The Rise of Digital Trade

by Jacob Maichel

The use of the internet in recent years has grown exponentially. The number of people with internet access has increased from 738 million in 2000 to a staggering 3.2 billion in 2015. The internet has brought with it myriad innovations and conveniences to our lives. This transformation molds every aspect of society, including the redefinition of international trade.

The internet’s ability to transcend borders to connect people has changed how we do business. Digital trade can be thought of as the transfer of goods and services either completely online or via electronically managed physical deliveries. Purely electronic services are companies such as Netflix while electronic middle men such as Amazon connect sellers and buyers across the globe.

Internet traffic increased 500 fold from 2000 to 2015. This has led to an expansion of competition.  Digital trade encourages the exchange of ideas and offers collaborative opportunities not seen before.

The rise of the internet has also reduced the cost of exchange, bringing massive financial benefits to everyone in society. The exchange of data has reduced information asymmetries and enables consumers to make find new products they would not have had access to in the past, while also teaching producers how to create better products. Transaction costs have been slashed due to the easy access to the global market. Tracking systems have completely revised global supply chains, helping reduce expenditures on replacing lost items. Particularly exciting for smaller businesses is the fact search costs are minimal now as they can use a trusted middleman such as Amazon to bring their goods to consumers.The U.S. Trade Commission estimates that the internet reduces trade costs by an average of 26%.

Small and Medium enterprises (SMEs) have the greatest chance to benefit from digital trade barring future regulation. Businesses that do not have the capability to have a physical presence in foreign countries can now access new revenue through intermediaries at exceptionally low prices.

In the United States we should celebrate the rise of digital trade. The United States has traditionally been a technological leader, having a comparative advantage in both tech platforms and electronic devices. American companies have also done well to capitalize on the global market as it emerges. For example 40% of Amazon’s shipments and ⅓ of Netflix’s streamers are outside of the country. This healthy involvement contributed to a $158.9 billion digital trade surplus in 2014. We should rejoice in the increasing efficiencies as the internet is not simply a one time leap forward, but a opportunity for permanent long term growth.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University