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THE TRADE POLICY IMPLICATIONS OF THE NEW ECONOMY Pierre Sauv 1 Abstract This paper draws attention to a number of forces that are shaping the two way interaction between the emerging new economic landscape and the rules based trading system Implicit to the analysis is the question of whether the role of trade policy in an environment of more rapid technological diffusion differs in any significant manner from the role it has hitherto assumed The paper shows that important building blocks for the new economy were laid during the Uruguay Round notably in the fields of intellectual property protection trade and investment liberalisation in services and technical barriers to trade It shows that the period since the end of the Uruguay Round which paralleled the rise of what has come to be called the New Economy has seen concerted efforts at both the multilateral and regional levels to adapt the trading system to the realities of doing business in the digital age The New Economy lies at the heart of negotiations which recently resumed under the WTO s built in agenda in the services field Such negotiations offer WTO members an important opportunity to lock in the far reaching reforms and liberalisation efforts that many have in recent years enacted in industries that are heavy users of information and communications technologies The paper describes the important complementary role trade policy can play in helping countries harness the growth and development potential of the new economy 1 OECD Trade Directorate Paris and Center for Business and Government Harvard University Cambridge Massachussets The views expressed in this document are personal and should not be attributed to the Organisation for Economic Cooperation and Development or its Member countries The author is grateful to Barbara Fliess Ken Heydon Julia Nielson and Christopher Wilkie for helpful comments and suggestions 1 I Introduction This paper focuses on the interaction between trade policy and ongoing developments in the information and communication technology ICT sector whose growth and economy wide diffusion is most centrally associated with what has come to be called the New Economy Such interaction is increasingly two way in nature ICT applications are exerting significant changes on business models both within and between firms and across borders In the process they are spawning new forms of cross border exchanges and novel ways of contesting markets They are also challenging the efficacy of traditional instruments of trade and investment protection and prompting policy makers to reconsider long standing approaches to regulation Such developments present important new challenges to trade policy whose agenda in recent years has increasingly been concerned with the need to anticipate accompany facilitate and help nurture ICT driven changes Three such challenges appear of greatest relevance in an ICT context i adapting the trading system s architecture of rules to the realities of business in the digital age ii removing in a progressive and orderly manner obstacles that impede the development and diffusion of innovative ideas and products and iii ensuring that all members of the multilateral community can share in the economywide benefits that the ICT revolution portends regardless of their level of development II What s new about the new economy Some background considerations The new economy and the favourable economic conditions accompanying it has been the subject of considerable recent attention in the media and financial markets as well as in academic and policy circles Many have hypothesised that we are indeed in a new economy that is the product of various structural changes occurring in the last two decades and that has contributed to the recent improvement in overall economic performance For the most part such changes have to date been confined to the OECD area and most visible in the United States OECD 2000 The forces behind such changes include the effects of globalisation and increased international competition on labour and management practices and the resulting reduction in costs and improvements in efficiency associated with these changes But most prominently the new economy is associated with the impact of technological innovation over the last several decades that appears to have begun to bear fruit by the mid 1990 s At its core lies the pervasive role that information and communication technologies ICTs are playing in bringing about in a growing number of countries a restructuring of economic activities across a wide range of sectors see Box 1 2 Box 1 ICT in world trade The United States Japan Europe and emerging Asian electronic producers vie for leadership in the information and communications technology ICT sector U S EU and Japanese producers generally compete in high value added areas such as software micro processors and product design Meanwhile emerging Asian countries concentrate on more labour intensive production of commodity electronic components or final assembly of ICT equipment The ICT industry is characterised by relentless competition constantly declining profit margins and rapid obsolescence with product cycles of less than one year in some market segments As a result cost management and speed to market are critical to success The need to move quickly and at low cost in a competitive global setting make ICT producers exceptionally vulnerable to factors that delay market entry Tariff and non tariff barriers including standards related measures increase ICT suppliers relative costs in key foreign markets and play an important role in determining their international competitiveness The ICT industry ranks amongst the most globalised of all major industrial groups with production of commodity electronic components and peripherals and final product assembly largely done abroad particularly in the rapidly emerging Asian economies characterised by lower wage costs 2 ICT producers seek to contain costs and enhance their competitive positions by securing high quality products and components internationally setting up foreign production and sales facilities and entering into international strategic alliances The quest for greater scale economies has seen the sector account for a significant share of cross border merger and acquisition activity in recent years Recognition of the sector s high growth and development potential in particular the scope for economy wide technological diffusion and

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