general » Digitalization, Trade and Politics

Digitalization, Trade and Politics
Historical experience suggest that political decision-makers are likely to listen to the interests of capital owners and employees who are losers in the new digital economy

Photo by NASA on UnsplashPhoto by NASA on Unsplash

Digitalization not only reduces an organization’s costs of production, but also the costs of cross-border trade. In a global economy, advancing digitalization can result in one more factor causing realignment of traditional trading patterns and can accelerate the structural change of the entire global economy. This can and will result in income losses for certain regions and individuals – some of which will resist change…in predictable ways.

Digitalization is reducing the costs of international trade

The increasing spread of information and communication technologies, as well as, big data analyses has reduced communication costs. Lesser discussed is the significantly reduced cost of trade. In addition to reduced transport costs from computer-controlled logistics that optimize procurement and supply networks, there are:

  • Lower search costs to identify customers abroad.
  • Software solutions for processing and translating digital transport and customs documents.
  • More efficient coordination of logistics to cross national borders and distribute products in various foreign markets.

Digitalization can increase exports by reducing transaction costs  

A digitalization-related reduction in the cost of cross-border sales of products can increase domestic exports: Reducing transaction costs can mean that companies can offer products at a price that is more acceptable to foreign consumers. This has positive domestic macroeconomic effects:

  • Increased domestic exports cause an increase in production.
  • A higher level of production usually requires a larger number of employees.
  • Domestically, employment rises, and unemployment is reduced.
  • Income rises with the number of employees, leading to an increase in domestic demand for consumer goods.
  •  As a result, the number of people employed in the consumer goods industry also increases.

The digitalization-related reduction in the costs of foreign trade has the happy impact of stimulating an economic upswing. However, this has consequences.

Digitalization accelerates structural change in the economy

In order to improve sales opportunities in their own country, domestic companies must achieve cost reductions. This incentivizes them to increase their research and development expenditures and to make investments that lower their costs of production. For the entire economy, this means technological progress that increases overall economic productivity.

On the other hand, the intensified competitive pressure exerted by foreign suppliersparticularly affects those domestic suppliers who are already less productive. If they fail to achieve the necessary productivity increases, they disappear from the market. This process of “creative destruction” accelerates structural change of the economy.

Digitalization can propel income redistribution

Through the intensification of international competitive pressure, digitalization accelerating the structural change of an economy, in the long term, has a positive effect on the productivity of the economy and growth. However, it should be pointed out that this structural change also produces losers in the country in question.

The sectors that were previously protected from foreign competition due to high trade costs are now threatened with being driven out of the market. This can result in substantial income losses: employees lose their jobs and their most important source of income. Business owners lose capital income. Company’s shares lose value.

For owners, this means asset losses and it is highly possible that the economic actors negatively affected will influence political decision-makers to take protectionist measures to protect the threatened jobs.

Will Digitalization lead to increased protectionism?

Whether the digitization-related reduction in the costs of cross-border trade will actually lead to an intensification of international trade and the associated structural change cannot be guaranteed. Theoretical considerations and historical experience suggest however that political decision-makers are likely to listen to the interests of endangered domestic providers – i.e. capital owners and employees – and take protectionist measures. In this way, however, society as a whole is foregoing increases in income and material prosperity.

In order to reduce the resistance of the potential losers of structural change, country’s must better prepare to allocate the material benefits of this change. In addition to the tax transfer system, instruments for this include access to public goods (education, health, infrastructure) and greater participation in society’s productive assets.

Whether appropriate measure will be taken to productively allocate the benefits of digitalization across societies is yet to be determined.

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Read More on the sometimes surprising impact of digitalization:

How Can Consumers Benefit from Big Data and AI?

Will the Digital Economy Change the Rules of the Game in the World Economy?