The DEFA Treads a Fine Line to be Successful in Driving Digital Services Trade in ASEAN

ASEAN embarked on an ambitious region-wide initiative last year in the form of the ASEAN Digital Economy Framework Agreement (DEFA). Touted as the first regional digital economy agreement in the world, it aims to accelerate the growth of ASEAN’s digital economy to a potential US$2 trillion in value by 2030. Part of this increase will be driven by digital trade activities, which will be a key component to reap the benefits of deeper regional digital collaboration. However, numerous ‘at the border’ and ‘beyond the border’ trade frictions exist which may stand in the way of achieving this.

Southeast Asia recorded US$473.8 billion in digital services trade in 2022. Singapore dominates the market, accounting for the largest shares of both exports (72.1 per cent) and imports (62.8 per cent). The Philippines follows with 11.5 per cent of the region’s exports, while Thailand comes in second for imports at 11.3 per cent. Notably, Singapore leads by a wide margin in terms of the share of trade activities. Analysing trade competitiveness of digital services through the Revealed Comparative Advantage (RCA) indicator, reveals that both the Philippines and Singapore outperform other ASEAN countries in terms of competitiveness as well as exhibiting respective trade surpluses, indicated by positive values of the normalised trade balance measures below.

Table 1. Digital Services Trade in ASEAN – State of Play (2022)

The largest component of digital services exports is attributed to the ‘other business services’ (Table 2). This encompasses consulting and accounting, and other professional services delivered through digital means. This accounts for 54.2 per cent of ASEAN’s average share, followed by telecommunication (13.9 per cent share) and computer services (13.6 per cent share) sub-sectors. In terms of the composition of digital services imports (Table 3), the ‘other business services’ component remains the largest component, with an ASEAN average of 45.7 per cent.

Table 2. Composition of Digital Services Exports across ASEAN Countries (2022)

Table 3. Composition of Digital Services Imports across ASEAN Countries (2022)

Services trade has traditionally been riddled with trade frictions and digital services are no exception. Both ‘at the border’ and ‘beyond the border’, aspects may hinder the seamless flow of digital trade. ‘At the border’ barriers to digital services trade refer to enablers such as rules on cross-border data transfers, digital payment eligibility and intellectual property rights enforcement. ‘Behind the border’ measures refer to the digital economy landscape of a country which influences its digital capabilities. They include factors such as digital skills availability, regulatory frameworks and measures of business agility.

When examining ‘at the border’ restrictions, the OECD’s Digital Services Restrictiveness Index (DSTRI) (Table 4) highlights the highest level of restrictiveness in Lao PDR (0.499), Cambodia (0.405) and Indonesia (0.307). This is primarily due to issues related to infrastructure and connectivity. In particular, most of the constraints pertain to restrictions on cross-border flows of data and data localisation requirements. Although these factors are generally interpreted as well-known impediments to digital services trade, risk aversion by countries concerning the free-flow of data also contributes to these regulations and safeguards being put in place.

Table 4. Measures of Digital Services Trade Restrictiveness Around the ASEAN Region

In some of the other sub-measures, the frictions highlighted by the DSTRI include laws and regulations protecting confidential information (under the electronic transactions sub-index), as well as limitations on downloading and streaming (under the other barriers sub-index). While they constrain digital flows, such obstructions can also be seen as safeguarding measures.

Another aspect contributing to higher DSTRI scores is the institutional capacities of regulators. For example, under the intellectual property rights sub-index, the absence of provisional measures for the enforcement of intellectual property rights is flagged as a restriction to digital services trade. However, it could also reflect a less sophisticated form of the regulation due in part to a lack of maturity in its implementation or development. Thus, a nuanced approach to interpreting digital services trade frictions is useful, with an understanding of the regulatory and institutional frameworks of different countries, as well as the constraints they face in completely liberalising digital trade on all fronts. In short, in some cases, this liberalisation may cause more harm than good, especially when there are insufficient safeguards in place and ineffective enforcement of regulations.

Although Singapore is a leader in the region in terms of volume of digital services trade activities by share, it does not have the lowest DSTRI values. This implies that for sustainable growth in digital services trade, there needs to be a balance struck between enabling this form of trade and making sure it is secure. On the flipside, countries which are regarded as having lower levels of restrictiveness than Singapore have not achieved the levels of trade it has.

Figure 1. DSTRI and Digital Services Trade Activities

Other than the ‘at the border’ measures of impediments to cross-border digital services trade, the operating landscape to which a country grows its digital economy may also provide a catalytic push to digital services trade activities. Taking guidance from the IMD’s Digital Competitiveness Rankings (Figure 2), Singapore does better by a substantial margin, overall and in the individual sub-categories, compared to its ASEAN member states (AMS) counterparts. In particular, Singapore excels in aspects such as education and high-tech patent grants (under the knowledge pillar), enforcement of contracts and internet bandwidth speed (under the technology pillar) as well as knowledge transfer (in terms of future readiness considerations). Thus, a well-rounded digital ecosystem is an important driver of digital services trade growth.

Figure 2. Digital Competitiveness Standings Across the ASEAN Region

Singapore, the best performing ASEAN country in digital services trade has a moderate level of ‘at the border’ measures and a very well-developed onshore digital economy ecosystem and supportive landscape. This underscores importance of a middle-ground approach in striking a balance in regulations between safeguards and digital enablers. This will be a challenging balancing act for the DEFA to steer.

As the analysis highlights, it is not just the quantity of restrictions to trade that matters but also their quality. Moreover, the right level of safeguards in one country may not always be right for another: this remains dependent upon the relative institutional and regulatory capabilities of the AMS.  As we near the half-way mark of the negotiations, the challenge in the final stretch will be to strengthen trade whilst keeping adequate safeguards intact, and within the comfort thresholds and capabilities of its members. Despite the DEFA’s best intentions, treading this fine line may well be the ‘make or break’ factor weighing on its success, more so than its aspirational level of ambition.

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Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.