Digital trade—i.e. transactions leveraging the Internet to order, produce, or deliver goods, services, or information1—has grown at a tremendous pace over the past decade. E-commerce is now facilitating as much as 12 per cent of all goods trade worldwide.2 Buyers and sellers of all types of goods and services can now be connected instantly through the multiplication of online marketplaces. And digitization3 has led to an explosion of new digital products that can be sold internationally with just one click.
Cross-border data flows underpin all digital trade taking place between countries, and their contribution to the global economy is already larger than that of merchandise trade.4 Since 2010, cross-border data flows have grown exponentially, essentially doubling in size every 24 months. (See Chart 1.) And according to the McKinsey Global Institute, this trend will continue for the foreseeable future.
Cross-border data flows are expected to reach close to 2,000 terabits per second by the early 2020s— compared with an estimated 500 today.5
New applications leveraging the power of artificial intelligence, the Internet of Things (IoT) and blockchain technologies will be playing a key role behind the surge in digital trade in coming years. As such, global demand for new products and services built on these technologies will explode over the next decade. In particular, businesses across all industries will need powerful cloud-based solutions leveraging the power of AI, IoT and blockchain to better collect, store and analyse sensitive data and extract value from it.
Sources: TeleGeography, Global Bandwidth Forecast Service; McKinsey Global Institute analysis; James Manyika and others. “Digital Globalization: The New Era of Global Flows” (McKinsey Global Institute, 2016).
The surge in digital trade and cross-border data flows is accompanied by major challenges for Canadian businesses, whether these challenges are soaring IT and cybersecurity costs or navigating the growing wave of digital protectionism around the world. However, the opportunities made possible by digital trade are endless. Blockchain, artificial intelligence and the Internet of Things applications will create entirely new markets for digital products, while also streamlining and enabling further growth in traditional merchandise trade.
Digital trade is not immune to trade barriers and protectionist policies. As such, a growing number of nations are adopting measures that restrict cross-border data flows and impede digital trade.6 Data localization measures, which require firms to locate their data within a country’s borders, are the most common type of barriers. Their use is widespread around the world, including in China, Europe, the United States, and Canada (notably for the storage of government data).7
Privacy and security reasons are often cited by governments as reasons to justify the use of these policies. But the ultimate protection of domestic players from international competition can also be an underlying motive. And, as with barriers to traditional trade, impediments to digital trade—such as data localization requirements—can also have a negative impact on productivity and GDP. Estimated GDP losses are around 0.5 per cent for China, Korea, and the EU, according to a 2016 study.8 Barriers to cross-border data flows also result in foregone business opportunities, especially for smaller firms without the necessary means to navigate these rules and comply with them.
New trade agreements now incorporating digital trade. Given the rapidly growing importance of digital trade within global commerce, trade agreements currently being negotiated by Canada include provisions specifically addressing the rules and barriers to digital trade. As such, both NAFTA and the Trans-Pacific Partnership will include an entire chapter on the topic. This will help to protect business opportunities in foreign markets for Canadian firms selling digital products and services.
Blockchain technologies enabling traditional goods trade. Digital and traditional merchandise trade will become even more closely intertwined in coming years, with applications leveraging blockchain technologies about to revolutionize the trade finance segment.9 Trade finance platforms powered by blockchain have the potential to provide a secure digital system for all the required documentation. These include letters of credit and shipment certifications—making them easily accessible to the various stakeholders along the supply chain, and providing real-time updates on each step of the process.10 In turn, the digitization of trade finance could significantly improve the financing options available to small and medium-sized businesses, notably through reducing the risks associated with each transaction.11 Maersk, the shipping company, is currently partnering with IBM to test and develop such a blockchain platform.12
To leverage the full potential from digital trade, firms have to make a significant investment in their IT systems and infrastructure. Moreover, the growing threats of data breaches means more resources need to be dedicated to cybersecurity, especially for firms handling large amount of confidential data. In 2016, the average cost of data breaches in Canada topped $6 million, up 13 per cent from the year before.13
Sourcing inputs and finding talent. With one click, digital trade allows firms to do business with suppliers of goods and services from around the world, and has the potential to make significant cost-savings and improve productivity. For smaller firms and start-ups, accessing the necessary IT infrastructure through cloud-based services is easier than ever. Firms can also access global talent pool by using online marketplaces such as Upwork and Freelancer. Connecting talent with global needs could add $2.7 trillion to global GDP by 2025 by allowing for better skills-matching globally.14
Tapping into the wealth of data. By investing in IT infrastructure and systems to engage in digital trade, firms become well-positioned to collect valuable data and information on their customers and suppliers. This can help with identifying new business opportunities, lead to improved decision-making and cost savings, and create a competitive advantage. Further, over the next decade, IoT applications will lead to an explosion in the volume of data that firms will be able to leverage and monetize. According to Bain and company, the global market for IoT applications will be worth over $450 billion by 2020—two-thirds expected to come from the business to business segment alone.15
In less than 15 years, the explosion in digital trade has disrupted many business models and industries. Businesses need to get accustomed to today’s rapid pace of change, as it will only accelerate with technologies such as AI and IoT, and as blockchain applications become widespread. To stay on top of the curve and make the most from the tremendous opportunities the digital revolution makes possible, businesses should:
Company Name: CC Global Solutions Inc.
Location: Burlington, Ontario
Product: Conception, production, and delivery of brand-building merchandise
Year Established / Started Exporting: 2014 / 2014
Total Revenues: $7 million
Export Share of Sales: 10 per cent
Export Markets: U.S., Europe, Russia, Australia
CC Global Solutions (CCGS) is a vertically integrated manufacturer of brand-building merchandise, supported by a digital infrastructure for everything from product creation to warehousing and delivery.
The company’s Global Management System (GMS) links all supply chain pieces together, allowing it to deliver quality products on time and on budget. This collaborative software is central to the firm’s activities, from product idea to consumption by the end user, while also reducing the miscommunication that can happen between global companies and their suppliers.
Data security in an era where cyber attacks are on the rise
One of the ways the firm is tackling concerns about cross-border data flows and data security is by developing a Tier 4—a fully compliant data centre in Canada with enhanced security and features.
Increased complexity and costs associated with cross-border data flow rules and regulations
“ Given the ever-changing political relationships between countries, increases in cross-border data flow restrictions will become more and more complex and prevalent. Businesses that build systems to manage these complex relationships will be strategically positioned to expand into markets that enforce geopolitical data flow restrictions.”—Annette Mitchell, President
CCGS plans to boost export sales from 10 to 50–60 per cent of revenues. “We want to diversify and become a truly global company, to minimize the risk associated with the peaks and valleys of relying on a single market.” In terms of the geographic markets the company targets: “We just follow the problem. We want to be geospatially agnostic”, says Mitchell.
This research series is funded by HSBC Bank Canada, and is researched and written by The Conference Board of Canada.
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