Defining digital trade should occur within an independent digital market.

Defining Digital Trade

There is no set definition of “digital trade“. Depending on the organization, digital trade is used interchangeably with “e-commerce.” To give you an idea of the variance in definitions, consider the following:

“The production, distribution, marketing, sale, or delivery of goods or services by electronic means.” — World Trade Organization

“Purchases and sales conducted over computer networks. E-commerce can involve physical goods as well as intangible (digital) products and services that can be delivered digitally. ” — United Nations Conference on Trade and Development

“The delivery of products and services over either fixed-line or wireless digital networks. It excludes commerce in most physical products, such as goods ordered online and physical goods that have a digital counterpart, such as books and software, and music and films sold on CDs or DVDs.” — United States International Trade Commission

“The direct exchange of digital goods, and digitally enabled exchanges of services or labour. The exchange of personal communications is included in the definition.” — McKinsey Global Institute

What strikes me about most of the definitions is that “digital” refers to an alternative method of delivery of goods and services versus the actual construction of the market itself. The value from digitization is likely lower costs to producers and distributors and to consumers likely benefits are lower costs of product acquisition, assuming the costs of shipping and handling resulting from online shopping don’t exceed the costs of shopping in person.

Where’s the Surprise?

But beyond this, where is the “surprise” from using a communications medium like the internet to engage in e-commerce? In my opinion, the real value, the surprise, should be beyond the actual goods and services exchanged.

The pursuit of time saving, one of the benefits of online trade, is nothing new. Today I saw two women walk into Starbucks and grab coffee ordered via an app. The value for them was getting in and out of the coffee shop with the coffee versus sitting down in a Starbucks at 7:45 am with a group of people admittedly looking a bit too scruffy.

But is this enough, the time saving to the consumer and the costs savings to the producer to treat digital trade separately from traditional trade?

The Value in Digital Trade is in the Independence of a Digital Market

As currently constructed, digital trade is more an infrastructure adjunct to traditional, physical trade. True digital trade will happen when there are pure digital players exchanging data that can only be created in cyberspace through cyberspace. A true digital market and the digital trade that occurs within should be separate from human intervention where machines are responsible for analyzing, organizing, and distributing information and knowledge over digital networks.

One example of this digital market independence is occurring in the financial markets. In an article for Forbes.com, Bernard Marr shares how artificial intelligence is being used by hedge funds to trade stocks. According to Mr. Marr, what is extraordinary is an artificially intelligent machine making trades without the assistance of a data scientist. Mr. Marr goes on further to say that:

“Artificially intelligent machines analyze inordinate amounts of data at extraordinary speeds that is impossible for humans. They learn from the information they analyze to improve their trading acumen. This information includes market prices to corporate financial reports and accounting documents to social media, news trends, and macroeconomic data. Once the information is analyzed by thousands of machines, the machines then “vote” on what action to take and the best trades to make. “

While Mr. Marr doesn’t go on to discuss AI machines on the other side of the trade, I can envision the next step where an AI machine for Trader x exchanges shares with an AI machine for Trader y making a market entirely without human assistance. This exchange of shares or information and the making of a market for information independent of human intervention is the true digital trade.

Conclusion

While the commercial internet is three decades old, I don’t think we are at a stage yet where we can say we have complete digital trade. At best, digital trade is a subset of cross border trade and robust markets for autonomous trade between pure digital players in cyberspace is around the corner with the innovation and inclusion of artificial intelligence. The definitions we have now for digital trade should be changed to reflect the creation of true digital markets.

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Should Comcast and Verizon be allowed to enter the information mining game? Yes.

Overview

Proponents of the implementation by the Federal Communications Commission of net neutrality rules have been expressing outwardly that by ensuring no throttling of traffic from websites; no blocking access to favored and lawful websites; transparency when it comes to terms and conditions of service or network management; and the prohibition of favored treatment of one content provider’s traffic over another, that consumers of broadband services will be treated fairly and that edge providers will be able to innovate on the edge of the internet while competing with core providers.

While proponents have successfully convinced millions of Americans that net neutrality is about the consumer’s ability to democratize the web or have their voices equally heard among other, especially larger corporate voices, the real issue is whether core providers should be allowed to participate in the information markets or be kept out by making an 85-year old statute a barrier to their entry.

Battle in the Information Market

The statutory approach recommended by edge providers such as Facebook and Google to ensure that core providers such as Comcast and Verizon are reigned in is to apply Title II of the Communications Act of 1934. Edge providers make their bread and butter by mining information from visitors to or users of their website services and packaging that information into advertising products that they sell to businesses that are trying to get their services before as many eyeballs on the internet as possible.

The concern that the edge provider has with the core provider is that given the core provider’s “gateway” service and the core provider’s alleged monopoly or near monopoly control of the access to the internet, the core provider will then be able to capture consumer behavioral information that the edge provider has less access to.

The core provider, the edge provider will argue, is gathering this information from its telecommunications infrastructure; therefore, to ensure fairness, the core provider should not be allowed to call the telecommunications portion of his service an information service just so that they can skirt the information or data collection requirements under Title II.

By creating a net neutrality rule that says that core providers should treat access as a telecommunications service, the edge provider gets the government to apply a barrier to entry to the information market, a barrier that the edge provider has no confidence its superior information services can erect itself.

The Content Endgame: What Would Title II Do and Not Do

If Verizon wanted to use information “that relates to the quantity, technical configuration, type, destination, location, and amount of telecommunications service used by a consumer of a telecommunications service, that information, in general, would be limited in use to services related to the provision of telecommunications services. Verizon would not be able to use information related to the provision of telecommunications services to predict consumer demand for Verizon’s video streaming services.

Interpreting and applying Title II in this manner would help Hulu and Netflix keep Comcast and Verizon at bay. What it may also do is expose Hulu and Netflix’s pricing and cost structures during any public hearing resulting from Hulu and Netflix’s new roles as consumers of telecommunications services. Sections 204 and 205 of Title II provide the Federal Communications Commission the authority to set just and reasonable charges and to have hearings on those charges or on complaints regarding charges and price schedules. What Hulu and Netflix may not understand is that regulation of a market means scrutiny of both of its sides, and challenges to rates charged by a core provider means rebuttal that could include discovery of what economic rationale underlies an edge provider’s assertions. In short, Title II opens the Pandora’s Box for edge providers, too.

What Title II doesn’t do is tell Comcast or Verizon that they couldn’t collect consumer behavioral information from their websites or information portals. This “oversight” is further evidence of how arcane Title II is. A declaration by the courts that a core provider’s services are information services, from end user through a core provider’s entire network would be indication that the State recognizes that core and edge providers equally play in the information markets. Avoiding a balkanized, bifurcated view of broadband service provision would make regulation of advanced communications more efficient because of less time spent having to look at two separated pieces of internet service versus one.

The FCC’s Constitutional Quandry

But even if regulators continued down the two-prong path of regulating core providers, the end game would still be how to treat the content portions of their services. The Federal Communications Commission should not want to be in the position where it would take a hands-off approach to Facebook’s information mining techniques while taking a heavy handed approach to Verizon’s emerging content play. It would cause a constitutional dust up were the Commission to regulate the content of one service provider but not the content of another.

Conclusion

Core providers have the technical knowledge and desire to enter information markets and for that reason alone they should be allowed to profit from the development of content and the extraction and packaging of data that drives a modern economy. Core providers shouldn’t be punished because their basic business model includes the conveyor belts that information is placed on when being extracted. Imagine telling a coal miner that in order to foster competition, they will have to forego their conveyor belt and, like a firm that entered the market late and poorly capitalized, will have to use their hands and wheel barrel to move coal out of the mine. That is not competition but favoritism.

Trump and the Federal Reserve: Governing with transparent purpose

Listening to the rhetoric of President Donald Trump over the past 19 months, if I were to summarize the role of government, it is to defend national borders, sustain an environment that creates jobs, and be impactful in driving up stock market values.  Mr. Trump has effectively drowned out the Republican congressional leadership to the point where I don’t care what Senate Majority Leader Mitch McConnell or Speaker of the House Paul Ryan’s views on what the government’s role is supposed to be.

Under my interpretation of public administration, the buck, when it comes to governing, begins and ends with who is in the White House.  It is the Executive who enforces the law and interprets the law every day given a particular problem.  An argument can be made that during the run-up to the 2020 presidential election, the views of Mr. Trump’s challengers will take on some importance as voters compare the record of Mr. Trump with the promises of his Democratic challenger, but Americans have a way to go before the Democrats settle down on a few contenders and beginning pushing their messages before the electorate.  All we have right now are the whispered names of Andrew Cuomo, Elizabeth Warren, Joe Biden, and, yes, Hillary Clinton.

I suspect that none of the above named Democrats will be serious contenders in the spring of 2020 anyway.  Listening to the roll call of potential presidential candidates is like believing that the baseball team leading their division eight weeks into the season will be in the World Series much less holding the trophy.

In my lifetime, Mr. Trump has been the most transparent of presidents when it comes to the factions that he promotes.  Mr. Trump has been consistent and clear with his America’s economy first message. He took Mr. Trudeau out to the woodshed during the renegotiations of the North American Free Trade Agreement.  He kept his word on pulling the United States out of the Paris accords on climate change and the Trans Pacific Partnership Agreement.  He will not enforce the mandate that taxpayers are required to purchase health insurance, facing penalties if they don’t.  These initiatives are driven by a philosophy of American economic nationalism with the hopes of creating incentives for American businesses to repatriate jobs and cash to America’s shores.

He’s recently been transparent about the most important engine in the American economy: the Federal Reserve.  Mr. Trump disapproves of the Federal Reserve’s increase in the target for its federal funds rate, even though the Federal Reserve’s independence gives the central bank the okay to thumb their noses at the President.  The federal funds rate is the interest rate at which the Federal Reserve’s member banks may lend each other money overnight.  Changes in the fed funds rate seep into the overall economy in the form of mortgage rates, credit card rates, and interest rates on bonds.  Higher rates raise the costs of borrowing making it tougher for businesses to invest in growth including hiring more labor.

Higher rates mean that the economy’s “labor to tax conversion mechanism” becomes less efficient.  The labor to tax conversion mechanism is that layer of the economy where companies convert human resources into tax dollars by adding labor to payroll and collect and transmit income, payroll, and social security taxes to the Treasury.  Tax dollars are collected by the U.S. Treasury and either deposited for future spending on public programs or to service the debt.

But as I alluded to before, companies will feel constrained by interest hikes as they see revenues and profits reduced by higher costs for doing business. This may mean, depending on the business, a move toward automation in order to reduce labor costs.  Taking labor off of payroll means removing a head that could be taxed.  Will government have to apply some type of alternative tax applicable to an artificial intelligence that replaces a human intelligence on a factory line?

Going back to transparency, neither Mr. Trump or any leading Democrats have clearly demonstrated an ability to describe to the American public how their current economic environment works.  Neither begin any of their discussions on the economy with a discussion on capital or describe how the central bank is still the only game in town and the relationship to and importance of the central bank to all Americans. Mr. Trump has come the closest which means at this time he is the only elected official that gets it.