Negotiating trade rules in e-commerce: Strategies that benefit the Indian industry

As the pandemic continues, digtialisation will play a key role in inclusive growth and recovery of the  Indian economy.  In this context, Dr Arpita Mukherjee and Dr Pritam Bannerjee argue that India should be at the forefront of global negotiations on e-commerce, particularly the Joint Statement Initiative that now has 86 member countries. Further, they elaborate on the Indian perspective to various issues under the purview of these negotiations, based on detailed interactions with stakeholders.

The global digital economy and e-commerce has seen a unprecedent growth in the past decade, which has been fast-tracked by the fourth industrial revolution (4IR) and the coronavirus pandemic. Global e-commerce sales were US$ 26.7 trillion in 2020 (UNCTAD, 2021). India’s digital economy is projected to be US$1 trillion by 2025, constituting around 18-23% of the gross domestic product (GDP). India’s e-commerce market was valued at US$ 38.5 billion by volume in 2017 and is estimated to reach US$ 165.5 billion by 2025.

NASSCOM data shows that the Indian technology-based industry has grown from US$ 191 billion in FY 2019-20 to US$ 194 billion in 2020-21 and growth has doubled between 2009 and 2019. The sector employed around 4.47 million in FY 2020-21. India is the 3rd largest technology start-up hub in the world. In 2020-21, telecommunications, computer and information services accounted for nearly 50% of India’s services exports. Thus, India is at the centre-stage of the global digital and e-commerce revolution, and the country needs to harness its strength through domestic policy reforms and negotiations in international platforms, as it’s poised to become the 3rd largest economy by the year 2047.

India’s International Engagement

India has been a proponent of liberalising Mode 4 (temporary movement of high-skilled professionals) and Mode 1 (cross-border trade) in the World Trade Organization (WTO) and in its trade agreements. While India continues to maintain this position, as its relaunches trade agreements with key partners like the European Union (EU) and Australia and enters into trade negotiations with the United Kingdom, it is yet to take active role in wider international discussions on e-commerce.

For example, India is not a part of the Joint Statement Initiative (JSI) on e-commerce, which was launched by 71 WTO members at the 11th WTO Ministerial Conference in December 2017, and now has 86 members. India also did not sign on “sharing of data with a trust” during the Osaka Track of the Japanese G20 Presidency.  The discussions in JSI are moving at a fast pace and participating countries have finalised the negotiating text on issues like e-signatures and authentication. By not participating, India may be at a receiving end, where it has missed the bus on contributing to the discussions, which could be beneficial for the domestic industry.

TPCI_Data Protection

There can be some genuine concerns for India to take a defensive position and one of them is related to regulatory gaps. India is yet to come up with a regulation governing data protection and privacy. Majority of Indian industry players, that are exporting are General Data Protection Regulation (GDPR) compliant. Hence, the industry is ready and in fact requesting for a regulatory framework, which is transparent and fair. At the same time, not all countries participating in JSI have their regulatory framework in place and, therefore, JSI will have to keep options for regulatory evolution with technology developments.

India’s position to stay out of JSI may be more strategic than economic, where it would like to be a leader of developing countries, protesting any initiatives led by developed countries in the WTO. In this context, a 2021 paper by UNCTAD, titled “Joint Statement Initiative on E-Commerce (JSI): Economic and Fiscal Implications for the South”, argued that digital rules can restrict fiscal and regulatory space of the developing countries and can lead to high costs of compliance.

Based on this paper, some experts opine that India can lead the developing countries in not joining the JSI. At the same time, 86 countries, including many developing counties, have already joined the JSI. Most important is that in case of digital trade and e-commerce, India’s position and its strengths are different from many developing countries and generic concerns of developing countries may not be applicable to India. Another view is whether India can use its entry into JSI as a bargaining tool for gains in other areas, as it did for trade facilitation vis-a-vis food security. This may be a good option, but time is running out to contribute to JSI.

Based on UNCTAD research, India has also submitted a communication to the WTO on the E-commerce Moratorium: Scope and Impact, along with South Africa, in March 2020 and received clarification on the scope. Regarding, continuation of the moratorium, and other issues discussed in JSI, the authors had in-depth meetings with technology companies, their associations and policy experts, and the summary of the discussions are presented below.

Moratorium, Duties and Taxes

 There are some researchers who would like the government to oppose the extension or permanency of moratorium on Customs duty for digitally delivered products and services in the WTO as it will potentially lead to tariff loss, especially for developing countries.

However, JSI proposals include provisions allowing domestic taxation of such intangible digital products. For most developing countries, since most of the largest providers of digital content and products are large global MNCs, imposing domestic taxes would be akin to a tariff as its incidence would largely be on these global players. The OECD has already developed a robust framework for digital taxation to which India is a party.

For large developing countries like India who would like to retain policy space to promote local digital firms and development of local digital content, work arounds such as tax breaks or incentives for local digital content development, start-up incentive funds, and incentives designed for specific digital products can also be used. Many of these instruments are being used by countries across the world to support the growth of their local digital economies.

Since over 50% of India’s services exports are IT/ITeS, and a significant chunk of it is delivered cross-border digitally, some measure of tariff-free market access would be critical. Thus, a moratorium works in favour of the Indian IT/ITeS industry. India is also developing its export capabilities in new areas like e-sports and online gaming. It is, therefore, in India’s interest to ensure that its exports are not adversely impacted by any decision taken in the interest of other developing countries, who may not be exporting digital products and services.

Developing a Legal Framework for E-commerce

The JSI proposal requires members to mandatorily develop a legal framework based on the UNCITRAL Model Law on Electronic Commerce to govern e-commerce transactions, while ensuring that such a legal framework does not put unnecessary regulatory burden on electronic commerce and electronic transactions.

There is concern that the mandatory requirement to develop a legal framework to govern e-commerce would put unnecessary burden on the existing legal institutions of developing countries. In addition, the requirements to adhere to the UNICTRAL model law, would limit the legal flexibilities available to regulators in developing countries in being able to adequately regulate the big technology firms from markets such as the US, EU, and China.

Given that cross-border e-commerce is increasing, there is an urgent need to have laws governing these transactions. If these laws are based on internationally agreed upon principles, it is the best approach. Unless India participates in the discussions, how can it raise its concerns?  There is need for detailed discussion with the industry and legal experts on the UNICTRAL model law. This law already includes fundamental principles that allow regulation of anti-competitive and monopolistic practices and provide leeway in developing national standards.

Using the UNICTRAL Model law as a guide, India and other developing countries can choose to define what legal principles are necessary and draft proposals to the JSI accordingly, prioritizing the legal instruments and principles essential to ensure competitive safeguards. This can include the additional caveat that the necessity of what type of regulation is needed is reviewed every five years and be made subject to consensus given that the dynamic nature of technology, and new technological means that enables incumbents to create monopolies or enable them to impose unfair and anti-competitive practices on the market.

E-signature, Contracts and Authentication

JSI has proposals for rules for universal acceptability of electronic signatures, contracts, and invoices. JSI proposals also want to push for universal acceptability of digital versions of all trade related documents, i.e., ensure that most documents submitted to Customs and other regulators for exports and imports are in electronic form. There are concerns that developing countries may lack the financial resources, technology and adequately trained manpower for large scale mandatory adoption of these technologies, and that SMEs in developing countries who are digitally less advanced would be disadvantaged.

Countries of the world_e-commerce_TPCI

However, given the ongoing pandemic, governments are fast adapting technologies and digital inclusion of SMEs is a priority for all governments, including India. In fact, India is a leader among developing countries in terms of both electronic contracting and signature use, and aggressive use for trade facilitation, and, therefore, has all the more reason to proactively participate in this aspect of JSI negotiations, using its experience to ensure that the principles agreed upon are in the interest of developing countries. Countries lacking resources can be given more time for adoption (special and differential treatment as is mandated under other WTO agreements).

This is an area where the JSI made significant progress. In a statement issue by co-conveners Japan, Australia and Singapore, on December 14, 2021, it was mentioned that the JSI has achieved good convergence in negotiating groups on eight articles, namely, online consumer protection; electronic signatures and authentication; unsolicited commercial electronic messages; open government data; electronic contracts; transparency; paperless trading; and open internet access.

All these will facilitate trade and are important for businesses and India needs to know and see what is agreed upon. For example, not all JSI proposals on electronic transactions may be easy to agree to. The Chinese proposal to grant full market access to foreign e-payment services and equal treatment on par with national firms is an over-reach. Governments would have legitimate security and consumer protection concerns about safeguarding their citizens and firms. There are also complicated issues related to the jurisdictional ability of local regulators to hold a foreign e-payment firm accountable in case of wrongdoing. These concerns are largely shared by most countries, and India would not be alone in rejecting such over-ambitious proposals.

Cross-border Data Flow and Data Localisation

In 2022, negotiations in JSI will intensify in this area. While JSI proposals are strongly in favour of eliminating restrictions on cross-border transfer and offshore processing of data, and opposes data localization, they allow restrictions related to legitimate policy goals like data security, privacy, and national security. Basically, there is a consensus on “data sharing with a trust”.

Large developing countries like India generate a lot of commercially profitable data. There is a fear that data generated in developing countries can be tapped by large digital players based in industrialized countries for profit, while the data generators in developing countries will get no benefit from this. This is an important concern that needs to be looked at in practical terms.

The linkage between data localization leading to data centres being developed locally and that leading to competitiveness is highly spurious one. What actually matters is who ‘owns’ the data (i.e., has the ability to make people/systems share the data), and has the capability to process and then use that data for economically profitable ends.

Without having the firms that can manage the process of collecting and storing big data, and have the knowhow for applying algorithms and analytics, it would be impossible to leverage the benefits of big data in industrial design and automation (so-called industry 4.0), logistics management, product design and development, consumer targeting and marketing, or provide embedded digital products and services across vast swathe of manufactured products.

There is no doubt that a country like India, which generates a large amount of data, can benefit with state-of-the art data processing facilities, and government need access to data for governance and policymaking. However, the issue is of governments being able to access this data when needed, and ensuring that sensitive data is kept safe. Both these objectives can be achieved irrespective of where the data is stored.  An Indian private players with local data server can misuse data just as much as a foreign player storing data outside the country.

Data Centre_TPCI

In fact, most global MNCs have data centres in multiple locations. Malaysia is a great example. It hosts many data centres, but apart from some revenues from data centre location, gains little economic advantage from the data from across the world being hosted physically in data centres located in that country. Thus, hosting does not imply benefiting from the data that the country hosted.

India has one of the world’s largest consumer markets including a large and growing middle-class that generates massive amounts of data. The allowed restrictions in JSI proposals on personal and sensitive geological or logistical data, again based on allowed restrictions on security aspects would create a natural case for locating data centres in India. This would not be true for most other developing countries that do not produce such massive amounts of data, especially that represents significant commercial value, and hence, India is different from other developing countries.

India also has a large pool of technically skilled manpower and start-up/innovation eco-system that can analyse this data successfully. This again is not true for most developing countries. The combination of the two would make India an ideal location for developing data centres and associated analytics and related services, data service centres. If India can provide assured high-class digital infrastructure that is secure and reliable, the economies of scale and on average lower cost skilled manpower would make India the global location for data centres and become a major source of revenue.

It would therefore extremely important for India to help design a global system that allows cross-border flow of data with a trust, with some restrictions, privacy and security requirements put in place. India is a business process outsourcing hub and has the potential to mine sensitive data in sectors like healthcare and financial services and the country needs to leverage this strength.

To leverage on its potential, India would have to remain engaged in global negotiations and try and get the best deal possible, i.e., nuanced restrictions based on legitimate needs to protect citizens and national security that also allows it to leverage its economies of scale in data generation, but not so restrictive that it prevents data flows across borders adversely impacting the growth of the data led services where India can potentially emerge as the global leader.

It needs to be pointed out that restrictions on data flows based on protection of privacy, consumer protection or national security are very common, especially in most OECD member states (for e.g., EU, Canada, USA), the same countries that are proposing open borders for data in JSI. This underlines that this ‘nuanced protection’ approach is already a reality and is being strategically used. India needs to be actively playing the game, not withdrawing into isolation.

The focus on ‘data localization’ stems from some regulators belief that by having jurisdiction over local entity and local servers, they would have better ability to regulate and hold accountable any miscreants. This represents an old practical challenge in global commerce, i.e., the ability for smaller countries to impose due process on large multi-national players. The answer must lie in developing international arbitration, where all members will commit to cooperation not just on the framing of common rules and punitive measures, but also on enforcement, i.e., if wrong-doing is established, all member states will cooperate to enforce the punitive measures.

Taxing the digital transmission of production design and 3D printing

Increasing digitalization and automation of manufacturing means that Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) files can be used to ‘print’ manufactured products in any country, irrespective of the tariff protection given to those products. This process is being exacerbated by increasing adoption of 3D printing. The concern is that if the current growth trajectory of 3D printing continues, 50% of the manufactured goods will be ‘printed’ by 2060 and if investments in 3D printing doubles, this target will be achieved in 2040, wiping out almost 40% of cross-border physical global trade.

However, simply putting a duty on the electronic transmission of CAD for a product in no way creates barriers to actual local production. In fact, most developing countries would be happy to have local production aided by CAD in their country, and benefit from all the value-addition related to that local manufacturing instead of simply importing those goods.

3D printing does not mean producing tangible goods out of thin air. 3D printing combines three main elements to produce a product. A product design or customization in form of a digital coded form that is transmitted online, combination of ‘material mixtures’ or paste which is used to produce or ‘print’ the product, and the printer(s) themselves.

This means that only the digital code encapsulating the design or product customization is being transmitted across the border in electronic form. The materials mixtures or paste that represent the inter-mediate inputs have to be either imported physically into the country of production, or produced locally. Similarly, the capital goods for such production, i.e., the printers would also need to be either imported or locally sourced.

In essence, this is not so different from the current situation, where intermediates and capital goods are imported as tangibles (or sourced locally), and product design/customizations are the ‘intangibles’ that are brought into the country without any-check. For e.g., there is nothing stopping anyone carrying hard-drive full of production designs into a country and then tooling the machines using these designs to produce the goods they want.

In the future, with 3D printing becoming more ubiquitous, countries would have to classify the new tangible inputs, i.e., the different types of material mixtures and pastes, and apply tariffs on them accordingly as per their strategic needs and priorities. The same would be true for the new type of capital goods, i.e., the different categories of printers. The IPR, i.e., the design elements are even today not taxed at the border, but are subject to tax regimes related to royalty etc. for intellectual property rights purchases or represent a form of intra-firm transfer pricing. In fact, in most cases, they are internalized in the overall production costs, and subject to the taxation on the price of the final product.

Restricting the Rights of Governments to Demand Source Code

JSI proposals would like to restrict member governments from requiring the transfer or access to source code of software owned by foreign firms as a pre-condition for commercial use of products/services using that software/algorithm in its territory. However, the right of governments to demand access or transfer to source code for security reasons, enforce IPR violations or anti-competitive practices, or in order to enforce court orders are allowed as exceptions in these proposals. These firms need to be assured of protection of their source code, reduce victimization and ensure transparency of the investigations.

The concerns being expressed in some quarters is that accepting such proposals would severely limit the sovereign ability of governments to demand source codes from foreign firms to ensure their effective compliance with taxation requirements or with other national laws. These concerns need to be put in context what Indian priorities should be in this matter, and the fact JSI proposals already includes exclusions related to security, competition, and adherence to requirements by a court of law subject to which regulators would be able to access sources codes.

As Indian companies, especially digital Unicorns, also tap the international markets, they also want to have some means to deny unjustified requests for source code from governments in countries they operate in. These codes represent research and development effort by firms and have commercial value for them.

If there were no adequate checks and balances on the right of states to demand source codes, especially if the purpose was obtaining the knowhow and passing it on to local firms in the name of ‘knowledge transfer’, this would be unfair and against the principles of fair trade, and against the interests of the many Indian firms making the presence felt globally in the IT and digital sectors.

To Conclude

India is negotiating bilateral trade agreements and discussions in JSI are going to be reflected in these agreements. Existing bilateral like the one with Japan is also up for review. It is better to be a part of a forum like JSI and play an active role to develop the trade rules rather than to enter JSI at a later stage or to agree to it through the bilateral agreements. The year 2022 is important in JSI as discussions in key areas like data sharing and localisation and source code will be held. Discussions will also intensify on market access. India cannot afford to be outside such discussions.

As the pandemic continues, digtialisation will play a key role in inclusive growth and recovery of the economy.  At the same time, it is important to collect and collate robust data on e-commerce and digital trade in the country, identify the export barriers, and understand the expectation and requirements of the industry. Interest of the Indian industry should be at the centre of India’s negotiating strategies and options – that will help to make India “Atmanirbhar Bharat” and help it achieve the target of the third largest economy by 2047.

Dr. Pritam Banerjee brings several years of experience in the areas of economic policy, logistics operations, trade facilitation, and trade policy. He is currently engaged as Logistics Sector Specialist Consultant with the Asian Development Bank (ADB). Dr. Banerjee was previously Head of Public Policy, South Asia with Deutsche Post DHL Group. Prior to that he has served as the Head of Trade Policy, Confederation of Indian Industry’s (CII). and with the World Bank in Washington, D.C.  Dr. Banerjee is member, Steering Committee of the National Council for Trade Facilitation (NCTF). He serves as the Executive Member of the Federation of Indian Chambers of Commerce and Industry (FICCI) Logistics Task Force. Dr. Banerjee has a PhD in Public Policy from the Schar School of Policy and Government, George Mason University, and a MA in Economics from Jawaharlal Nehru University. He has been extensively published on issues related to international trade, regional integration, regulatory reforms, logistics and connectivity, and trade facilitation.

Dr Arpita Mukherjee is a Professor at ICRIER. She has several years of experience in policy-oriented research, working closely with the Government of India and policymakers in the EU, US, ASEAN and in East Asian countries. She has conducted studies for international organizations such as ADB, ADBI, ASEAN Secretariat, FCO (UK), Italian Trade Commission, Konrad-Adenauer Stiftung (KAS), OECD, Taipei Economic and Cultural Centre (TECC), UNCTAD and the WTO and Indian industry associations such as NASSCOM, FICCI, IBA, IDSA and EICI. Her research is a key contributor to India’s negotiating strategies in the WTO and bilateral agreements.

Views expressed in this blog are personal. Usual disclaimers apply.

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