1THE TRADE POLICY IMPLICATIONS OF THE NEW ECONOMYPierre Sauvé1AbstractThis paper draws attention to a number of forces that are shaping the two-way interaction between theemerging new economic landscape and the rules-based trading system. Implicit to the analysis is thequestion of whether the role of trade policy in an environment of more rapid technological diffusion differsin any significant manner from the role it has hitherto assumed. The paper shows that important buildingblocks for the new economy were laid during the Uruguay Round, notably in the fields of intellectualproperty protection, trade and investment liberalisation in services, and technical barriers to trade. It showsthat the period since the end of the Uruguay Round, which paralleled the rise of what has come to be calledthe “New Economy”, has seen concerted efforts at both the multilateral and regional levels to adapt thetrading system to the realities of doing business in the digital age. The New Economy lies at the heart ofnegotiations which recently resumed under the WTO’s built-in agenda in the services field. Suchnegotiations offer WTO members an important opportunity to lock in the far-reaching reforms andliberalisation efforts that many have in recent years enacted in industries that are heavy users ofinformation and communications technologies. The paper describes the important complementary roletrade policy can play in helping countries harness the growth and development potential of the neweconomy. 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 theOrganisation for Economic Cooperation and Development or its Member countries. The author is gratefulto Barbara Fliess, Ken Heydon, Julia Nielson and Christopher Wilkie for helpful comments andsuggestions.2I. IntroductionThis paper focuses on the interaction between trade policy and ongoing developments in theinformation and communication technology (ICT) sector, whose growth and economy-wide diffusion ismost centrally associated with what has come to be called the “New Economy”. Such interaction isincreasingly two-way in nature. ICT applications are exerting significant changes on business models, bothwithin and between firms and across borders. In the process, they are spawning new forms of cross-borderexchanges and novel ways of contesting markets. They are also challenging the efficacy of traditionalinstruments of trade and investment protection and prompting policy-makers to reconsider long-standingapproaches to regulation.Such developments present important new challenges to trade policy, whose agenda in recentyears has increasingly been concerned with the need to anticipate, accompany, facilitate and help nurtureICT-driven changes. Three such challenges appear of greatest relevance in an ICT context: (i) adapting thetrading system’s architecture of rules to the realities of business in the digital age; (ii) removing, in aprogressive and orderly manner, obstacles that impede the development and diffusion of innovative ideasand products; and (iii) ensuring that all members of the multilateral community can share in the economy-wide benefits that the ICT revolution portends, regardless of their level of development.II. What’s new about the new economy? Some background considerationsThe new economy and the favourable economic conditions accompanying it has been the subjectof considerable recent attention in the media and financial markets, as well as in academic and policycircles. Many have hypothesised that we are indeed in a new economy that is the product of variousstructural changes occurring in the last two decades and that has contributed to the recent improvement inoverall economic performance. For the most part, such changes have to date been confined to the OECDarea, and most visible in the United States (OECD, 2000). The forces behind such changes include theeffects of globalisation and increased international competition on labour and management practices andthe resulting reduction in costs and improvements in efficiency associated with these changes. But mostprominently, the new economy is associated with the impact of technological innovation over the lastseveral decades that appears to have begun to bear fruit by the mid-1990’s. At its core lies the pervasiverole that information and communication technologies (ICTs) are playing in bringing about in a growingnumber of countries a restructuring of economic activities across a wide range of sectors (see Box 1).3Box 1. ICT in world tradeThe United States, Japan, Europe and emerging Asian electronic producers vie for leadership in theinformation and communications technology (ICT) sector. U.S., EU and Japanese producers generallycompete 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 electroniccomponents or final assembly of ICT equipment.The ICT industry is characterised by relentless competition, constantly declining profit margins and rapidobsolescence, with product cycles of less than one year in some market segments. As a result, costmanagement and speed to market are critical to success. The need to move quickly and at low cost in acompetitive 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 costsin 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 ofcommodity 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 producersseek to contain costs and enhance their competitive positions by securing high quality products andcomponents internationally, setting up foreign production and sales facilities and entering into internationalstrategic alliances. The quest for greater scale economies has seen the sector account for a significant shareof cross-border merger and acquisition activity in recent years. Recognition of the sector’s high growth anddevelopment potential, in particular