INTERNATIONAL TRADE AND THE INTERNET

Elizabeth J. Bailey, Troy State University Ernest A. Capozzoli, Troy State University ABSTRACT The Internet has revolutionized how individuals and businesses conduct their affairs. The Internet has impacted daily activities and communications and is having a profound effect on global trade. This paper examines the impact of the Internet, and more specifically Electronic- Commerce, on international trade. INTRODUCTION New technologies are reshaping and impacting international trade. These changes bring both benefits and challenges to organizations. Potential economic benefits, such as the acceleration in the rate of innovation allow organizations to compete in more focused markets, and increased global growth and market access allow in new and expanding markets. However, there are numerous challenges associated with new technology and global markets, such as cultural differences, channel operations and government intervention. No single force embodies the ongoing electronic transformation of the global economy more than the evolving medium known as the Internet. The Internet is a global matrix of interconnected computer networks, or a network of networks, that is a collection of hundreds of thousands of private and public networks (Laudon 2000). Once a tool reserved for scientific and academic exchange, the Internet has emerged as an appliance of everyday life, accessible from almost every point on the Earth. The Internet is being used to reinvent government, private business, and reshape individual lives. As the Internet empowers citizens and democratizes societies, it is also changing classic and traditional business and economic paradigms. New models of commercial interaction are developing as businesses and consumers participate in the electronic marketplace. Entrepreneurs are able to start new businesses more easily with smaller upfront investment requirements by accessing the Internet's worldwide networks of customers. An indicator of how technology is advancing can be found in Moore's Law. Gordon Moore, Intel Corp. co- founder predicted in 1965 that the density of transistors in an integrated circuit would double every year. His axiom, dubbed Moore's Law, was later changed to reflect 18 months' progress. Moore's Law has proven remarkably accurate for over three decades. Not only transistor density but also microprocessor performance tends to follow Moore's Law (Stam. 1999). International economics deals with the economic interdependence, or relationships among nations. It analyzes the flow of goods, services and payments between nations, the policies directed at regulating this flow and their effect on the nations' welfare. This economic interdependence among nations is affected by and, in turn, influences the political, social, cultural and military relations among nations. Specifically, international economics deals with international trade (Salvatore 1998). Economic interdependence among nations has been growing over the years as measured by the more rapid growth of world trade over world production. International commerce is also being impacted Internet related activities.

IMPACT OF THE INTERNET There are many reasons trade interdependence has been increasing, and the most recent common denominator in the equation is the Internet. The evolution of the Internet as a pervasive phenomenon means that the traditional factors of production, capital and labor are no longer the main determinant of the power of the economy. An increasing percentage of the United States economy, as well as other industrial nations, depends on imports and exports. Foreign trade, imports and exports, account for approximately 25% of the goods and services produced in the United States and even more in countries like Japan and Germany (Laudon 2000). The success of firms today and in the future depends on their ability to operate in the global marketplace, and their economic potential is increasingly linked to the ability to manipulate information. The dynamics of global growth are changing as profoundly as they did with the advent of railroads and electricity; however, today we have entered the Age of the Internet. The initial manifestation of the new era is the stunning performance of the United States economy in the 1990's. For most of the post war era, Western Europe and Japan slowly gained ground on the United States by adopting modern technology and adding their own innovations. In 1970, the United States per capita income was 3 1 % higher than that of other major industrialized countries. By 1991, the difference had narrowed to 10% (Mandel 2000). With the dawn of the Internet age, the gap has started to widen again to more that 22% this year. "This is historically unique," says Luc Soete, an economist at Maastricht University in the Netherlands and Europe's leading expert on the New Economy. "For the first time in the post war period, you have growth divergence-the pulling away of the leading technology country" Soete explains (Mandel 2000). The acceleration of the U.S. growth is only the opening act of a much larger concert of global economic change and growth. The Internet should make many more industries open to globalization. Historically, international trade flows consisted mainly of goods. Whether it was spices from the Spice Islands or automobiles, it was much easier to ship goods rather than services overseas. With the Internet, it becomes much easier to provide various types of services, including banking, education, consulting and retailing through a website that is globally accessible. "The Internet is the backbone of greater service trade," says Joseph Quinlan, SeniorInternational Economist at Morgan Stanley Dean Whitter (Mandel 2000). Beyond that, as more and more companies become tied into the global Internet, there may be acceleration in the rate of innovation. New growth theory predicts that, as the size of the market gets bigger, the rewards for uncovering lucrative new ideas will as well. Moreover, as new ideas flow back and forth across national boundaries faster and more easily, everyone will benefit. The Internet may lead to a much more rapid diffusion of knowledge. A study by Jonathan Eaton, an economist at Boston University, and his co-author, Samuel Kortum, estimates that in the extreme case, international borders become irrelevant and global growth could go up by one full percentage point (Mandel 2000).

The global economy has not yet reached the point where international borders are irrelevant; however, the advent of E-Commerce may serve as the vehicle to globalization. E-Commerce is the process of deploying computer and communications technology to support an organization's sales process (Capozzoli 2000). The United States still dominates the Internet, accounting for more than half the individuals online and three-quarters of Internet commerce (Mandel 2000). With only a few exceptions, most other countries have less than onequarter of their population online, which appears to be the level at which the Internet and E-Commerce activity in the United States increased rapidly. Moreover, most industrialized countries are not yet seeing rapid acceleration in information technology spending. In fact, only a small percentage of companies, one in ten, are doing true global E-Commerce from their websites (Leibs 2000). This is not to say that the benefits of Internet usage and E-Commerce do not exist. International Data Corporation (IDC), Framingham, MA, estimates that global E-Commerce will grow from $80 billion in 1999 to $1.64 trillion in 2003 (Leibs 2000). While North America will continue to account for about one-half the total, other markets are coming on so strongly that American companies can not afford to ignore them. For example, IDC says that Western Europe will see online sales explode from $5.6 billion in 1999 to $430 billion in 2003. The picture is murkier in the Asia/Pacific region where Internet access varies widely. It is estimated that 18.1% of Australians have Internet access versus 7% in Japan and only 0. 1% in China (Leibs 2000). But experts at IDC say that as the overall economy improves in that part of the world, E-Commerce will accelerate quickly as well. Even as the size of the global pie increases, there is the question of who will get the biggest share of the benefits. Periods of great technological ferment often see new countries or regions become pacesetters for the global economy. The second Industrial Revolution of the late 1800's and early 1900's saw the United States supplant Britain as the major industrial power, in part because the U.S. adopted new innovations faster. Thus, the Internet makes innovation even more crucial. With ideas diffusing quickly, there is little chance of protecting a monopoly, nor are small differences in product costs as important when the technology is quickly evolving. Instead, whichever company is able to generate and make use of innovation the fastest, will come out ahead. This race can only be an improvement over the past impediment to the free flow of information across national borders. An economic study done in 1980 found that it took upwards of ten years for an important innovation made in one country to be adopted elsewhere. That is approximately how long it took for United States automakers to adopt Japanese manufacturing methods after Japanese cars took a large share of the U.S. market in the early 1980's (Mandel). If history shows that it has taken years, if not decades, for even the most important technological business innovation to spread across national boarders, history is changing. Today an engineer in Hong Kong can log onto the Internet and have immediate access to vast stores of data on U.S. websites. More importantly, engineers in developing countries can communicate much more quickly with counterparts in other countries and learn what works and what doesn't. As mentioned earlier, the gains from faster transmission of innovation can add up to 1% to global growth rates, according to Jonathan Eaton and Samuel Kortum (Mandel 2000). Although increased trade and faster diffusion of information allows companies and countries to play on a larger playing field, the laws of comparative advantage between two countries have not been totally repealed, but instead reformulated. Now, countries are vying for market share and jockeying to earn the title of front-runner in the race. How these two advantages play out will determine how far reaching the impact of the Internet is.

However, the process of shifting to a fast growth track is still in the early stages in most of the world. Europe is at least two to three years behind the United States, with Asia lagging even farther behind. While there are pockets of rigor and venture capitalists in places, it has become an enormous challenge to reshape cultures to allow more risktaking in Europe and Asia, where caution is a virtue. Fortunately, the rapid diffusion of knowledge and ideas in the Internet Age is helping European, and to some degree Asian companies, learn from what American companies have already done. There are signs that the process of change has started with growth picking up in Europe and Asia emerging from its slump. Although Merrill Lynch & Company is forecasting 3.3% world growth in 2000 with inflation slowing down, there are still many challenges posed by true global E- Commerce (Mandel 2000). Corporate restructuring has begun in Europe and Asia where financial markets are being rebuilt to support innovation and where there is more willingness to take risk. Even in slow growing Japan, "I think there will be a New Economy," says Toshiba Corporation President Taizo Nishimuro, though he cautions that, "it won't be the same as the United States," (Mandel 2000). Each country and organization will approach Internet based E-Commerce differently. ORGANIZATIONAL IMPLICATIONS Organizational culture is typically engrained in most firms and is a powerful restraint and even hindrance on change, especially technological change and innovation. Any technological change that may threaten commonly held cultural assumptions, norms and beliefs, is usually met with a great deal of resistance. Acknowledging, making and finally accepting the need for change is absolutely necessary to keep pace with today's fast-paced global economy. In fact, companies are encountering the necessity to implement technological changes just to keep pace with their competitors or maintain their competitive edge. Overcoming internal organizational change may be the most difficult challenge posed to some cultures by the New Economy and Internet age and the first step in the race. However, overcoming this challenge does not void or make other challenges of engaging in E-Commerce easier, such as logistical challenges. MARKETING CHANNEL: CHALLENGES AND SOLUTIONS Shipping Despite the fact that the Internet makes national boundaries more porous to knowledge, packaged goods do not float freely across boarders as by osmosis. Land's End, Incorporated, a clothing retailer, has facilities in the UK, Germany and Japan. "Shipping products within the countries where we have distribution facilities is easy," says Jeremy Hauser, a Land's End research and analysis specialist, "but even shipping to Italy from Germany at a low, consistent price poses challenges," (Leibs 2000). Some estimate hold that international return rates for goods ordered online is 80%. "Someone in France may see that a camcorder is $200.00 cheaper from a United States site," says Perry Ziff, VicePresident of Corporate Strategy and Business at New York-based Syntra Technologies, "but by the time it arrives, duties and fees have added $250.00 to the price" (Leibs 2000).

A large part of the unfavorable fee structure of shipping is the cost of air transport, which is the most common and widely used method of transporting goods. Unless firms have a global network of warehouses, fulfilling orders by airfreight is not economically feasible or viable. Not only is the cost prohibitive, but the time associated with researching alternate means of delivery may be as well. Syntra Technologies hopes to provide a technological solution through its "landed cost engine," software that gives customers a much more accurate calculation of total costs up- front. The company recently announced a contract with DHL Airways, Incorporated, that will allow DHL, which has 40% of the international air express package market, to provide customers with a shipping charge that includes tariffs, duties and other 'additive costs' such as value added taxes. Another organization committed to facilitating a global reach is Global CommerceZone, formerly known as vShip. Global CommerceZone recently unveiled Custom Wire, a payment processing system that helps remove some obstacles to international trade and expedite the movement of goods, data and funds. Additionally, Global CommerceZone signed a service agreement with the United States Postal Service, through which the postal service will complete shipments to Canada, France, Germany, Japan and the United Kingdom. A final example is the organization GoShip, who provides what they call "personal shipping." GoShip offers a wide variety of carriers, services and price plans at the time of purchase, for shipping goods worldwide (Shewmake and Sapp 2000). A possible reason why global logistical problems have escalated to being almost prohibitive to organizations is that individuals with technical expertise and an entrepreneurial spirit tend to launch many dot.com companies. As a result of these problems, many companies have yet to move their E-Commerce activities, beyond their native shores. According to Cambridge, MA, based Forrester Research, only about 15% of United Stated companies conducting business online fill international orders, and most are shipping to just a few countries in Europe and Asia (Shewmake and Sapp 2000). Many companies are ready and willing to facilitate channel operations or provide technology that can simplify other elements of the transaction, such as different methods of payment and exchange rates, which is another challenge encountered by global E-Commerce players. A new company called GlobalNet Systems has launched an Internet start-up geared toward streamlining global trade. Realizing that cross-border trade involves a complex matrix of currency conversions, transportation costs, duties and tariffs, GlobalNet Systems built a software solution to eliminate those concerns for both buyers and sellers. Called eGAP, the software links directly to merchants' websites, and converts language and currency from the U.S. system into those used by any of the country's top 25 trading partners. This gives potential buyers in any of those nations easy access to product and price information. Through an extensive database, eGAP attaches the appropriate weight and measurements, unit price, harmonized codes and duties and tariffs to individual products ordered over the web. The system also incorporates transportation costs and conversion rates, so purchasers can see the landed cost of ordering a product electronically and having it delivered to the door (Anonymous 2000). Although eGAP has created an easy solution to complex channel problems, it does not solve the challenge of government restrictions on E-Commerce or the imposition of undue tariffs.

Government Involvement Although governments are involved in international trade, governments should take a handsoff approach and avoid undue restrictions on E-Commerce. Parties should be able to enter into leitimate agreements to buy and sell products and services on the Internet with minimal government involvement or intervention. Unnecessary regulation of commercial activities will distort development of the electronic marketplace by decreasing the supply and raising the cost of products and services for consumers the world over. Business models must evolve rapidly to keep pace with the rapid change in technology; government attempts to regulate are likely to be outmoded by the time they are finally enacted, especially to the extent such regulations are technology-specific. Accordingly, governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures, or taxes and tariffs on commercial activities that take place via the Internet. Although spurring organizational change across cultures to accommodate for the more risk-oriented nature of the global marketplace is a difficult challenge to overcome, convincing governments to take a hands-off approach to commercial activities via the Internet may be an even bigger challenge. A final challenge in the race to be a global E- Commerce contender is the overwhelming and potentially prohibitive implementation cost. International Data Corporation recently surveyed more than 100 of the nation's top Web sellers. More than 30% of the surveyed sites spent in excess of $1 million getting the site up and running, and another 10% spent at least $10 million. Lastly, maintenance costs can add up to as much per year as the initial development cost (Gant 1999). SUMMARY International trade is increasingly becoming a fast- paced environment. This fast-paced environment has given birth to a new economy through a technological revolution. From this technological revolution, the world stands to gain such things as a shift in the tradition of only trading goods to include services, more industries being open to globalization, acceleration in the rate of innovation and increased global and economic growth. Although the Internet age promises to bring about an economic boom, a whole new set of international trade challenges has presented itself. As discussed previously, the challenges include the necessity of organizational and cultural change, overcoming logistical challenges such as shipping and transportations costs, language barriers, currency conversions, duties and tariffs, attaining government cooperation and lastly, exorbitant implementation costs. In conclusion, the global race has begun, the playing field is global in nature and the challenge is fierce. There is no better way to describe the current state of the Internet Age than to say it is moving at the speed of technology.

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