Little Need for Government In E-Commerce

by Aaron Lukas

Aaron Lukas is an analyst with the Cato Institute's Center for Trade Policy Studies.

November 23, 1998

The whole thing had the flavor of a medieval surgeon preparing to bleed a flu patient. The "surgeons" at the recent OECD ministerial conference on electronic commerce in Ottawa, Canada, were various ministers of industriousness and secretaries of consumer happiness from around the globe. They fancy themselves as the people who make the world's economies work. The patient upon whom they planned to operate is business, run by hard-nosed CEOs, techno-nerds, and Silicon Valley-types who actually do the work. The OECD gathering confirmed what I instinctively knew: unnecessary surgery is scary stuff.

After all, electronic commerce--"E-Com" in conference lingo--was looking strong before the doctor arrived. E-Com transactions are expected to hit $300 billion a year by the turn of the millennium. That's no surprise, given the phenomenal growth of the Internet over the past decade. The mystery is why, with so much cash flowing around unhindered, it took so long for the physician to come calling.

E-Com is increasingly attracting everyone's attention. Bold outfits like Amazon.com are thriving by selling directly over the Web. Smaller consumer-oriented operations, like the Tradeshop online jewelry store, have garnered less press but are proliferating rapidly. But the bulk of successful online commerce has been invisible because it consists of business-to-business transactions. Large multinational corporations like Mobil Oil, Office Depot, and Delta Dental are using the Internet to streamline distribution, coordinate suppliers, and manage inventories. Doing business over the Internet isn't a future dream, it's happening now.

But as I learned in Ottawa, the regulators have finally arrived, and they're here to help. The conference was modestly titled "Realising the Potential of Global Electronic Commerce," and it focused on the essential, vital, and, yes, indispensable role that government must play in nurturing the online economy. And, oh, how maybe business can do something too. Phrases like "public-private partnership" and "mutually beneficial cooperation" hung on every lip. Speaker after speaker declared that governments would build vibrant E-Com by… by what? Putting banner ads on the Ken Starr report Web site? I didn't hear any better suggestions at the conference.

And that's what was disturbing about the whole affair. Not what was said, but what wasn't. Government ministers were absolutely, positively certain that they are crucial to the successful development of E-Com, but not a single one told me how.

Vague prescriptions intended to "foster trust" were as close as anyone came to proposing specific policy changes. As usual, the prescriptions were buried in rhetoric about the importance of government to the whole process. The conference conclusion document sums it up: "Participants highlighted the important areas where actions to promote the growth and use of electronic commerce were important: creating and implementing trustworthy technologies and policies; developing, where appropriate, underlying regulations; and, developing codes of practices, standards, industry and institutional arrangements, and technology tools, necessary for 'self-regulation', effective user protection and consumer empowerment in the different environments."

In other words, everyone agreed that the right things must be done, and those would be very important things. Businesses should develop great products and codes of conduct that please consumers, and governments will supply the "appropriate" regulatory framework.

Of course, there's no doubting the necessity of consumer trust if E-Com is to flourish. But Internet transactions are increasing exponentially without a coordinated international regulatory structure and without government acting as a "model user" of new technologies. As Don Sanford, president of Net Shepherd, Inc., pointed out, governments have even retarded trust-building technologies through overly restrictive encryption controls.

The need to remove "unnecessary barriers" to E-Com was another oft-repeated theme. Exactly what those barriers are, few ventured to say. But there was plenty of talk about "necessary" barriers. U.S. Secretary of Commerce William Daley stressed government's essential role in protecting children and, well, everyone else. Echoing the nagging tone of his European colleagues, Daley concluded with a helpful tip for the business community: "You must provide products that consumers want." For this Americans pay him a salary?

Governments do have an important role to play in e-commerce, but it's the same one they've always had. Enforcing existing laws and providing a judicial forum where private parties can settle disputes is challenge enough.

If governments truly want to remove unnecessary barriers to E-Com, they already have the tools to do so. Internet business isn't fundamentally different from traditional forms of commerce. It simply uses a new medium to link customers and suppliers. With the exception of wholly digital products and services--which I doubt can be restricted--E-Com is hampered by the same old tariffs, quotas, and barriers that damage trade of the more mundane sort. We don't need a new legal framework to govern electronic exchange, we just need to jettison the protectionist relics that we already have.

Of all the speakers I heard, only World Trade Organization director general Renato Ruggiero pointed out that E-Com is mostly covered by existing trade rules, most notably those that govern mail ordering. But why stop there? Governments should go further than their World Trade Organization commitments and drop trade barriers unilaterally. Such a move would do more to promote electronic commerce than any number of multilateral negotiating rounds.

I was also surprised to hear relatively little about taxation. One of the main fears of tax authorities worldwide is that they will lose revenues if cybermarkets and digital cash move economic activity beyond their surveillance. Similarly, the growth of private intranets within multinational corporations is making it easier for companies to conduct more operations in tax-friendly locations overseas. If governments respond to decreasing revenues by simplifying tax codes and reducing expenditures, all will be well. Unfortunately, they're more likely to turn to draconian collection measures and heavy-handed regulations, both of which could strangle the E-Com baby in its crib. Washington has shown unusual good sense in this area, arguing for an international agreement to keep electronic transactions duty-free and implementing a three-year Internet "tax holiday" at home. In the long run, an international treaty on E-Com taxation would be preferable to a patchwork of panicked national responses.

In all fairness, some of the presentations were insightful, if frustratingly timid. Those stressed the great potential government has to mess things up and focused on the virtues of a minimal regulatory approach. Clinton administration adviser Ira Magaziner was notable in this regard. Yet he was quick to soothe government sensibilities by explaining that "when we talk in the U.S. about private sector leadership, we aren't speaking out of an ideological distrust of government." Unfortunately, he's probably correct--given his own role in proposing a bureaucratic takeover of the U.S. health care system, he's certainly pegged himself accurately.

One of the ground-breaking aspects of the conference, or so I was told, was that representatives from the private sector were allowed to attend. Naturally, those folks advocated "self-regulatory" solutions but, like Mr. Magaziner, softened their remarks with pandering to inflated ministerial egos. It wasn't easy to watch. Lou Gerstner Jr., chairman of IBM, even derided the "faction inside the information technology industry that … concludes there's no role for government in crafting any policy framework for electronic commerce." He then laid out the "responsible" position, saying, "A number of my industry colleagues share the view that working out solutions for the governance of this new medium falls to industry and government." Members of the laissez-faire faction had apparently not been invited to comment.

In the scores of speeches delivered at the conference, only one clear trend was discernible: if a regulation was "good" or "necessary," then the speaker would be for it. If it was "bad" or "overly burdensome," he was against it. Government and business were destined, all agreed, to work hand in hand to achieve the magical, revolutionary electronic economy of the future.

Call me a skeptic, but I'm not convinced. I don't doubt the enormous potential of E-Com, only the viability of a rosy state-private relationship. It seems strange to call government a "valuable partner" when its primary contribution will be to remove unnecessary barriers it erected in the first place. Telecommunications deregulation is much to be desired, of course, but calling it a "positive role" for government is like praising a thief because he's decided to stop robbing us.

Governments do have an important role to play, but it's the same one they've always had. Enforcing existing laws and providing a judicial forum where private parties can settle disputes is challenging enough. There are some novel issues--especially those that involve geographical jurisdiction--but grand schemes to maximize the benefits of E-Com are dangerous, potentially expensive, and not likely to yield much benefit. Fortunately, bewildered by new technology, governments still haven't figured out what kind of "help" they intend to give.

At the end of the day, "Realising the Potential of Global Electronic Commerce" left me feeling like I'd read a Michael Crichton novel: I was entertained but not enlightened. Perhaps that's typical of intergovernmental meetings, but given the revolutionary nature of the subject, I had hoped for more.

On the other hand, since the first G7 Ministerial Conference on the Information Society held in Brussels in February 1995, governments have done little except agree to agree to study the issues. Meanwhile, in the real world, E-Com has been progressing at lightning speed. As long as the "surgeons" remain content to argue over where to insert the scalpel, the patient will survive, and even prosper. So perhaps the conference was useful after all.

This article originally appeared in the Ottawa Citizen