Will digital economy pacts create spaghetti bowl effect?

Written by Cecil Leong, Deloitte Singapore Tax Partner and Wong Chian Voen, Deloitte Singapore Tax Director. The below are their personal views and may not represent the views of Deloitte.

As published in The Business Times on 20 January 2022.

Digital economy agreements (DEAs), sometimes called digital trade agreements, seem to be the rage these days, and Singapore is taking an active role in driving the establishment of digital trade rules and digital economy collaborations with other like-minded economies.

Singapore kicked off its first Digital Economy Partnership Agreement with Chile and New Zealand; and countries such as South Korea, Canada and China have since applied to join. Singapore is also working on bilateral arrangements and trade digitalisation initiatives with China, the Netherlands, Indonesia, Hong Kong, the United Kingdom and the United States.

Closer to home, Asean is slowly broadening its trade digitalisation efforts—from the Asean Single Window, an automated system for clearing customs across the region, to the recently launched negotiations on the Asean Digital Economy Framework Agreement. It is expected that as part of the agreement, cross-border data flows will be encouraged, personal data will be safeguarded, consumer rights will be protected, and innovation and cooperation will be encouraged in areas such as artificial intelligence.

This development is reminiscent of the dramatic rise of free trade agreements (FTAs) and the ensuing complications and costs brought about by the multiple rules of origin, popularly known in the trade policy community as the spaghetti bowl effect—which describes the phenomenon in which the increasing number of FTAs slows down trade relations between countries due to the mess resulting from different FTA rules of origin.

First came the opportunities, then came challenges

Rapid technological advancements over the last few years have changed the way we trade. Companies can bring new products and services to a wider pool of customers around the world at a faster speed. Smaller companies, in particular, can now easily overcome conventional barriers to trade and access new markets, enable payments, collaborate, and reduce fixed asset investments through cloud-based services.

For example, predictive analytics of internal and external data can provide companies with more precise forecasts of customer demand and supply delivery. Companies are also able to react faster and more dynamically to changing demand and supply situations. Integrating suppliers and service providers through a "digital supply network" can enhance real-time transparency across the supply chain, ensuring that all stakeholders are making decisions based on the same information.

Data—collection and accessibility—is key to these achievements. Companies have long understood the value of data, and now, governments are also wising up to it. This has led to the introduction of digital services tax, the ongoing global tax reforms, and regulations on cross-border data flows.

Opportunities often in themselves present challenges. As we advance in trade digitalisation, we are facing a new set of issues, particularly in the way data is collected, used and managed, and in the areas of accessibility, integration, sharing and trust between the stakeholders within the digital supply network.

It also appears that globalisation is in reverse in the world of digital trade. Recently, technology "walls" have started to appear, whether due to US-China tensions, a desire by some governments to grow their own digital sector, or privacy and data security concerns. Technology or digital sovereignty, strategic autonomy, self-reliance are just the latest catchphrases governments are using to justify technology-related policies and regulations.

Whose standards and what rules?

Existing traditional trade rules and commitments which are predicated on identifying whether products are goods or services, and whose borders they cross, do not appear to be adequate to deal with new digital trade issues. While there is growing awareness of the need for an international regime governing digital trade, the reality points towards selective connectivity between "like-minded" economies rather than global integration. The real concern here is the emergence of mini digital tech blocs or "hermit" systems as countries prioritise their own technology and force its use. The ensuing spaghetti bowl effect will inhibit growth as it would be challenging for companies to comply with all the different digital rules and standards.

As a result, the race is on in the realm of digital standards—not just in shaping digital technical standards and setting precedents for emerging technologies, but also in ensuring the widest adoption—with the ultimate prize of strategic advantage going to the standards setters.

As a leading technology hub in the Asia-Pacific region, Singapore is headquarters or regional office to major technology giants and has state-of-the-art engineering, research and development facilities. In addition, the country is home to some 4,000 technology-enabled startups and the lion's share of South-east Asia's technology unicorns. And it has a slew of programmes that spur digitalisation and innovation, including the Emerging Technology Programme, Open Innovation Platform, Digital Services Lab, Corporate Venture Launchpad and Startup SG.

These are evidence that Singapore has a fully supported technology ecosystem; even so, Singapore needs to ensure that its companies have the widest range of options to operate and can offer the widest possible choice of products and services to the largest number of international markets. Singapore's active involvement in various standards-setting fora, and through different digital initiatives (for example, DEAs), gives the country a say in determining the future direction of digital technologies and ensuring interoperability so that solutions can be successfully scaled up for global implementation.

Do businesses care about standards?

Given consumers' growing interest in the origins of the goods they buy, regulations around tracking and traceability of products, and trade facilitation measures that require transparency, self-compliance and "chain of custody" information are becoming increasingly important, making digital tools essential for companies to successfully deal with such market and regulatory demands. Thus, for most companies that are users of these tools, their key considerations would be the operational scope of the digital technology used—what can they use it for, who can they connect with—and not so much what the actual digital technical standards are.

Singapore has put in place several schemes to support businesses in their digitalisation journey, from the SMEs Go Digital Programme, the Digital Resilience Bonus, to the recently launched comprehensive Supply Chain 4.0 Initiative. However, the impact of such support would be affected by emerging selective connectivity as companies may be forced to choose one system or technological standard over another (limiting opportunities), or to adopt multiple systems in order to operate in different jurisdictions (increasing costs).

Whether for the benefit of digital technology developers and innovators or users of digital tools, Singapore needs to have a seat at the table(s) shaping digital technical standards and ensuring optimal interoperability. Though DEAs may appear geared towards selective connectivity, we are hopeful that they will serve as a foundation for a global conversation about the world's digital economy.

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