Georgetown Journal of International Affairs, Volume 1, Number 2, Summer/Fall 2000

CIAO DATE: 05/02

Georgetown Journal of International Affairs

Volume 1, Number 2, Summer/Fall 2000

The Promise and Challenge of E-Commerce
Patricia Buckley^* and Sabrina Montes^**

In 1996, a small family–owned store in the valley of Benasque in the Spanish Pyrenees mountains began selling its ski gear and mountaineering equipment on the fledgling Internet. The store’s sales went from just over $590,000 with 2 percent sold outside the store in 1995 to $4.7 million with almost 25 percent of sales made online in 1999. A small business in a remote area creates an online store that enables it to expand its market globally and grow its business dramatically: This is the promise, but also the hype, of e–commerce. It is the promise because these are actual gains going to an actual producer. It is the hype because these types of transactions still compose only a minute fraction of total worldwide sales.

Even in the United States, where e–commerce is arguably most prevalent, online retail sales were only $5.3 billion in the first quarter of 2000. This amounted to less than 1 percent of the $748 billion total retail sales tallied during that same period. Given this tiny number, one might reasonably ask, why all the media coverage? Indeed, the media’s focus on e–commerce’s retail potential is misplaced. A more far–reaching consequence of emerging e–commerce technology will be the way it influences and improves business processes themselves.

The snazzy Web sites that enable firms to sell books, computers, and ski equipment to consumers worldwide represent only a tiny facet of what is made possible by technological progress. Many of the revolutionary applications of these information and communication technologies are taking place in the more prosaic world of business processes, such as procurement and information management. While these applications are changing the face of global business, it is not clear how they will develop in the future and what their impact will be on business. Will the new technologies level the playing field among businesses of different sizes or will they exacerbate the differences? Will they increase economic opportunity for developing countries or will they contribute to the advantages already held by industrialized countries?

Two implications, however, are clear about these technologies. First, there is a great deal at stake. The future economic health of businesses and nations hinges on how well they adapt to the realities of an increasingly digital world. Second, one cannot ignore the technological, regulatory, and legal issues brought about by e–commerce. And they are likely to become thornier as the Internet continues to grow rapidly. The number of connected computers has already increased dramatically from about 6 million in 1995 to 72 million in early 2000. The number of people online worldwide continues to surge, from fewer than 40 million in 1996 to an estimated 304 million in 2000. Now, for the first time, more than half of those online reside outside the United States and Canada.

In this environment, it is important to recognize and examine the stakes of the technology–driven changes that are taking place in business practices. If a small mountaineering equipment store can use the Web to expand its market globally, imagine what a multinational company can do. How will new technologies change business practices and what are the implications of these changes on global commerce? How have governments responded?

New Business Models

E–commerce is reshaping business practices and raising new sorts of cross–border issues between countries whose firms engage in electronic commerce:

A growing number of African tourist facilities now promote their accommodations and amenities directly to vacationers on the Internet, decreasing their dependence on overseas travel agents.

At World2Market.com, one can purchase a variety of handicrafts, from exquisite beaded Huichol masks from Mexico to a hand–embroidered quilt from Bihar, India.

An international collection of leading energy and petrochemical companies have announced plans to launch an online exchange specializing in goods and services (from gas exploration to marketing) relevant to the industry. The collective annual procurement spending of the founding partners exceeds $125 billion: 40 percent of this spending is in North and South America, 40 percent in Europe and Africa, and 20 percent in the Asia Pacific and the Middle East.

The example of the African tourist facilities using e–commerce to reach Western vacationers illustrates one of the key benefits of using the Internet. Electronic commerce enables firms to extend their reach, bring in new business, and at times bypass intermediaries (in this case, the overseas travel agents) and connect directly with potential customers. This model fulfills one of the early predictions about the Internet and e–commerce–that e–commerce would create efficiencies by eliminating the need for intermediaries. Manufacturers and service providers sell directly to the customer, and “middlemen” disappear.

The early predictions, however, failed to take into account the important role that intermediaries play. Nor did the early speculation foresee the resourcefulness some intermediaries would exhibit in finding new ways to add value in an online world. These predictions failed to anticipate, for example, a new type of intermediary, the online marketplace. While some producers directly target their customers, others are finding new spaces in which to conduct business online. In the World2Market example, the handiwork of widely dispersed artisans is brought together by a new online business–to–consumer intermediary.

The online petrochemicals exchange is another, although somewhat different, example of an online marketplace–a business–to–business marketplace. According to a recent estimate by the Economist, over 750 of these networked marketplaces have been developed worldwide. Some of these cover a wide variety of products and a diverse group of buyers and sellers. Some sites offer broader functions for more targeted client groups. Onvia, for example, is one of the many sites targeting small businesses. It seeks to be the portal for all of the goods and services required by small businesses. Other sites leverage existing relationships within specific industries on a global basis. Ford Motor Company, General Motors, and DaimlerChrysler AG, for example, have plans to develop an automotive supply space. Sears, Roebuck and Company and Carrefour SA, a Paris–based retailer, recently announced their intention to develop an online marketplace for the retail industry.

In all three examples, access to the Internet enables firms to extend their reach and potentially bring in new business. However, businesses and individuals in less developed countries, like those in the first two examples, are among the least able to take advantage of such benefits because of poor communications infrastructure in these countries.

E–commerce impacts many aspects of business beyond increasing the number of potential parties able to participate in the marketplace. For example, online markets can cause a shift in the relative balance of power among participants in a transaction. In Argentina, two Internet companies have created marketplaces for farmers (only 10 percent of whom have individual Internet access) to pool their buying power for the purchase of pesticides and herbicides. These companies claim to have achieved volume discounts of 5 to 15 percent and have seized the attention of the large multinationals from which they purchase.

The Challenge of Access

Access to the enabling technologies is a necessary precondition for the diffusion of e–commerce. Such access is limited in many countries by either inadequate communications infrastructure, by relatively high user costs, or both. It is difficult to talk about the benefits of e–commerce in places where there may be, at best, a single telephone for an entire village. In places where communications infrastructure is available, the cost of computers and other technologies needed for e–commerce may be a barrier. Even in countries with an extensive communications infrastructure and ready access to capital for investment in computers, the spread of e–commerce may slow down because of the cost of access to infrastructure. For example, some countries meter local phone calls, making it expensive for individuals to stay online for any length of time.

Access to appropriately trained human capital is also a necessary condition for the adoption of e–commerce. Unfortunately, worldwide demand for these workers easily outstrips available supply. While this labor imbalance has the potential to limit the evolution of the digital economies of developed nations, it has even more serious implications for less developed countries. The higher salaries and greater opportunity to work on cutting–edge projects in industrialized countries make it difficult for the developing world to keep their limited pool of technology workers at home.

Many regulatory and legal issues, however, stand to be resolved before the benefits of e–commerce can be realized on a global level. Many businesses and consumers are wary of conducting extensive business over the Internet due to the lack of a predictable legal environment governing transactions. This is particularly true in business–to–consumer transactions (where typically there is no written contract) and for international commercial activity where e–commerce accentuates existing issues related to cross–border trade or e–commerce, such as the enforcement of contracts and legal dispute jurisdiction. Take the hypothetical example of a European company operating servers in the United States that enable transactions to take place between the European headquarters and customers in Latin America. If a contract is developed using these computer–mediated communications channels, the legal jurisdiction for any subsequent disputes may be unclear.

Security versus Privacy

The global reach of online markets also raises issues of privacy and consumer protection. Different countries also have differing views on individuals’ rights to privacy and differing opinions on how to enforce privacy rights for their citizens. The proliferation of technologies that allow customer tracking and profiling raises questions about the use and sale of data collected over the Internet. Electronically collected information can now be compiled, matched, and “mined” to reveal the characteristics and habits of individuals or groups. Applications, such as “cookies”–text files automatically stored on a Web user’s hard drive by a Web site–enable the tracking of a Web user’s online activities. These tools help businesses to manage their inventories and customize the products they offer, but they also raise issues of privacy.

The ease with which information can be duplicated and transmitted has posed a challenge to intellectual property rights and raised questions of authentication and security. Authentication refers to assuring that a file or document has not been altered since its creation and that it came from the person or organization indicated as the sender. These concerns are particularly important in the case of legal records, such as contracts, or in situations in which control of duplication can be the key to profits, such as limiting distribution of digitized copyrighted materials. Related to authentication are issues of security. When data is transferred across a computer network, interception is always a possibility. Unauthorized access to data can also be damaging. A common concern of consumers on the Internet is the security of their credit card information.

Authentication and security concerns can be addressed through encryption technology, but this solution produces a different set of issues that pits concerns about privacy against the needs of law enforcement officials. In the open Internet environment, it is difficult to ensure that individuals and businesses can conduct their activities in a confidential manner without also affording the same degree of protection to criminal activities. The law enforcement community argues that the availability of strong encryption reduces law enforcement capabilities and represents a threat to national security. Others argue in favor of encryption on the grounds that sensitive electronic information–government, commercial, and private personal information–requires strong protection from unauthorized and unlawful access.

Taxation

Numerous questions also surround taxation, tariffs, and e–commerce. In the United States, sales taxes represent a substantial revenue source for state and local governments. These taxes are collected by businesses and remitted to states. A state, however, cannot require an out–of–state business, which lacks a local presence, to collect and remit sales tax for purchases made by its residents. States must therefore rely on self–reporting of purchases by taxpayers. State governments have no reason to assume that e–commerce sales will be reported any more often than catalogue sales (where use taxes are rarely reported). They are concerned that business–to–consumer e–commerce transactions could result in tremendous revenue losses if such transactions continue to grow at a rapid pace.

Other countries are also confronting the issue of e–commerce taxation. In the case of those countries that rely heavily on value–added taxes to support government services, it may be even more critical to find a resolution. Another complicating factor is the growing interest in digital delivery. If countries are not able to find an acceptable way to tax a compact disc delivered to the door, it is unlikely that they will be able to devise a method of directly taxing downloaded music. In addition to lost revenue, governments are concerned that tax differentials may unfairly disadvantage the “bricks and mortar” establishments located within their borders and favor cyber businesses.

The Multilateral Response

This is by no means a complete account of the issues that remain to be resolved if the benefits of e–commerce are to be fully realized. New issues will continue to emerge. Because these issues arise from use of a global computer network, in certain cases multilateral efforts may be required to resolve them. Many efforts to address these issues are already under way.

Ministers for the Organization for Economic Cooperation and Development (OECD) recently endorsed the Taxation Framework Conditions, which treats online commerce no differently than offline commerce. The OECD also issued the Consumer Protection Guidelines which establish benchmarks for transparent and effective consumer protection online. To facilitate implementation of its 1980 Privacy Guidelines, the OECD released a Privacy Inventory of Instruments and Mechanisms. It also developed a Web–based application, a “Privacy Policy Wizard,” to help private sector organizations establish privacy policies for their Web sites.

During the Free Trade Area of the Americas (FTAA) Conference, Western Hemisphere governments embraced private sector leadership and agreed to establish a groundbreaking public–private sector collaboration on electronic commerce. Drafted with the full participation of private sector representatives from throughout the hemisphere and approved by government delegates, the FTAA’s Joint Committee of Experts on Electronic Commerce recommended a broad range of market–led policies that would expand the benefits of e–commerce to the region.

Asia–Pacific Economic Cooperation Council (APEC) demonstrated its commitment to market–led electronic commerce by establishing an Electronic Commerce Steering Group and endorsing the OECD’s Taxation Framework Conditions and the United Nations’ Model Law on Electronic Commerce. The latter furthers electronic commerce by giving electronic documents the same legal validity as paper documents. APEC’s Telecommunications Working Group also joined the OECD in giving critical support to the U.S. view that governments should allow market forces to determine the development of electronic authentication systems.

In May 1998, the World Trade Organization’s (WTO) Ministerial Conference adopted a declaration committing all WTO member governments to refrain from imposing customs duties on electronic transmissions. Over the past year, the United States has worked intensively with the 135 WTO countries to extend this moratorium.

Through commitments on market access, national treatment, and regulatory safeguards by seventy WTO members, the February 1998 WTO Telecommunications Services Agreement already has encouraged billions of dollars in international investment in new telecommunications facilities. As a result, the drastic reduction in long distance rates witnessed in the United States is being steadily replicated internationally, removing geography and borders as a constraint on the delivery of a broad range of services and products.

Businesses are at the forefront of the rapid technological change. Many of the problems associated with this change have technological solutions that businesses are better suited to solve than governments or multilateral institutions. Such groups as the Transatlantic Business Dialogue, the International Chamber of Commerce, the Global Information Infrastructure Commission, and the U.S.–Japan Business Council have launched innovative efforts to provide policy leadership.

In many ways, the issues brought forward by these technologies–privacy, jurisdiction, intellectual property rights–are not new. The rapid pace of change associated with the emergence of e–commerce has, however, forced these issues to the forefront of international dialogue. The cross–border implications of e–commerce, as well as access to and use of the technologies driving it, have become high–priority matters for governments around the world. How effectively these governments, international institutions, and the private sector work together to address the challenges and potential of e–commerce will have critical long–term consequences for world productivity and prosperity.

Endnotes

The views expressed in this article are those of the authors and do not necessarily reflect the view of any other employee or entity of the U.S. Government.

Note *: Patricia Buckley is Senior Policy Adviser in the Office of Policy and Development of the Economics and Statistics Administration at the United States Department of Commerce. Back.

Note **: Sabrina Montes examines economic and policy issues for the Economics and Statistics Administration of the United States Department of Commerce. Back.