RESEARCH PAPER SUBJECT: INTERNATIONAL BUSINESS TOPIC: THE RELATIONSHIP BETWEEN LABOR AND DIGITAL TRADE

TABLE OF CONTENTS ABSTRACT 4 INTRODUCTION 5 LITERATURE REVIEW 8 1. Situating digital trade 8 2. Labor and digital trade restriction 10 METHODOLOGY AND DATA 14 DISCUSSION 16 CONCLUSION 23 REFERENCES 25 3 | P a g e Foreign Trade University Group 12 The relationship between labor and digital trade ABSTRACT Is a countrys industrial sector a hindrance to digital trade? Although the importance of data flows in allowing global value chains is becoming more well recognised, less is understood about digital commerce and its consequences for the home economy. It is commonly considered that, like investments, the extent to which nations are prepared to liberalise markets and how institutions support ease of transactions determines digital trade. Incipient patterns based on new indications, on the other hand, appear to contradict this viewpoint. For example, the digital trade restrictiveness score indicates that, despite their polarising regime frameworks, China and India are both among the most restrictive. The scale of a countrys industrial sector, as well as traditional characteristics like the total size of its economy and political system, are connected with its openness or restrictions to digital trade, according to this article. The study examines crosssectional fiscal, labor, and trade data from 64 economies and shows that nations with a relatively large industrial worker force compared to their service labor force are more prosperous. The findings add to our understanding of the impact of digital trade, particularly in emerging markets. Perhaps labor markets are sluggish to adjust to globalisation, and restrictive regulations are mostly longterm solutions designed to preserve a weak industry from losing out (industrial sector). As a result, measures ostensibly promoting digital commerce must include the effects on employees and consider if a digital transformation is worth the associated economic disruptions. 4 | P a g e Foreign Trade University Group 12 The relationship between labor and digital trade INTRODUCTION International trade has always been driven by technology. As mobile and internet technologies reinvent corporate processes and supply chains, the worldwide movement of commodities has grown more dynamic and widespread in recent years. While it took Marco Polo and his brother years to travel the Silk Road, governments, corporations, and even individual merchants may today trade in large amounts with the touch of a button or a phone call. However, as digitisation opens up new possibilities for products and processes, it also poses a threat to the status quo in the labor market (Buttner and Muller 2018; Chinorackya and Corejova 2019). Digital trade, in particular, has shifted perceptions of product and service providers, making many old sectors outdated. As a result, many emerging and developing nations have enacted interventionist digital policies under the guise of safeguarding their budding businesses from foreign competition (Drake, Cerf, and Kleinwachter 2016; Foster and Azmeh 2020). Why is the fate of the manufacturing sector linked to digital trade? What role do industries play in digital commodity regulatory policies? Is the countrys industrial labor force a barrier to digital trade? It is commonly considered that, like investments, the extent to which nations are prepared to liberalise markets and how institutions support ease of transactions determines digital trade. Lowincome democracies are said to be more inclined to implement tariffs to compensate for difficulties in collecting taxes, among other things (Moutos 2003). On the other hand, varying levels of corruption have been proven to have a detrimental influence on trade, particularly among poor and middleincome nations (GilPareja, LlorcaVivero, and MartínezSerrano 2019). There is also widespread scholarly agreement that a countrys authoritarian or autocratic status has a considerable impact on its commerce, albeit the relationships direction is less definite (Banerji and Ghanem 1997; Dai 2002; Aidt and Gassebner 2010; Rosendorff and Shin 2015). 5 | P a g e Foreign Trade University Group 12 The relationship between labor and digital trade However, emerging trends based on new variables call into question the relationship between digital trade and traditional institutional drivers. For example, the digital trade restrictiveness index (DTRI) indicates that, despite their polarized regime structures, China and India are both among the most restrictive countries. The scale of a countrys industrial sector, as well as traditional characteristics like the total size of its economy or political system, is connected with its openness or restrictions to digital trade, according to this article. The study examines crosssectional fiscal, labor, and trade data from 64 economies and shows that nations with a high industrial labor force compared to their service sector are more likely to place severe rules on digital commerce and networkbased services. The findings add to our understanding of the impact of digital trade, particularly in emerging markets. Its likely that labor markets would react to globalization more slowly than expected, and that restrictive regulations will be implemented over time to safeguard a weak industry from losing out (industrial sector). If established economies have to face problems in dealing with the digital market, the challenges for emerging countries that rely on traditional sectors as the backbone of their growth trajectories are undoubtedly greater. The extent to which governments are prepared to open their digital marketplaces thus goes beyond economic models and has clear redistributive repercussions for individuals who are at danger of losing their livelihood. The following is the order in which the paper is presented. First, we review the existing literature on the digitization of goods and services, demonstrating that, while restrictive laws are often seen as welfaredefeating, there is no consensus on why states choose restrictive rules to other policy options. Following that, the study focuses on the theoretical logic of how the relative sizes of an economys industry and service sectors restrict government actions and, as a result, impact its openness to digital commerce. Following that, we go into the operational measures we employed to proxy the variables of interest, as well as the analytical technique we utilized to back up our hypothesis. Following then, a discussion of the conclusions based on the estimations takes place. The studys empirical findings are reiterated 6 | P a g e Foreign Trade University Group 12 The relationship between labor and digital trade in the conclusion, which has a number of consequences for both trade and labor policies. 7 | P a g e Foreign Trade University Group 12 The relationship between labor and digital trade LITERATURE REVIEW 1. Situating digital trade Until now, there has been no single agreed definition of what encompasses digital trade. According to LopezGonzales and Joanjean (2017), digital trade is a broad class of digitally enabled transactions involving goods and services which can either be digitally or physically delivered. This is actually the definition that the OECD has come to adopt. Others refer to it as a transaction that is largely commercial in nature performed remotely through electronic means (Daza Jaller, Gaillard, and Molinuevo 2020). Some also have defined digital trade as including both wide and specific sense, such as commerce in products and services delivered via the internet, as well as the enabling innovation and free flow of information in the digital environment (Burri and Polanco 2020). The challenge as to pinpoint exactly what digital trade entails also makes it difficult to assess its impact on a variety of policy sectors, including market access, trade, small businesses, government regulation, and data privacy (Fayyaz 2018). Attempts to define the breadth of digital trade and operationalize the scope and value of crossborder data flows have been made in recent years. To come up with a statistic that may be reflected in the gross domestic product, the US Department of Commerce uses the wholesale or retail trade margin the total money gained from only sales minus the cost of producing the goods or services offered through the electronic market (Barefoot, et al., 2018). On the other hand, the Organization for Economic Cooperation and Development uses a variety of methodologies, including expert judgment, anecdotal evidence, and observations based on the experience and results of comparable countries (OECD 2020). Many digital transactions, however, are still beyond the scope of trade statistics because no monetary transaction is involved. For example, blogs and usergenerated films produce large amounts of internet traffic but are unlikely to be reflected in national statistics because users do not pay for these services (Lund and Manyika 2016). Nevertheless, there seems to be united approval that regulatory interference in digital trading has become increasingly common. It was noted by Burri (2015) that the WTO had acknowledged the impact of digital technology on all sectors of trade, including intellectual property, as early as 1998, albeit arguments on digital trade at the time focused on services and their regulation. However, as hybrid products emerge, governments and multilateral bodies are under increasing pressure to promulgate regulations managing the digital economy in subsequent free trade agreements (Meltzer 2020). This is usually accomplished through international regulatory mechanisms such as the development of standards and mutual recognition agreements in areas like privacy and consumer protection (Neeraj 2019; Janow and Mavroidis 2019), or state regulatory instruments such as mandatory registration for foreign suppliers of crossborder digital goods and services (van Zyl 2014). Contract clauses committing companies to high security and privacy standards, audits and certifications of foreign suppliers, protections available in foreign suppliers local laws, and adherence to international agreements and standards on transactionrelated issues, as well as reputational sanctions, are all available at the firm level (Chander and Le 2017). Its reasonable that governments around the world are wary of digital trade. Many parts of the digital market are dominated by technology companies, whose oligopolistic position makes it difficult for new players to enter (Neeraj 2019). Some of these businesses are gaining market share at a higher rate than their ostensibly related industries. Digital transactions are also removed from the taxing economy due to the absence of physical presence as when data is collected in one place, then processed or stored in another (Ahmed and Chander 2015). The ubiquitous exchange of data across borders has only surged concerns about digital security, audit capacity, and individual privacy protection, prompting many governments to enact even more regulatory measures, such as imposing conditions on crossborder data transfers or requiring companies to store data locally for audit and security purposes (Lopez Gonzales and Joanjean 2017).

INTERNATIONAL BUSINESS AND ECONOMICS

-***** -RESEARCH PAPER

SUBJECT: INTERNATIONAL BUSINESS

TOPIC:

THE RELATIONSHIP BETWEEN LABOR

AND DIGITAL TRADE

Topic: The relationship between labor and digital trade

2 | P a g e

TABLE OF CONTENTS

ABSTRACT 4

INTRODUCTION 5

LITERATURE REVIEW 8

1 Situating digital trade 8

2 Labor and digital trade restriction 10

METHODOLOGY AND DATA 14

DISCUSSION 16

CONCLUSION 23

REFERENCES 25

Is a country's industrial sector a hindrance to digital trade?

Although the importance of data flows in allowing global value chains isbecoming more well recognised, less is understood about digital commerce andits consequences for the home economy It is commonly considered that, likeinvestments, the extent to which nations are prepared to liberalise markets andhow institutions support ease of transactions determines digital trade

Incipient patterns based on new indications, on the other hand, appear tocontradict this viewpoint For example, the digital trade restrictiveness scoreindicates that, despite their polarising regime frameworks, China and India areboth among the most restrictive

The scale of a country's industrial sector, as well as traditionalcharacteristics like the total size of its economy and political system, areconnected with its openness or restrictions to digital trade, according to thisarticle The study examines cross-sectional fiscal, labor, and trade data from 64economies and shows that nations with a relatively large industrial worker forcecompared to their service labor force are more prosperous

The findings add to our understanding of the impact of digital trade,particularly in emerging markets Perhaps labor markets are sluggish to adjust toglobalisation, and restrictive regulations are mostly long-term solutions designed

to preserve a weak industry from losing out (industrial sector) As a result,measures ostensibly promoting digital commerce must include the effects onemployees and consider if a digital transformation is worth the associatedeconomic disruptions

International trade has always been driven by technology As mobile andinternet technologies reinvent corporate processes and supply chains, the worldwidemovement of commodities has grown more dynamic and widespread in recent years.While it took Marco Polo and his brother years to travel the Silk Road, governments,corporations, and even individual merchants may today trade in large amounts withthe touch of a button or a phone call However, as digitisation opens up newpossibilities for products and processes, it also poses a threat to the status quo in thelabor market (Buttner and Muller 2018; Chinorackya and Corejova 2019) Digitaltrade, in particular, has shifted perceptions of product and service providers, makingmany old sectors outdated As a result, many emerging and developing nations haveenacted interventionist digital policies under the guise of safeguarding their buddingbusinesses from foreign competition (Drake, Cerf, and Kleinwachter 2016; Fosterand Azmeh 2020)

Why is the fate of the manufacturing sector linked to digital trade? Whatrole do industries play in digital commodity regulatory policies? Is the country'sindustrial labor force a barrier to digital trade?

It is commonly considered that, like investments, the extent to whichnations are prepared to liberalise markets and how institutions support ease oftransactions determines digital trade Low-income democracies are said to bemore inclined to implement tariffs to compensate for difficulties in collectingtaxes, among other things (Moutos 2003) On the other hand, varying levels ofcorruption have been proven to have a detrimental influence on trade, particularlyamong poor and middle-income nations (Gil-Pareja, Llorca-Vivero, andMartínez-Serrano 2019) There is also widespread scholarly agreement that acountry's authoritarian or autocratic status has a considerable impact on itscommerce, albeit the relationship's direction is less definite (Banerji and Ghanem1997; Dai 2002; Aidt and Gassebner 2010; Rosendorff and Shin 2015)

However, emerging trends based on new variables call into question therelationship between digital trade and traditional institutional drivers For example,the digital trade restrictiveness index (DTRI) indicates that, despite their polarizedregime structures, China and India are both among the most restrictive countries.

The scale of a country's industrial sector, as well as traditional characteristicslike the total size of its economy or political system, is connected with its openness

or restrictions to digital trade, according to this article The study examines sectional fiscal, labor, and trade data from 64 economies and shows that nations with

cross-a high industricross-al lcross-abor force compcross-ared to their service sector cross-are more likely to plcross-acesevere rules on digital commerce and network-based services

The findings add to our understanding of the impact of digital trade,particularly in emerging markets It's likely that labor markets would react toglobalization more slowly than expected, and that restrictive regulations will beimplemented over time to safeguard a weak industry from losing out (industrialsector) If established economies have to face problems in dealing with the digitalmarket, the challenges for emerging countries that rely on traditional sectors asthe backbone of their growth trajectories are undoubtedly greater The extent towhich governments are prepared to open their digital marketplaces thus goesbeyond economic models and has clear redistributive repercussions forindividuals who are at danger of losing their livelihood

The following is the order in which the paper is presented First, we reviewthe existing literature on the digitization of goods and services, demonstrating that,while restrictive laws are often seen as welfare-defeating, there is no consensus onwhy states choose restrictive rules to other policy options Following that, the studyfocuses on the theoretical logic of how the relative sizes of an economy's industryand service sectors restrict government actions and, as a result, impact its openness

to digital commerce Following that, we go into the operational measures weemployed to proxy the variables of interest, as well as the analytical technique weutilized to back up our hypothesis Following then, a discussion of the conclusionsbased on the estimations takes place The study's empirical findings are reiterated

in the conclusion, which has a number of consequences for both trade and labor policies.

LITERATURE REVIEW

1 Situating digital trade

Until now, there has been no single agreed definition of what encompassesdigital trade According to Lopez-Gonzales and Joanjean (2017), digital trade is abroad class of digitally enabled transactions involving goods and services whichcan either be digitally or physically delivered This is actually the definition thatthe OECD has come to adopt Others refer to it as a transaction

that is largely commercial in nature performed remotely through electronic means(Daza Jaller, Gaillard, and Molinuevo 2020) Some also have defined digital trade

as including both wide and specific sense, such as commerce in products andservices delivered via the internet, as well as the enabling innovation and freeflow of information in the digital environment (Burri and Polanco 2020) Thechallenge as to pinpoint exactly what digital trade entails also makes it difficult toassess its impact on a variety of policy sectors, including market access, trade,small businesses, government regulation, and data privacy (Fayyaz 2018)

Attempts to define the breadth of digital trade and operationalize the scopeand value of cross-border data flows have been made in recent years To come upwith a statistic that may be reflected in the gross domestic product, the USDepartment of Commerce uses the wholesale or retail trade margin - the total moneygained from only sales minus the cost of producing the goods or services offeredthrough the electronic market (Barefoot, et al., 2018) On the other hand, theOrganization for Economic Cooperation and Development uses a variety ofmethodologies, including expert judgment, anecdotal evidence, and observationsbased on the experience and results of comparable countries (OECD 2020) Manydigital transactions, however, are still beyond the scope of trade statistics because nomonetary transaction is involved For example, blogs and user-generated filmsproduce large amounts of internet traffic but are unlikely to be reflected in nationalstatistics because users do not pay for these services (Lund and Manyika 2016)

Nevertheless, there seems to be united approval that regulatory interference indigital trading has become increasingly common It was noted by Burri (2015) thatthe WTO had acknowledged the impact of digital technology on all sectors of trade,including intellectual property, as early as 1998, albeit arguments on digital trade atthe time focused on services and their regulation However, as hybrid productsemerge, governments and multilateral bodies are under increasing pressure topromulgate regulations managing the digital economy in subsequent free tradeagreements (Meltzer 2020) This is usually accomplished through internationalregulatory mechanisms such as the development of standards and mutual recognitionagreements in areas like privacy and consumer protection (Neeraj 2019; Janow andMavroidis 2019), or state regulatory instruments such as mandatory registration forforeign suppliers of cross-border digital goods and services (van Zyl 2014) Contractclauses committing companies to high security and privacy standards, audits andcertifications of foreign suppliers, protections available in foreign suppliers' locallaws, and adherence to international agreements and standards on transaction-relatedissues, as well as reputational sanctions, are all available at the firm level (Chanderand Le 2017).

It's reasonable that governments around the world are wary of digital trade.Many parts of the digital market are dominated by technology companies, whoseoligopolistic position makes it difficult for new players to enter (Neeraj 2019) Some

of these businesses are gaining market share at a higher rate than their ostensiblyrelated industries Digital transactions are also removed from the taxing economydue to the absence of physical presence - as when data is collected in one place, thenprocessed or stored in another (Ahmed and Chander 2015) The ubiquitous exchange

of data across borders has only surged concerns about digital security, audit capacity,and individual privacy protection, prompting many governments to enact even moreregulatory measures, such as imposing conditions on cross-border data transfers orrequiring companies to store data locally for audit and security purposes (LopezGonzales and Joanjean 2017)

From a social justice standpoint, digital trading also raises a can of worms.Work in the digital labor market, for example, shares many features with othertypes of work that are deemed informal or precarious (Akhtar and Moore 2016),and taps into a large fraction of non-standard and transitory employment (Moore2018) This has long been noted in the service sector (see, for example, Nelson1994), but it is now beginning to characterize the contemporary digital labormarket Collective bargaining, freedom of association, and the right to strike arefrequently not available to workers in these arrangements (De Stefano 2016).Internet-mediated production is illegal in many developing and rising countries,leaving workers vulnerable to discrimination and underbidding (Graham, Hjorth,and Lehdonvirta 2017) Meanwhile, people who do invisible work, such asfiltering and editing social media information, are under a lot of mental andemotional strain (Cherry 2016).

What appears to be the case is that digital trade and market digitization areushering in new occupations while simultaneously eliminating others Althoughstructural adaptation in the economy is not new, it has been a feature ofcivilizations since humans first learnt to trade In this light, restricting digital trade

as a redistributive strategy is only logical for growing economies still reliant onmany businesses that have been rendered unnecessary or redundant by digitalmarkets Technology has altered the platform, but not the reason for states toengage in commerce Trade in the digital market, like traditional trade, is stillgoverned by the logic of comparative advantage and is sensitive to labor marketimbalances between the source and target economies

Unfortunately, the existing literature barely mentions this viewpoint inpassing

2 Labor and digital trade restriction

The theoretical conjecture in this paper is built from political economictheories based on labor factor mobility (Mayer 1984; Gilligan 1997; Hiscox 2001;Mukherjee, Smith, and Li 2009) and structural transformation (Kuznets 1973;

Acemoglu 1999; Giovanni and Makridis 2018; Baymul and Sen 2020) andapplies them to digital trade.

According to the classic Ricardo -Viner model, only mobile factors ofproduction, particularly labor, can move between sectors Nevertheless, suchmobility is associated with diminishing returns to scale (Jones 1971; Mussa 1974;Borkakoti 1998; Krugman, Obsfelt, and Melitz 2015) Capital is completelyimmobile and it is considered to be differentiated or industry-specific If a simpleeconomy consists of only two sectors - industry and services for example, thencapital is not interchangeable in output Given that only labor is mobile, aproduct's marginal value corresponds to the increase in income obtained byadding a unit of labor to the production process Because an additional worker hasless of the fixed component to work with because of the fixed stock of capital,each additional worker will add a smaller increment than the previous As aresult, as labor in one sector expands, the value of the marginal product decreases

Assume that in a digitalized economy, the price of services rises relative tothe industrial sector thanks to the increasing demand for knowledge workers andthe borderless flexibility of digital trade This is a reasonable assumption, giventhe services sector is known to absorb the majority of employment and valueadded when manufacturing shrinks or when the economy shifts (Urquhart 1984;Allen and du Gay 1994; Witt and Gross 2020) Consumer services employmentalso rises as a result of trade (Bhattacharya and Mitra 1997) Enterprises in theservice industry are more likely to require more capital and employees Thedemand for productive capital and labor in the industrial sector, on the other hand,would fall Even though workers in the industrial sector can shift to services, it isdifficult to convert the manufacturing industry's machines and equipment intocomputers or internet connections - capital vital for the digital market Laborshifts from the industrial to the service sectors, lowering the capital-labor ratio inthe latter and, as a result, lowering the return on capital in the former sector

Unfortunately, this labor factor movement may pose some repercussions

on the wage structure According to Yabuuchi (2015), where skilled and unskilled

employees move in contrast directions, the movement of skilled labor exacerbateswage inequality due to the concentration of unskilled labor Furthermore, labormarket adjustment takes longer not only because it is sensitive to the mobility ofphysical capital, but also because inter-sectoral mobility entails cost (DixCarneiro 2014).

From here, it is intuitive to explain why governments in impacted countrieswould choose to limit digital trade Despite the fact that free trade improves long-term welfare, those in declining industries will organize significant opposition tounlimited digital trade in the absence of redistributive restrictions When the cost ofintersectoral mobility is huge, a certain type of voter becomes trapped in a trade-competition-affected sector and thus becomes the median voter As a result, themedian voter, who is characterized by a high level of labor specialization, will favortrade protection (Mukherjee, Smith, and Lee 2009) Politicians will then appeal tothe median voter by raising tariffs or enacting protective policies (Ladewig 2006)

This viewpoint, however, oversimplifies the market by assuming that labormay freely shift from one business to another regardless of skill distinction Inreality, labor is similar to capital in the industrial sector, and workers needintervening variables such as training and retooling in order to mobilize

Even though labor mobility is difficult, there is reason to infer that the relativeproportions of the industrial and service sectors are linked to restrictive policiesbased on structural transformation Reexamining Kuznets' (1955) thesis, Baymul andSen (2020) conclude that while manufacturing-driven structural transformationoccurs in the formal sector, where labor markets are safeguarded by minimum wageand labor laws, inequality may not always rise When the country industrializes, it iseasier for the organized working class in the manufacturing sector to establishpolitical strength, unlike their counterparts in the service sector, whose laborarrangements are insecure and informal (Baymul and Sen) (2020) As Mukherjee,Smith, and Lee (2009) pointed out, this causes reelection-minded politicians to cater

to these employees in exchange for their support and implement protectionistpolicies Unionization rates and the size of industries are positively

connected with the amount of trade obstacles, according to Goldberg and Maggi (1999), Scheve and Slaughter (2001), and Matschke and Sherlund (2006).

In the next section, we will look at the industry sector's relative size and how it relates to digital trade restrictions

METHODOLOGY AND DATA

To measure the amount of digital trade restriction implemented in eachcountry the study used the Digital Trade Restrictiveness Index (DTRI) The figurewas developed by the European Center for International Political Economy(ECIPE) and derived from hundreds of studies on policy measures of 64countries According to Ferracane et al (2016), an increase in DTRI is directlycorrelated to the restrictiveness of the accounted economy to digital trade

Table 1 represents all components contributed to the index, from barriers tothe flow of data to policy barriers, namely the domestic commercial environment

Table 1: ECIPE’s digital trade restrictiveness index’s components.

The ratio of employment in the industry sector to that in the service sector, on theother hand, is calculated by dividing the industrial sector figure by the servicesector data The International Labor Organization (ILO) provided the measuresfor both the industrial and service sectors, which equate to percentages of totalemployment According to the International Labor Organization, the industrialsector includes mining and quarrying, manufacturing, building, and publicutilities (e.g., electricity, gas, and water) In contrast, the services sector includeswholesale and retail commerce, as well as restaurants and hotels; transportation,storage, and communications; financial, insurance, real estate, and businessservices; and communal, social, and personal services A rising number of theseservices are being made more accessible through digital transactions