The Trump administration’s imposition of tariffs on steel and aluminium imports, announced in March, raises the spectre of an escalating trade war. The European Union, China and Canada have all threatened retaliation, while the justification for the tariffs, on grounds of national security, risks undermining the rule-based trade dispute mechanism of the World Trade Organisation. The threat to the synchronised global recovery and to investment, innovation and jobs, is substantial.
But while tariffs are the most visible form of trade costs, and the ones most easily controlled by governments, they are not the most important. Differing regulations and product standards, uneven access to trade finance, lengthy customs procedures and taxes, as well as infrastructure and transportation costs, can have a much greater effect.
These factors are behind the relatively low participation rate in global trade. Only 10%-20% of companies export their products, and this trade is dominated by large firms that can afford the complex processes, customs and payments involved. Much of this trade happens within the supply chains of large companies, on which smaller firms depend for demand. The average exporter sells to just three or four countries.
Developments in logistics, electronic payments, data processing and global product listings, aided by online commerce platforms, are changing this rapidly. Such platforms are tackling high costs and complexity by combining a range of services that trade depends on, such as customs facilitation, shipping, warehousing, and data and payments handling, and performing them as part of the sales process. Using data generated by online transactions, they also offer targeted marketing and search tools and global product listings, significantly reducing information barriers.
Data from eBay suggest these factors have lowered trade costs on ecommerce platforms sixfold relative to traditional exports. As a result, up to 98% of companies listed on platforms like eBay, Amazon and Alibaba trade internationally. They also export to more countries, at between 20 and 40 on average.
This combination of processes distinguishes the ecommerce model from companies that simply have an online presence. These companies must pay for advertising, shipping, website design and other factors separately, both reducing their reach and raising their costs.
The World Bank estimates that improving the efficiency of national logistics services would have a greater impact on boosting trade than the elimination of all tariffs. Ecommerce is providing the catalyst for this improvement.
Over the past six years, institutional investors have spent almost $100bn on logistics centres, warehousing, data storage and other infrastructure related to ecommerce. This has increased export efficiency and lowered transportation costs at a time when governments have generally been underspending on infrastructure.
Yet despite its rapid growth, ecommerce’s share of world trade remains low and is uneven between regions. Ecommerce platforms face a number of hurdles. Overcoming them will require government support.
Inefficient ports, bad roads, monopolies on infrastructure ownership and lack of domestic competition are among the challenges. The low threshold at which consumers in some countries must pay customs duties on imported items, which disproportionately affect the high-volume, low-value goods that dominate small and medium-sized enterprises’ exports, must be raised. These taxes are highly disruptive to ecommerce models that depend on rapid, low cost exports and which allow international refunds and returns as part of the service.
The prospect of achieving economic growth and development by utilising online marketplaces may persuade governments to adapt their policies. The potential is particularly high in emerging economies, where internet penetration is growing rapidly from a low base.
Malaysia opened the first free-trade ‘e-hub’ with China’s Alibaba in November 2017, offering simplified regulations, customs clearance, payments and logistics to facilitate trade between SMEs from the two countries. The WTO made ecommerce a focus of its ministerial meeting in December.
This trend could be transformational. Global trade growth has slowed to half its pre-crisis average and export participation remains uneven. At a time when governments are contemplating trade barriers, ecommerce platforms and their associated digital, logistics and financial services could help drive a new and more balanced wave of trade expansion.
Ben Robinson is Senior Economist at OMFIF.