WTO report warns of protectionist policy in non-digital sectors

Last Monday, the World Trade Organization (WTO) released its annual World Trade Report (WTR) that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system. It says in the digital age, a growing number of governments are adopting policies aimed at boosting growth through innovation and technological upgrading.

The WTR notes that many government policies still retain ‘defensive’ aspects, particularly in mature non-digital sectors that are subjected to intense competition and technological transition. The greatest concentration of ‘protective policy’ instruments are seen in these sectors, aiming to manage the transition and address employment concerns.

However, going forward, supporting the transition towards a digital economy is becoming the key objective of so-called ‘new industrial policies’, whose conceptual basis and content have been partly reshaped by the distinct features of the digital economy. As data becomes an essential input, firms rely more on intangible assets than on physical ones. Digital firms are more scalable, reach global markets faster, and large players may expand globally without the amount of physical investment previously necessary in other sectors.

Success in the digital economy underscores the need for openness, for access to information and communications technology goods and services, open-source technology, foreign markets, collaborative research projects, and in general for the diffusion of knowledge and new technology, says the report.

The WTO has helped eliminate tariffs on internet and telecommunications infrastructure products through the Information Technology Agreement (ITA) and extension of these benefits to non-ITA members. It has helped liberalise internet services through the Telecommunications Agreement, and stimulated e-commerce with the moratorium on duties on cross-border digital flows and also advocated a robust and stable framework for the development of global and open standards and intellectual property protection. It can, in the years ahead, play an important role in reducing uncertainty in markets for digital goods and services but this will mean updating the WTO framework to address new challenges and demands, says the report.

The WTR, however, warns the transition towards digital economy can have positive spillovers such as generating growth, creating new markets and encouraging technology diffusion as well as negative fallouts such as distorting trade, diverting investment, or promoting unfair competition with the winner-takes-all characteristics of certain digital industries.

Our government has articulated a vision to vastly expand the digital infrastructure, provide more government services through internet and digitally empower the citizens and taken many actions through the ‘Digital India’ initiative. However, to generate more employment opportunities, recent policies have shifted focus to the domestic manufacturing sector through higher import duties besides lower income tax rates and production-linked incentives to large companies.

The WTR seems to favour relatively new policies such as collaborative research and development support, knowledge diffusion through agglomeration, technological hubs, data policies etc., instead of the more conventional policies focused on tariffs, investment and tax incentives. It seems to hint at limits of policies that facilitate access to advanced technology by import of capital goods or technologies and building knowledge through partnerships and global value chain participation.

The WTR is a highly nuanced report that deserves the attention of policymakers, business leaders and analysts, as its essential focus is on the current trends and future possibilities. Wider discussions on the issues it raises can help tweak the policy responses.