Peddling the E-Ticket to the Development Train

As both the Democratic and Republican parties jockey to win the favor of the high-tech industry, U.S. trade officials under Clinton and now under the Bush Administration have been aggressively promoting high tech's global interests by breaking down barriers to electronic commerce. They have pushed "e-friendly" policies through the World Trade Organization, Asian Pacific Economic Cooperation (APEC), and 11 bilateral agreements. In the ongoing talks around a hemisphere-wide Free Trade Area of the Americas, the U.S. government even persuaded other countries to allow America Online, IBM, Microsoft and other U.S. high-tech firms to sit side by side with officials to hammer out recommendations for the FTAA negotiators.¹

The U.S. goal in these arenas is to promote an unregulated, free market approach to e-commerce development that benefits not only the dot-coms but also the U.S. telecommunications and information technology giants.

While e-commerce has been central to the free traders' agenda, the critics of corporate globalization have largely ignored the issue. To date, there has been scant research to investigate the potential impacts of e-commerce on the world's environment, jobs, and the ability of governments to provide essential services. Granted, the current dot-com bloodbath suggests that this lack of attention may be reasonable. Indeed, the severity of the shakeout gives the impression that e-commerce firms are hardly worth scrutinizing.

The reality, though, is that online commerce is far from extinction. According to the Commerce Department, overall e-commerce sales were up 67 percent in the 4th quarter of 2000, compared to the same period in 1999. By contrast, overall retail sales were up only 4 percent.² One factor in continued e-commerce growth is the success of major traditional retailers in using their brand names and marketing expertise to expand into the online market. JC Penney, for example, is now one of the nation's largest e-tailers.

E-commerce remains a tiny fraction (about 1 percent) of total U.S. retail sales, but is a rising force in certain sectors. For example, some predict that 40 to 50 percent of software and personal computers will be purchased online by the year 2003.³ Most e-commerce (85 percent) remains concentrated in the United States, but analysts project rapid growth internationally as well. The UN Conference on Trade and Development reports that an estimated 10-25 percent of international trade by the year 2003 could be made up by e-commerce.⁴

For U.S. officials, much of the enthusiasm about e-commerce is that the allure of this new technology provides a powerful tool for pushing developing countries to accept the same old free market reforms that the United States has been pushing in other arenas, such as the World Bank and International Monetary Fund.

Catherine Mann, a supporter of the U.S. government's agenda based at the Institute for International Economics, says she warns developing country officials that "E-commerce is the last ticket on the development train." In other words, if you don't buy this ticket, forget it, the development train has left the station and your country is just beyond hope. Of course in order to get that e-ticket to development, governments must jump through a number of hoops, including tax and tariff reforms, the privatization of telecommunications and lifting trade barriers.

Anti-Tax Measures

The U.S. government argues that taxing fledgling e-businesses would be like strangling the baby while it's still in the crib. Therefore, they use international institutions like the World Bank/IMF and the WTO, among others, to pressure governments to agree to duty-free Internet commerce in products and services delivered electronically and a ban on new taxes on Internet commerce.

Even if governments wanted to tax e-commerce, they would have a hard time of it. Purchases are difficult to track, especially if the goods or services are transmitted electronically. This could include software, computer games, music, financial data, or architectural drawings, for example. The European Commission recently abandoned a proposal to require companies that sell such digital products to European customers to collect value-added tax, largely because they feared it was unenforceable.⁵

Even goods that are ordered online but delivered by traditional means pose tax challenges. In the United States, sales taxes are not collected on online purchases. State governments have fought to change this, since sales taxes make up about 40 percent of their revenues. As more business shifts online, state and local governments' ability to earn the revenues needed to provide adequate health, education, and other services, will be eroded.

Traditional brick-and-mortar retailers have also demanded an end to the tax-free advantage enjoyed by their online competitors. Since sales taxes are regressive, some may wonder whether the loophole enjoyed by dot-coms might be a good thing. However, unless sales taxes are eliminated across the board (an unlikely prospect in the near future), there is little justification for a system that allows Amazon to elude them while small independent booksellers may not -- especially when low-income consumers, with limited access to computers, are less likely to benefit from tax-free e-commerce.

A coalition of state governments is currently working with corporate volunteers to work out the technical problems of collecting sales taxes on e-commerce, but legal and political obstacles remain. The Supreme Court has ruled that businesses cannot be required to collect sales taxes in states where they do not have a physical presence. Thus, Congress would need to approve an interstate compact -- a high hurdle given the eagerness of both major parties to curry favor in the high-tech sector.

Developing countries face even bigger problems in taxing e-commerce. Most online orders in the South are received as imports from the United States. Governments can impose customs duties, but most developing countries lack the capacity to screen each individual package, calculate a duty, and collect the revenue. As a result, even generally conservative, free market-oriented analysts and institutions are raising concerns about how e-commerce could affect the already eroding power of nation states. For example, a recent World Bank report states, "electronic commerce will pose difficult challenges for government regulation of tax and financial systems... Multinationals will find it easier to shift activities to low-tax regimes. Governments may find it more difficult to impose desired income tax levels on existing corporations, and competition among developing countries for investment by multinationals may rise."⁶ IMF and UNCTAD reports have raised similar alarms.⁷

Meanwhile, the U.S. government, rather than addressing these legitimate concerns, is attempting to take advantage of the confusion by moving quickly to push for international rules that would minimize government's ability to tax e-commerce.

Privatization of Telecommunications

The next step towards obtaining the e-ticket to development is privatization of telecommunications. The argument is that a modernized, less costly system is necessary for e-commerce expansion and the only way to get that is through privatization. Promoters of this approach cite statistics on increases in telephone density and cheaper rates in countries that privatize. The real story is more complex.

In the summer of 2000, tens of thousands of Costa Ricans carried out a general strike that shut down the country and successfully defeated a plan to privatize the country's telecommunications system. Not known for their militancy, Costa Ricans took to the streets for fear that privatization would result in mass layoffs of relatively well-paid telecommunications workers as well as rate increases for basic services, especially in rural areas. Indeed, while large firms may be able to negotiate favorable terms, average users tend to see rates climb once their phone systems are turned over to the for-profit sector. In Mexico, for example, rates for local calls rose 1,065 percent in 1990 after the privatization of Telmex.⁸ Of course, some developing countries with state-owned systems do suffer from poor service, but one reason for that is that the World Bank and the IMF won't authorize investment to upgrade systems unless they are privatized first.

For U.S. telecommunications firms (and their advocates in government) the benefits are clear. A recent U.S. government report boasts of the global dominance of U.S. telecommunications firms, stating that they hold substantial investments in operators in more than 36 countries and lead in all other areas of network technology.⁹

Lifting Barriers to Trade in Information Technology

Another hoop that developing countries must clear to get their e-ticket on the development train is to lift barriers to imports of information technology. The argument is that in order to develop e-commerce, a country must have the latest in computer technology and at a price people can afford. Tariff removal may help lower prices for some consumers. However, developing country officials must weigh that gain against other issues. Brazil, for example, has maintained controls on computer imports as part of a plan to develop a domestic information technology industry. Other countries may be concerned about the loss of tariff revenues. As with telecommunications privatization, this is a step that should be considered carefully, but instead U.S. officials, prodded by the American hi-tech industry, are promoting it as a no-brainer.

Beyond the issues on the official global e-commerce agenda, there are several areas that deserve closer scrutiny.

Environment

Although some universities are beginning to research the issue, the environmental implications of rapid e-commerce growth are not yet well understood. Some analysts argue that e-commerce may actually have positive environmental effects, since traditional retailers suck up vast amounts of energy to heat and light large stores. Others have pointed out that it could reduce traffic, as more people do their shopping at home. Nevertheless, e-commerce raises strong questions that deserve more study. First, there are concerns related to the amount of fuel used to deliver purchases. A large percentage of online buyers select next-day air shipments, which use five times as much fuel as truck delivery.¹⁰ Then there is the waste created by the packaging materials used to wrap items individually rather than shipping them in bulk crates to traditional retailers. Consider the environmental implications, for example, of Amazon's historic overnight delivery of 250,000 copies of the Harry Potter book.

Another environmental concern is that the point-and-click ease of online shopping may encourage even more rampant consumerism in a world where U.S. over-consumption is already a tremendous environmental burden.

Labor

The U.S. government boasts that the information technology sector has accounted for almost one-third of U.S. economic growth since 1995, creating hundreds of thousands of jobs.¹¹ However, there has been no serious analysis of the potential losses of so-called "old economy" jobs that compete directly with online businesses, such as retail workers, bank tellers, and travel agents. Although no hard estimates exist, a report of the Trade Union Advisory Commission of the OECD states that "there is a danger that the shift towards a digital economy could have major employment shocks."¹²

Even for people who are employed in "new economy" jobs, the outlook is not as rosy as it once was. Internet firms have been at the forefront in the trends towards "flexibilizing" their workforce through high numbers of contingent workers (anyone without a full-time, permanent position). The practice was not as much of an issue until the recent wave of layoffs, when thousands of workers discovered the downside of non-unionized "at will" employment in the information technology field. Moreover, whereas Internet companies once boasted about the generous stock options they offered their employees, this perk has become less meaningful as the NASDAQ continues to plunge.

Social and Community Relations

A central critique of the current approach to globalization has been that it has led to further concentration of economic power in the hands of a relatively small number of global corporate giants and eliminated many smaller, locally owned businesses that are more likely to have a sense of community responsibility. Many would also argue that the loss of Main Street firms has contributed to the reduction of the face-to-face human interaction and the webs of economic interdependency that help build healthy, stable communities.

The growth of e-commerce will only exacerbate these problems. It would be difficult to imagine enterprises that are more footloose, less rooted in communities, or more discouraging of human interaction. E-commerce encourages isolation in virtual communities rather than real ones. And yet, little research has been conducted to investigate the potential impacts of this shift on social and community relations. A preliminary study by Stanford University suggested that regular internet users spend less time (in person or on the phone) with friends and family or socializing outside the home. According to author Norman Nie, "The internet could be the ultimate isolating technology that further reduces our participation in communities more than did automobile and television before it."¹³ A similar study by Carnegie Mellon University suggested a link between greater internet use and increases in depression and loneliness.¹⁴

More Study and Debate Needed

There is no question that the explosion of internet technology has dazzled millions around the globe. The web attracted more users in its first four years of existence than the television did in 13 years and radio in 38.¹⁵ Thus, it is understandable that e-commerce has enjoyed a honeymoon period during which there has been little scrutiny of its social impacts. The U.S. government has taken advantage of the world's love affair with the internet to advance an agenda that has obvious benefits for large corporations, but raises serious concerns for the environment, workers, and communities, particularly in the developing world. Before we all stampede to buy our e-ticket to prosperity, these issues should be more carefully studied and widely debated. This so-called "development train" may be headed in the wrong direction.

Endnotes

1. For more information on this committee, see www.ftaa-alca.org.
2. U.S. Department of Commerce press release, February 16, 2001.
3. Jupiter Research projections reported in the Wall Street Journal, October 23, 2000
4. UNCTAD, "Building Confidence: Electronic Commerce and Development," January 2000.
5. David Hardesty, "EU Withdraws Proposals for VAT on Digital Sales," EcomerceTax.com, February 4, 2001.
6. World Bank, Global Economic Prospects (Washington, DC: World Bank, December 5, 2000).
7. See Vito Tanzi, "IMF Working Paper: Globalization and the Future of Social Protection," January 2000, and UNCTAD, "Building Confidence: Electronic Commerce and Development," January 2000.
8. Catherine Mann, et al, Global Electronic Commerce (Washington, DC: Institute for International Economics, 2001).
9. "Leadership for the New Millennium, Delivering on Digital Progress and Prosperity," the third annual report of the U.S. Government Electronic Commerce Working Group, July 16, 2001 (www.ecommerce.gov).
10. Katharine Mieszkowski, "It's not easy being green," Salon.com, December 7, 2000.
11. "Leadership for the New Millennium, Delivering on Digital Progress and Prosperity," the third annual report of the U.S. Government Electronic Commerce Working Group, July 16, 2001 (www.ecommerce.gov).
12. Roland Schneider, TUAC, "Electronic Commerce challenges and Developments," A Discussion Paper for the OECD Ministerial Conference on Electronic Commerce, Ottawa, 7-9 October 1998.
13. Stanford Institute for the Quantitative Study of Society, February 16, 2000.
14. Robert Kraut, et al, "Internet Paradox," American Psychologist, January 2001.
15. National Governors Associations, "Sales Taxes and the Internet - Myths and Facts" (www.nga.org)

Sarah Anderson is the Director of the Global Economy Project of the Institute for Policy Studies in Washington, DC. The Project is conducting a research project on e-commerce in collaboration with the International Forum on Globalization.

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