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By Danny Hermawan

This journal seeks to provide empirical evidence regarding the significance and correlation between trade barriers to digital services and economic growth. Despite existing studies on the effect of trade barriers on international trade, the body of research on the impact of trade restrictions in digital services is still limited.  This research uses data for a panel of 44 countries from 2014-2019 and considers various types of digital services and income levels.

Since Solow established the classical growth model in 1956 to estimate economic growth by adding capital and labour variables, numerous studies have continued to add other variables, such as the flow of goods and services.  Various studies have demonstrated a positive and significant correlation between cross-border trade flows and economic growth, especially in low- and middle-income countries around the world.

In the 20^th century, world trade was dominated by capital- and labour-intensive flows of tangible goods, predominantly between industrialised nations, with the majority of flows comprised of monetised transactions.  In the 21^st century, however, international trade flows have evolved, starting with intangible data and information flows, the participation of developing economies, and transfer of knowledge to the exchange of free content and services, which has led to trade restrictions/barriers on data flows becoming more prevalent and expensive for firms and economies.

Many studies have demonstrated a negative correlation between trade barriers and economic growth.  In addition, the cost of international trade in services is significantly higher than for the trade in goods. The trade costs for final services were 277% and 194% for intermediate services, with several studies emphasising the importance of digital trade.  A recent follow-up study shows that data restriction rules tend to reduce the volume of trade in services, especially service imports because restrictions on access to digital services can increase the cost of providing online services.  Although studies do exist concerning the impact of cross-border data restrictions on international trade, research on the impact of trade restrictions in digital services is limited.

The term 'digital trade' previously referred to anything that relies on digitally transformed information and knowledge, such as the Internet, FinTech, cloud computing and other developing digital technologies, which are used to collect, analyse, store and distribute information digitally. Differences in nations' levels of digital readiness may explain the disparities in digitally delivered services across income groups. Countries with adequate Information and Communication Technology (ICT) infrastructures that are generally digitally ready are better positioned to capitalise on the opportunities created by service digitalisation.

The rapid pace of digital transformation has significantly impacted the services industry. The percentage of services delivered digitally has increased from 45% to 52% of the total trade in services.  This has occurred because digital technology encourages innovation, provides employment possibilities and increases productivity, thereby boosting economic growth.  The expanding involvement of digital technologies relates closely with digital trade, which includes digitally-enabled transactions of trade in products and services that may be provided digitally or physically, and which involve consumers, companies and governments. Barriers, therefore, such as inward-looking policies, regulatory disparity and limited trade infrastructure, could threaten to undermine the benefits of digitalisation.  Such barriers can stifle innovation and impede the cross-border flow of digitally-enabled services.

​This research seeks to provide evidence for the significance and correlation not found in previous studies regarding the empirical evidence of barriers to trade in digital services on economic growth.  By considering various aspects of digitally-enabled services, including infrastructure and connectivity, payment methods, electronic transactions, intellectual property rights and other restrictions, while grouping the countries into two categories, namely high income and middle income, the research finds that trade restrictions on digital services significantly reduce economic growth, while financial freedom and high-tech exports are shown to drive economic growth even though government spending impedes this.  In addition, the results were still consistent when the entire sample was divided into high- and middle-income groups.  The results for the middle-income group, however, were statistically insignificant.  To stimulate long-term economic growth, therefore, policymakers must reconsider trade restrictions on digital services.

References

Jangam, B. P. (n.d.). DO BARRIERS TO DIGITAL SERVICES TRADE HAMPER ECONOMIC GROWTH? EVIDENCE FROM A CROSS- COUNTRY ANALYSIS. Bulletin of Monetary Economics and Banking. https://bulletin.bmeb-bi.org/bmeb/vol26/iss0/7/