World Trade Report 2020: Government Policies To Promote .

WORLD TRADE REPORT 2020Foreword by DeputyDirectors-GeneralAgah, Brauner,Wolff and YiIn the digital age, a growing number of governmentshave adopted policies aimed at boosting growththrough innovation and technological upgrading. Thedomestic economic fallout linked to the COVID-19pandemic is leading countries to strengthen thesepolicies. This report looks at these trends, and athow trade and the WTO fit in. It shows that there is asignificant role for international cooperation to makecountries’ pursuit of such goals more effective, whileminimizing negative spill-overs from national policies.Historically, governments have sought to use policyto enhance long-term economic growth or societalwelfare. These policies have always had to balancemultiple objectives, from attempts to correct realor perceived market failures, to the dual task ofmanaging change in mature sectors, while promotingemerging industries and technologies. Over thepast two decades, countries have targeted theseobjectiveswith increasinglyoutward-orientedpolicies, in recognition that openness by access tolarger markets and increased competition leads firmsto innovate. Trade and trade policy have historicallybeen important engines for innovation. The certaintyand predictability in global market conditions fosteredby the multilateral trading system has made a majorcontribution to innovation and technology diffusionglobally, notably by underpinning the rise of globalvalue chains. Countries have accessed advancedtechnology by importing capital goods, technologiesand building knowledge through partnerships andglobal value chain participation. The economicliterature and experience in many countries highlightthat innovation, productivity and other key objectivesof government policies are best served by broadlyopen global markets.4Today, a defining feature of government policies is tosupport the transition towards the digital economy.This transition has become the key objective ofso-called “new industrial policies”, whose conceptualbasis and content have been partly reshaped bythe distinct features of the digital economy. As databecomes an essential input, firms rely more onintangible assets than on physical ones. Digital firmsare more scalable, reach global markets faster, andlarge players may expand globally without the amountof physical investment previously necessary in othersectors. Success in the digital economy underscoresthe need for openness, for access to informationand communications technology (ICT) goods andservices, open-source technology, foreign markets,collaborative research projects, and in general for thediffusion of knowledge and new technology.Spurring innovation in the digital field, whether“new in the world” or “new in the country”, is at thecore of many new industrial policies adopted incountries at all levels of development in recent years.Governments typically justify these interventions onthe grounds of market failures in financing innovationand entrepreneurship, the existence of economywide spill-overs for general-purpose technologies,the public nature of knowledge, and the presence ofnetwork externalities. The Report finds that some ofthe policy instruments being employed are relativelynew (data policies, some collaborative research anddevelopment support, knowledge diffusion throughagglomeration, technological hubs) while othersare more conventional (tariffs for infrastructuralequipment, investment and tax incentives, innovationbased procurement and intellectual property policies).The Report observes that many developing countrieshave adopted proactive policy frameworks to promotedigital development and technological innovation,with a view, inter alia, to catching up on infrastructure,developing the digitization of production and buildingdomestic capacity for a software/app economy whichrelies on open-source technologies. Innovation inthe digital field is widely sought by countries at alldevelopment levels. Provided they continue to catchup on internet infrastructure and the right policy andbusiness environment, least-developed countriesstand to gain increasingly in digital service exports,participation in global value chains, and the economicinclusion fostered by affordable mobile services.The Report notes that government policies retain“defensive” aspects, particularly in mature nondigital sectors subject to intense competition andtechnological transition. The greatest concentration

FOREWORD BY DEPUTY DIRECTORS-GENERAL AGAH, BRAUNER, WOLFF AND YIof “protective” policy instruments is seen in thesesectors, aiming to manage the transition and addressemployment concerns.In the digital field, the WTO and its existing rulebookalready support innovation directly and indirectly inmany ways: directly, by eliminating tariffs on internet andtelecommunications infrastructure products through theInformation Technology Agreement (ITA) and extendingthese benefits to non-ITA members, by liberalizinginternet services through the telecommunicationsagreement, and by stimulating e-commerce with themoratorium on duties on cross-border digital flows,as well as by providing a robust and stable frameworkfor the development of global and open standards,intellectual property protection and other criticalrules based on the principles of non-discrimination,transparency and reciprocity; and indirectly, through theimproved resource allocation and efficiency that comewith open trade, which frees up resources that can bedevoted to new cutting-edge pursuits.The WTO agreements reached a quarter-century agoproved to be remarkably forward-looking in providinga framework that helped foster the developmentof an ICT-enabled economy in countries across alllevels of development, while preserving policy spacefor countries to pursue different models of digitaldevelopment.Yonov Frederick AgahDeputy Director-GeneralKarl BraunerDeputy Director-GeneralJust as it has fostered broadly open, predictable andcompetitive markets in the wider global economy,the WTO can in the years ahead play an importantrole in reducing uncertainty in markets for digitalgoods and services. But this will mean updating theWTO framework to address new challenges anddemands. For example, the rising importance of dataleads to growing demands for shared internationalunderstanding on data transfer, localization andprivacy. International cooperation would be useful tofoster innovation and interoperability and to reducetensions in ways that would make internationalmarkets function more predictably.This report looks at how international cooperation –at the WTO, on Aid for Trade and elsewhere – canaddress these challenges and maximize the positivespill-overs from governments’ policies to promoteinnovation. While, in many instances, digital marketsenhance competition and generate positive spillovers for the rest of the economy, the Report alsowarns that the winner-takes-all characteristicsof certain digital industries could lead to policyresponses that raise tensions between countries andintroduce unnecessarily high market barriers. Here,international cooperation could play a particularlyvaluable role in limiting negative spill-overs.Alan WolffDeputy Director-GeneralXiaozhun YiDeputy Director-General5

WORLD TRADE REPORT 2020Executive summaryA. IntroductionIn the digital age, a growing number of governmentshave adopted policies aimed at boosting growththrough innovation and technological upgrading. Thedomestic economic fallout linked to the COVID-19pandemic is leading countries to strengthen thesepolicies. This report looks at those trends, and athow trade and the WTO fit into them. It shows thatinternational cooperation could play a significantrole in making countries’ pursuit of such goals moreeffective, while minimizing the negative spill-oversfrom national policies.The shift towards digitalization and knowledge-basedeconomies highlights the increasing importance ofinnovation and technology to economic growth. Underthe so-called “new industrial policies”, governmentpolicies aim at shifting domestic production towardsnew, enabling digital technologies, while at thesame time facilitating the modernization of matureindustries.At each phase of policymaking, governments have tobalance multiple objectives, from attempts to correctreal or perceived market failures, to the dual task ofmanaging change in mature sectors, while promotingemerging industries and technologies. Over the pasttwo decades, economies have met these objectiveswith increasingly outward-oriented policies, inrecognition of the fact that openness – access tolarger markets and increased competition – leadsfirms to innovate.The digital age further underlines this need foropenness. Trade and trade policy have historicallybeen important engines for innovation. The certaintyand predictability in global market conditions fosteredby the multilateral trading system have made anenormous contribution to innovation and technologydiffusion globally, notably by underpinning the riseof global value chains. Countries have accessedadvanced technology by importing capital goods, bymeans of technologies, and by building knowledgethrough partnerships and global value chainparticipation.6Today, a defining feature of government policies is tosupport the transition towards the digital economy,which is one reason why more and more international cooperation is necessary if outwardoriented policies are to be effective. In the context of“new industrial policies” and related policies gearedtowards innovation, and the transition towards thedigital economy, some of these strategies can havepositive spill-overs for other countries – generatinggrowth, creating new markets and encouragingtechnology diffusion. At other times, these strategiescan have negative spill-overs – distorting trade,diverting investment, or promoting unfair competition.The challenge for WTO members is to provide a

C. Innovation policy, trade and the digital challenge 78 1. Introduction 80 2. The rationale for innovation policy in the digital era 83 3. The determinants of innovation in the digital era 92 4. Cross-border effects of innovation policies 117 5. Conclusions 123 D. International cooperation on innovation policies in the digital age 128 1.