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A Contrarian Perspective on Electronic Commerce Public Policy

By Scott Proudfoot
January 1998

Despite good intentions, governments will not be able to deliver on current promises of a painless transition to a digital marketplace.

The word has gone out! Electronic commerce is going to be BIG!  Across the western world, governments are declaring their intent to be part of the solution — not part of the problem.  A common mantra is enunciated: the private sector should lead on E-commerce and government should follow... government will support business self-regulation...a minimalist, light regulatory touch is all that is required...no regulation for regulation’s sake and so on.

To a business audience, this is extremely comforting and reassuring.  Unfortunately, it is also encouraging a false sense of complacency. 

Governments will intervene in the digital marketplace!  They will impose regulations!  They will add to the bottom-line costs and liabilities of the digital marketplace!  Decisions will be taken which advance some companies at the expense of others! 

Some corporations with a stake in the digital economy readily understand this and are working to shape their future.  Others are underestimating the impact of the ‘government dimension’ on their own corporate costs, productivity and liability issues and risk being blind-sided!

Governments will intervene in E-commerce issues for multiple reasons but collectively these can be summed up by one word — complexity.  

Fundamentally, the creation of an agreed set of public rules to govern E-commerce is a complex task and it takes governments some time to absorb new complex tasks. Some reasons behind this complexity are:

E-commerce involves extensive international negotiations.

One of the key economic benefits of electronic commerce is to reduce the importance of distance.  In theory, businesses and consumers can communicate and engage in transactions anywhere on the globe.  In fact, most countries have regulations governing international trade and communications which impede such transactions. To reduce or eliminate those barriers, new multilateral or bilateral agreements must be struck.

The Internet may be global but trade negotiators generally follow agendas of narrowly defined national interests.  International processes to resolve differences are as likely to expose differences.

For example, since the USA and Europe already fight over many trade matters, some conflicts over electronic commerce might be predicted.  The US Administration is pushing an aggressive E-commerce agenda internationally.  It wants to remove existing barriers to digital trade and to obtain standstill agreements prohibiting new barriers, duties, or taxes.  Some European governments are suspicious of the American government’s motives. US arguments about digital market liberalization are being interpreted as a rationale to lock in a dominant position for leading US companies.  Europe may start dragging its feet on issues or change the rules to give European companies a chance to catch up.

Early signs of US/European conflicts have been evident data protection, taxation and telecommunication de-regulations issues.  As these trade arguments unfold between the US and Europe, Canada is likely to be in the US camp on some issues, the European camp on others, and somewhere in the mid-Atlantic on still others.

• E-commerce cuts across and between levels of government.

At least a dozen Canadian federal departments and agencies have some consequential responsibility for electronic commerce issues. The requirement to reconcile policy internally takes time and trade-off may be driven by internal departmental imperatives rather than optimal business objectives. 

Additionally, many issues straddle federal and provincial jurisdictions.  For example, the federal government will come forward with digital consumer protection guidelines.  But, for broad consumer protection, at least six areas of current provincial legislation have to be amended.

To provide a coherent set of E-commerce rules, the federal government and the provinces must agree to sing from the same hymnbook.  Current inter-provincial processes make that more likely but differences will emerge due to locally entrenched special interests, divergent regulatory approaches, misunderstandings, and just plain oversight.

• E-commerce requires multiple legislative and regulatory changes

Most legislation governing market activity was put in place in a gradual fashion in the sixties and seventies.  The rapid pace of Internet growth and E-commerce creates pressure to renovate that legislative edifice to accommodate the emerging digital economy.  The result is likely to be a mini-growth industry on the E-commerce legislative and regulatory front.

The pre-parliamentary stage of creating legislation can take from one to two years.  Legislation takes six months to two years (in many instances longer) to navigate the House of Commons and the Senate proceedings.  Negotiating and enacting the subsequent detailed regulations consumes from six months to one year.  Thus, depending on the individual piece of legislation and the government’s priorities, it can take two to five years or longer to have policy intent evolve into administered law.

Whenever government opens up an existing piece of legislation, conflicting interests come forward to advance their particular cause.  The legislative process is sufficiently prolonged to allow all interests to develop their case and find allies, both inside and outside government. 

E-commerce enthusiasm is currently politically fashionable but no one gets a free pass!  E-businesses have to sell their point of view in the political marketplace like everyone else or risk losing by default.

• E-commerce re-opens contentious public policy debates

The Internet provides a new battleground to fight old battles.  For example, customs inspectors spot-check pornographic material at the border but any Canadian citizen with a modem has access to many thousand sex sites.  Canada legislation covers hate literature but the number of hate sites on the Internet has been increasing.

Sex and obscenity, gambling, hate literature, protection of children, free speech, privacy — all these public issues are likely to be re-debated because of the Internet. 

The libertarian orientation of the Internet will be challenged as more people hook-up; morphing the on-line community into a closer reflection of our broader society and its divisions.  Ambitious regulators may also jump at the prospect of defending the public interest on the Internet.

There will be additional complications in Canada as the Internet becomes a backdrop to rehash our on-going debate about the tools, value and efficacy of our forms of cultural expression/protectionism. 

E-commerce highlights the gap between the haves and have-nots.

By definition, in a digital economy if you are not connected — you do not exist!

Fifty percent of the world’s population has never made a phone call!  80% has no phone!  The digital marketplace excludes an overwhelming majority of the world’s population.  The digital disparities between rich and poor countries are surfacing on the international agenda and will become more prominent.

Within industrialized economies, disparities between the connected and the unconnected is also becoming an issue. According to a recent OECD study, over 40% of the Canadian adult population appears to lack a sufficient level of literacy to operate a computer and hook it up to the Internet — assuming they could afford to buy the computer and pay for the Internet access. 

An issue of direct relevance to electronic commerce business interests is whether the connected will be expected to cross-subsidize efforts to get more target groups on-line — the poor, natives, rural Canadians, school children, Canadian content providers, etc.  Arguments which have justified similar policies in the telecommunications and broadcasting fields are now gravitating to Internet policy discussions.  

• E- Commerce will create conflicts over access and pricing issues

More people may be using the Internet but most utilize the back-bone infrastructure of a relatively small number of companies.  This is particularly true in the case of Canada.  Companies who own the infrastructure want to maximize their economic rents from their capital investment.  These companies may or may not have monopoly control of some part of the infrastructure.  They may be providing content and access services in competition with other companies who do not own a back-bone system.  Back-bone providers may want to limit their peering arrangements to large companies who can offer reciprocal or equivalent benefits.

These situations can lead to charges of anti-competitive behavior including discriminatory and predatory pricing; unfair cross-subsidization to gain market share; discrimination against smaller access providers or classes of customers; tied arrangements; etc.  These issues are inherently complex, technical, and arguable.  Many issues veer into areas in which government has an established regulatory presence.  In many instances, companies with considerable regulatory expertise and well established relationships in government will be pitted against less experienced new-comers who will have to play catch-up.

Over the longer term, competitive market dynamics will sort out many of these issues.  Over the short-to-medium term, many players will be asking the government to play umpire or be protesting the government’s umpiring.

Conclusion:

The impact of Internet is habitually over-hyped but there is little doubt a major transformation of social and economic activity is underway.  The full impact is not fully understood and it will be subject to heated debate.  Establishing the legislative and regulatory underpinnings for a new social and economic order is always a tricky business.

The hope always is that government decision-making will be far-sighted, inclusive, restrained, benign and impartial.  To its credit, the Canadian government’s approach to E-commerce shows signs of striving for many of those qualities.  But like many large organizations, government’s aspirations frequently falls victim to its habits.

It can be flattering to be the flavour of the month but E-businesses should avoid over-confidence and short-term thinking with respect to government.  Companies with a stake in electronic commerce should be alert to competitor activity in the public sector domain.  They need to track and understand the behind-the-scene forces shaping public policy.  They should reach out and broaden their levels of contacts in government.  When warranted, they should take a pro-active approach to shaping government’s understanding of their industry and influencing the government decision-making process.





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