As digitalization tightens its grip on the world economy, countries have sought to enhance and deepen their digital cooperation. Proliferating digital trade and the limited scope of digital commitments in the trade agreements paved the way for Digital Economy Agreements (DEA). DEAs are inter-governmental treaties that “establish digital trade rules and allow for digital economy collaborations between countries”. They are not simply digital counterparts of the regular Free Trade Agreements and go beyond merely removing trade barriers pertaining to trade in digital goods and services. DEAs establish new approaches to addressing digital trade issues and promote interoperability between different digital regimes. Singapore has spearheaded the execution of DEAs and has agreements with Chile, New Zealand, Australia, the UK, and Korea. As Singapore scouts for new DEA partners given the fresh impetus for digitalization, it is essential to measure the impact of these DEAs. Research by ACI is one of the first to study the quantitative effect of cross-border digital collaborations on the ICT, business, finance, and retail sectors and their subsequent impact on the ASEAN region.

The research uses a Computable General Equilibrium (CGE) model. They simulate the effects of a policy change by comparing the pre-policy baseline economy with a counterfactual model economy in which policy changes have been introduced. In other words, the counterfactual model simulation allows only for policy changes, keeping other macroeconomic parameters static. In the study, the DEAs signed by Singapore with Australia, and New Zealand are assessed. Utilizing the same framework, the research also quantifies the impact of a potential ASEAN-wide DEA on the ASEAN countries.

The authors look into three barriers to digital trade – technology barriers, barriers relating to e-payments, and data localization barriers. Analyzing the text, the authors gauge how concretely the DEAs contribute to the economy through either the removal or enhancement of these barriers. The parameters that are used to assess the impacts of these DEAs are industrial output, value-added, employment, and trade. For example, finding new ways to “better link the AI ecosystems” between the partners will be modeled as the removal of technological barriers. Improvements in the conduction of trade abroad can be modeled as reduced transportation costs of trade. On the other hand, restrictions on data movement will be modeled as increased production costs on the ICT sector in the counterfactual model.

The simulation results show that the benefits of DEAs go beyond the core ICT sectors. The output of the ICT, Financial & Insurance, and Business Services sectors is expected to increase by at least 6-7% for the three countries. This growth in ICT will further create positive spillover effects for the industries downstream. Being island nations, the three countries are highly trade-oriented. With the DEAs in place, they stand to significantly increase their ICT exports to the respective signatories. Moreover, a similar level of growth in the digital economy is expected across the three economies with Singapore marginally outdoing the other two. As cross-border data flow continues to underpin digital trade, it has invoked an international discourse around “digital border controls”. Domestic regulatory and legal regimes have developed independently and range from most restrictive (all data must be stored locally) to less restrictive (only one copy may be stored locally). This lack of standardization comes at the cost of losing opportunities for better data innovation and collaboration. The simulation predicts drops ranging between 0.8-1.69% in the ICT output of the three signatories in case of strict limitations on data transfer. This reflects that data localization requirements translate to a surge in operating and compliance costs for companies.

The study further explores the potential benefits of a broad and multilateral DEA within the ASEAN. ICT sectors in developing economies such as Cambodia, Laos, and Vietnam stand to gain most significantly due to increased collaboration. This could also considerably increase skilled labor demand in these countries. Moreover, if a single digital trade system is adopted, the region could experience a huge increase in the volume of trade among its countries (see Figure 1) which could improve trade integration in the region.

In an increasingly connected digital world, it is in everyone’s interest to leverage the interconnectedness of their economies. As the usage of data and technology proliferates, policymakers have continually focused on securing the success of digital trade while simultaneously protecting domestic interests. DEAs can prove helpful by ensuring continued economic growth and integration. A simulation through the CGE model offers an optimistic picture of the future of digital trade. The ICT output is expected to grow which could lead to an increase in its exports and the digital economy overall. For policymakers, the implications of this research go beyond the impetus to creating new DEAs. As the ICT industry grows, related downstream industries such as Business services, Financial & Insurance sectors need policy focus too. Their development will add more value and could have far-reaching implications for associated industries. Moreover, the right balance between data openness and data privacy will foster innovation and growth while maintaining adequate protection of consumer privacy rights.

By Shubhangi GUPTA

Researchers: Jing Zhi LIM, Taojun XIE