V. ELECTRONIC COMMERCE

Trade, including both exports and imports, has played a central role in the development of many developing economies in the region. Over the last five years or so, between 15 and 20 per cent of world trade in goods and services originated in the developing ESCAP region. Also, for the majority of these economies, export and import ratios to GDP are significantly larger than the world average.¹ In a worldwide context as well, trade has assumed an increasingly important role in driving economic progress: it is one of the major causes and signs of globalization. The dynamism which has characterized the trade sector over the past two decades, concomitant with the increasing liberalization of tariff and non-tariff barriers, is now being revolutionized and regenerated by the phenomenon of electronic commerce, particularly facilitated by the use of the Internet.

DEFINING ELECTRONIC COMMERCE

Electronic commerce, broadly defined, is the process of using electronic methods and procedures to conduct all forms of business activity. It encompasses the production, advertising, sale and distribution of products via telecommunication networks.² Internet commerce is the term used to describe the fusion of electronic commerce and Internet technologies. From a business perspective, the objectives of electronic commerce and Internet commerce are the same: to improve effectiveness, efficiency, timeliness, quality, and accuracy of interactions between businesses and their trading partners or customers.³

Until very recently, the primary technology for business-to-business electronic commerce of large firms has been electronic data interchange (EDI). EDI uses a store and forward messaging technology, a process which parallels the exchange of electronic mail (e-mail) with the addition of structured message content and functionality to assure audit ability and assurance of delivery. Because EDI enables communications between the business systems of trading partners, messages are translated into highly structured formats, allowing both the sending and the receiving organizations to share a common and identical understanding of the content and context of the messages. Private, value-added networks (VANs) have been the primary carriers of EDI communications, using a variety of communications protocols. EDI technology has been available for over 20 years, but has been implemented by less than 2 per cent of the business community worldwide. The use of EDI in trade in selected countries of the region is reported in table V.1.

Table V.1. Use of electronic data interchange in trade in selected economies of the ESCAP region

Source: "Member countries: country status (October 1998)" http://www.asycuda.org/test/partners.htm (9 February 1999) and the paper by John M. Simon, "APEC customs initiatives on electronic commerce", presented at the Expert Group Meeting of Trade Promotion Policy Experts, Bangkok, December 1998.
Notes: ASYCUDA = automated system for customs data (UNCTAD)
(++) = updated version of ASYCUDA
n.a. = not available

Today, EDI is undergoing a transformation spurred by the rapidly increasing connectivity provided by the Internet and is itself an integral part of the sweeping wave of Internet commerce automation. The Internet is eroding the value added attributes of private networks, shifting the balance of supplier value added from the network itself to software and services. In fact, the failure of EDI in its traditional form to achieve greater penetration reflects the complexity and expense of integration with existing business systems owing to the lack of agreement on standards, combined with the continuing costs of an EDI server and VAN network support resources. EDI automates existing processes and its benefits were derived from time compression, cost reduction and improved accuracy. This is contrasted with Internet commerce, which can not only support transaction processing but also, in certain cases, bring greater flexibility to the work-flow and so support new or improved processes. As Internet commerce can actually add value to processes and optimize their effectiveness, its business potential is significantly greater than traditional EDI. Nevertheless, EDI will continue to be an important technology through the next five to ten years because of the investment already made in it and because it is a proven and secure means of inter-business communications.

While it is difficult to quantify with precision the number of Internet users, studies suggest that this number grew from 28 million in 1996 to 50 million in 1997 and estimates suggest that the number of users will be approaching 200 million by the year 2001. This increasing number of users and the expanding range of applications have led to a rapid growth in commercial interest and activity on the Internet. While the widespread and diffused nature of the Internet does not make it easy to quantify the economic value of electronic commerce conducted on it, estimates indicate that this rose from around $2.5 billion in 1996 to around $20 billion in 1998.⁴ Real-time or near-real-time connectivity across the boundaries of corporations and with consumers, ultimately enabling system-to-system interoperability between trading partners, is driving the increasing value of this new technology. Four types of economic activity are likely to feature in this new trading environment:

Building up the Internet. If, as some experts believe, one billion people may be connected to the Internet by 2005, then such an expansion should drive dramatic increases in expenditure on computers, software, services and communications investments.

Electronic commerce among businesses (business-to-business transactions). Businesses began using the Internet for commercial transactions with their business partners very recently. Early users already report significant productivity improvements from using electronic networks to create, buy, distribute, sell and service products and services.

Retail sale of tangible goods (business-to-consumer transactions). The Internet is also being used to order goods and services that are produced, stored and physically delivered. Sales of certain products such as computers, cars, books and flowers are growing rapidly. However, electronic commerce via the Internet may reach a limit for purchases of physical goods, or services that rely on physical proximity such as tourism, owing to the need of consumers actually to see the goods or services that they are buying.

Digital delivery of goods and services. Software programmes, newspapers, magazines and music compact discs no longer need to be packaged and delivered to stores, homes or news kiosks; they can be delivered electronically over the Internet. Airline ticket sales and securities transactions over the Internet are already occurring in large numbers. Other industries such as consulting services, entertainment, banking and insurance, education and health care face some hurdles but are also beginning to use the Internet to change the way in which they do business. Over time, the sale of goods and services electronically is likely to be the largest and most visible driver of the new digital economy. The expanded scope for this type of commercial transaction is perhaps the most notable contribution of Internet technology and the most challenging aspect from a policy perspective.

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