their markets, and create new jobs.

In the eTrade Alliance's work, we time and again find that developing country MSMEs have already scored important gains from ecommerce in terms of new clients, higher revenues, greater profitability, and new export opportunities. Marketplace sellers that use global marketplaces such as Amazon, Etsy, and eBay that connect firms to hundreds of millions of buyers do particularly well, deriving a strong share of their revenues from online sales, including sales across borders. 

However, developing country MSMEs still face significant pain points to doing cross-border ecommerce – most typically, to onboard global marketplaces and do digital marketing, deal with customs procedures and international delivery costs, and access financing for working capital to fulfill export orders.

In addition, our surveys and observations increasingly indicate that a wave of new challenges is swelling in the horizon: the proliferation of national digital regulations, such as laws related to data privacy and transfer, online consumer protection, and online liability and copyright, and to taxes levied on online sales. These laws are in flux globally as countries around the world are currently fashioning, revising, and debating their digital regulatory frameworks.

Surveys and emerging studies suggest that digital regulations pose three types of challenges to MSMEs that seek to sell across borders online: (1) they are technical, complex, and changing rapidly, creating new challenges for firms to find, understand, and comply with them; (2) they can, studies show, inadvertently or by design favor domestic firms and restrict trade; and (3) they tend to vary across countries, potentially complicating especially small online sellers’ efforts to diversify their sales across markets – just as divergent national physical product standards have for decades made it challenging for MSMEs to export to many markets.

In our recent surveys both in the eTrade Alliance and via other Nextrade engagements, we find that especially online sellers in such diverse markets as Kenya, Philippines, Vietnam, South Africa, Egypt, and Mexico report that proliferating national digital regulations such as consumer protection and data privacy rules represent a major obstacle for them to grow their export sales – in part probably because foreign rules can be hard to keep up with and decipher, and in part because especially multimarket online sellers struggle to deal with the “splinternet” of disparate national digital regulatory regimes.

These same challenges have bedeviled developed country sellers: for example, 57% of European companies said in 2015 before Europe’s Digital Single Market project was launched that they would either start or increase their online sales to other EU Member States if the same ecommerce rules were applied in all EU Member States.

Digital regulations can be trade-distortive and undermine developing countries’ efforts to promote MSMEs’ cross-border ecommerce. If limiting cross-border trade and firms ability transfer data, they can also undermine developing countries’ aspirations to attract investment in their technology sectors. This implies new work for development agencies and governments aiming to promote MSME ecommerce, in three areas:

First, there is a significant need to ensure that developing countries that are fashioning digital regulations consider the trade effects of these regulations – and that trade, investment, and SME agencies are at the table when developing country governments design their digital regulations, to ensure they are conducive to cross-border trade. There certainly is also a need to educate especially MSMEs to apply the rules in the books both at home and in their export markets.

Second, there is a hugely important future agenda of regional digital integration, both in terms of (1) promoting compatibilities among national digital regulations so that firms can apply similar rules when selling across borders as when selling to domestic buyers; and (2) facilitating digital trade among countries, for example through such rules as banning customs duties on the sale of digital goods (such as ebooks, games, videos, 3D-printable designs, etc.), freeing trade in digitally deliverable services, and ensuring free transfer of data across borders.

There are good emerging examples of digital integration for developing countries. Some leading examples include two free trade agreements with robust digital trade chapters, the 11-country 2018 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the 2020 U.S.-Mexico-Canada Agreement (USMCA), which promote robust common policies for consumer protection and data privacy. USMCA also promotes convergence of online liability laws, to ensure that the three members apply safe harbor protections for online platforms and thus better enable online platforms to regionalize more easily across the North American region.

These agreements also liberalize digital trade and data transfer among members, while enabling members to retain their domestic data privacy regimes. They ensure cross-border data transfer, free trade in digital goods, ban server localization, and liberalize trade in digital services. USMCA builds on these rules and also refers as a valid data transfer regime for the members the 9-country Asia-Pacific Economic Cooperation (APEC) Cross-Border Privacy Rules (CBPR) system, a government-backed data privacy certification that private companies voluntarily join to demonstrate compliance with international data privacy protections. 

Our forthcoming survey suggests that also African companies would be strongly in favor of adopting in Africa the kind of data privacy, consumer protection, and data transfer rules as included in the CPTPP and USMCA.

Another region to recently adopt a common regime for cross-border digital trade is the Southern Common Market (Mercosur) consisting of Argentina, Brazil, Paraguay, and Uruguay that in April 2021 committed to allowing cross-border transfers of data, protecting ecommerce users' personal data, protecting personal data received from another member state, and banning duties on electronic transmissions.

Clearly a multilateral agreement on digital regulations would be optimal, for all countries to apply more similar digital rules and enable digital trade. Many developing countries form part of the of the World Trade Organization (WTO) Joint Statement Initiative (JSI) on Electronic Commerce, which aims at a plurilateral agreement on ecommerce covering multiple digital economy issues. This work is as challenging as it is critical.

For development agencies, there is an important future agenda to enable developing countries that participate in these regional and multilateral processes both understand the types of rules that are conducive to trade and investment, and implement regional and multilateral commitments that support digital trade and integration.  

Third, technology can be deployed to both help MSMEs meet challenging regulations and altogether pre-empt heavy-handed regulations that are costly for firms to implement and governments enforce.

For one, regulatory technology, or Regtech, that uses structured and unstructured data and technology to help firms monitor and meet regulatory requirements. Used especially by banks to comply with financial regulations, Regtech use cases are proliferating; one application could be  to enable developing country firms to use Regtech to monitor compliance with digital regulations.

In addition, emerging and rapidly improving solutions such as encryption and confidential computing can significantly help firms secure data at rest, in transit, and in use, enabling firms to secure the data that are transferred to third parties and across borders. Further promising technology solutions include a corporate digital identity that promotes trust among parties in online transactions (for example, among a consumer and an MSME seller, or two MSMEs located in different countries), and online dispute settlement resolution (ODR) that is helping countries like Mexico and Canada to solve small-ticket disputes related to online transactions and promotes consumers’ trust in online truncations.

Ongoing national, regional and multilateral processes aimed to establish digital regulations will have far-reaching implications for small firms that engage in ecommerce as well as the productivity and trade of firms in many other sectors. The development community needs to both ensure developing countries adopt digital regulations that are conducive to 21st century’s trade, and that they implement good regulations. There is also much more creative work to be done to use emerging technology solutions to facilitate firms' regulatory compliance across markets.