For much of their relatively short history, e-commerce and digital firms have had the luxury of operating a world devoid of regulations constraining their behavior. The lack of clear policy frameworks at the global, regional or even domestic levels have allowed a dazzling array of business models to develop and flourish.
Many of these inventions are now so baked into daily life it’s hard to remember a world without them (in the developed world, at least, and increasingly across developing economies).
However, a backlash is gathering pace. Even the upcoming launch of negotiations at the global level to start talks on e-commerce rules could signal peril for continuing expansion and innovation in the digital space.
It is worth debating the costs and consequences of many specific decisions. Up front, however, it is also critically important to remember that the implications of many new regulatory and policy changes are going to hit consumers and small firms hardest.
Unfortunately, these groups suffer from the problem of the commons—they are large in number, but diffuse and unorganized. They will bear the brunt of the impact and have very little say in the making of policy.
Often policymakers do not even realize that a rule change will make any difference at all to small firms domestically. This is particularly true in the digital space where officials tend to assume that large firms can handle adjustments without acknowledging the impact to smaller firms.
As a case in point, officials across Asia (at least) seem oblivious to the role of firms like Facebook for small firms. It may appear that Facebook is only good for sending updates on breakfast items or cat videos, but in Asia, millions of small firms advertise directly on the platform. For many of these companies, Facebook is literally their only tool to reach consumers.
This Talking Trade is not intended as an advertorial for Facebook, but to note that the implications of regulatory changes that affect the firm also directly hit millions of small firms that use the platform for doing business.
Nearly every one of the firms in our SME business group, the Asia-Pacific MSME Trade Coalition (AMTC), uses Facebook to sell their products and services, often out of remote domestic locations or into far-flung markets that would never be accessed otherwise.
Similar stories could be told about the links to SMEs from nearly every large e-commerce and digital company.
In the e-commerce space of selling goods to customers, regulators have similar misconceptions about the impact of changes. Rule changes about issues like warehousing may appear to affect only large firms. Certainly, the large companies are affected.
But large e-commerce companies like Alibaba do not make goods directly—the platform is filled with items from millions of firms. Even if a platform only took on board other large players or stocked just its “own” items, smaller firms would be implicated in rule changes, since small firms are always part of the supply chains.
Rule changes are therefore often quite damaging to SMEs. Ironically, some of the upcoming regulatory challenges in the digital space are taking place under the guise of “helping” SMEs.
One example is India’s recent about-face on e-commerce. Faced with an election and presumed opposition to expanding e-commerce reach by local SMEs, the Indian government abruptly changed the rules again for large e-commerce platforms. Companies are not allowed to handle “multi-brand retail” operations.
This rule change was first announced five weeks ago and has left some large players scrambling with huge investments that may turn to dust. (And India’s reputation as welcoming foreign investment or “winning” in the trade war, as the parallel Talking Trade post notes, equally trampled.)
The idea is that firms like Flipkart (acquired by Walmart for $16 billion just last year) are unfairly damaging small corner shops in India. (Left unaddressed is the issue of why “single brand” retail outfits like Ikea don’t seem to damage, for example, thousands of small firms selling furniture all over India.)
E-commerce and digital trade are certainly upending retail patterns globally. It is important to note that these changes are not a random act handed down from the heavens. Instead, these changes flow from millions or even billions of companies and consumers increasingly demanding goods and services to be delivered digitally.
The plan in India is to stop firms like Flipkart from selling goods in the market. This—it must be assumed—will help keep small, largely inefficient shops in business for longer and keep consumers spending more on products than they clearly would like. After all, if consumers did not want e-commerce goods, they would not be buying off Flipkart in the first place and would not be driving demand for more goods.
The rule change does not prevent local e-commerce players from operating. Hence, what is likely to happen is the development of more dominant local platforms and the continued shift to digital in any case.
Customers have clearly expressed their preferences. They are unlikely to completely abandon the corner shop, but their purchases are becoming increasingly diversified and digital orders play a key role.
While India represents the more extreme end of regulations on e-commerce, other governments are starting to take actions to increasingly constrain the actions of players. Most are still aimed at large firms with limited understanding of the collateral damage to small firms and consumers.
As governments move individually on the network of policies that support digital trade, including rules around data or privacy as well as specific rules on small size or small value shipments, new border rules and so forth, the risks of creating incompatible policies is rising rapidly.
The announced launch of e-commerce negotiations at the global level through a subset of members at the World Trade Organization (but not yet including India), is to be welcomed. This effort is likely to take a very long time to develop, though.
In the meantime, it is important that firms of all sizes work together to craft sensible policies that do not prematurely strangle the promise of the internet age.
After all, one of the most exciting elements of the digital economy is the ability of any firm, anywhere, to become a “micromultinational.” Such an outcome is not going to be possible if small firms are increasingly ensnared in rules originally aimed at large companies.
***Talking Trade was written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***