Written evidence submission from Federation of Small Businesses (DTD0005)

International Trade Select Committee inquiry: Digital trade and data

 

Federation of Small Businesses (FSB) written evidence

10 February 2021

 

  1. The Federation of Small Businesses (FSB) is the UK’s leading business organisation representing small businesses. Established over 45 years ago to help our members succeed in business, we are a non-profit making and non-party political organisation that is led by our members, for our members.

 

  1. FSB welcomes the opportunity to respond to the International Trade Select Committee’s inquiry into digital trade and data. We would be happy to provide further detail on any of the issues raised in this response.

 

What are the main barriers faced by UK businesses engaging in digital trade?

 

  1. Small firms engaging in digital trade report facing several issues, highlighted below. These are exacerbated by the fact that digital trade is regulated at multiple levels national, regional, supranational, and international – resulting in a complex regulatory patchwork.

 

  1. This is problematic for small firms, which are highly exposed to trade flow disruptions and less resilient to regulatory change than larger businesses. Small businesses have fewer resources to adapt, are less able to absorb the costs of new administrative and regulatory requirements, and cannot spread the costs of obtaining information and acquiring knowledge about compliance across a larger cost base.

 

  1. According to FSB research the main barriers reported by small firms engaging in digital trade relate to: delivery, unclear or unequal application of taxation and local regulations, difficulties receiving electronic payments, weak protection or infringement of intellectual property, and differing requirements around data protection and cybersecurity.[1]

 

  1. More than a third (38 per cent) of FSB members trading tangible goods cite delivery problems as the top barrier to cross-border trade.[2] These range from logistical challenges such as pricing, traceability, customs duties, taxes and returns, to understanding documentation requirements, shipments being stopped at customs, and goods disappearing.[3]

 

  1. FSB members indicate that they encounter more barriers associated with selling intangible goods and services than with tangible goods.[4] Of these, non-tariff barriers such as local taxes and regulations are the top barrier for exports of intangible goods, affecting close to half (42 per cent) of small firms.[5]

 

  1. Issues related to electronic payments including requirements to use particular payment methods in certain countries, obligations to carry out transactions in the local currency, prohibitions on the use of credit or debit cards for cross-border transactions and consumer reluctance to use unfamiliar payment services.[6]

 

  1. Infringement of intellectual property rights is a major concern for one in ten small businesses participating in digital trade. Of those small businesses that own intellectual property rights, one in three are heavily reliant upon them.[7] This means that weak protection or infringements can be incredibly damaging.

 

  1. The complex international patchwork of data protection legislation can cause interoperability issues for small firms. Many data protection laws contain significant gaps and exemptions. For instance, exemptions might apply to small businesses (in the cases of Australia and Canada) or to small datasets (in the case of Japan) that are not present in other jurisdictions.[8]

 

  1. In addition to data protection legislation, data localisation requirements can also constitute a significant cost for small firms engaged in cross-border digital trade. Requirements to store data on servers located in a particular jurisdiction can increase data storage costs and limit small firms’ access to cost effective cloud computing solutions.

 

  1. At the domestic level, small firms must have the right ecosystem and capabilities in place to capitalise on the opportunities of cross-border digital trade. Reliable digital infrastructure is essential. FSB research has found that poor broadband and mobile coverage is damaging to small businesses, hampering their ability to operate day-to-day.[9]

 

  1. In addition, business owners and employees need the right digital skills to run a successful business in this space. Significant numbers of small business owners lack confidence in their digital skills,[10] and there is clear scope for improving adoption of new digital technology.[11]

 

What opportunities does digital trade present for UK businesses?

 

  1. New technologies are changing the way small firms offer goods and services nationally and internationally. The digital transition has fundamentally altered the way businesses operate and has created a new environment in which the smallest business can go global from day one.

 

  1. The UK’s small and medium-sized business community is harnessing digital technology to reduce costs, grow their business and serve a wider customer base, via basic changes such as setting up their own online shops or making use of social to more complex innovations harnessing cloud computing. As the digital transition continues, the number of UK businesses using such technologies will continue to grow.

 

  1. Online platforms in particular present an attractive option for small firms looking to access or test products in new markets at reduced risk and cost. Services offered by online platforms, such as matchmaking, warehousing and logistics, payment security, and country-specific guidance on legislation are extremely valuable to small firms that often lack the resources or economies of scale available to larger firms. According to FSB’s Digital Trade Survey 2019, approximately one in five small firms use online platforms to export and import.[12]

 

  1. While there are many benefits associated with trading via online platforms, there are also issues related to platforms undertaking, or not undertaking, action that can impact the firms that use them. The top three issues identified by small firms concern: malicious or fake reviews, sudden changes to terms and conditions, and infringement of intellectual property rights.[13]

 

  1. As a result, FSB urges the Government to adopt an approach to digital markets and online platforms within its trade policy that maximises the opportunities presented by e-commerce while also ensuring that online competition is fair for small business.

 

What approach(es) should the UK take to negotiating digital and data provisions – including those concerning the free flow of data, protection for personal data, net neutrality, data localisation, and intellectual property– in its future trade agreements?

 

  1. Government should ensure that provisions work for and are understandable by the smallest of businesses. This includes subjecting any agreement to a mandatory small and micro-business test.

 

  1. Seek to include a comprehensive digital trade chapter in agreements with key trading partners based upon best practice examples of trade terms contained in USMCA, CPTPP, and the UK-Japan CEPA.

 

  1. Commit to adhering to the principle of non-discrimination and non-discriminatory treatment of digital products.

 

  1. Commit to the protection of personal data and encourage the development of mechanisms to promote compatibility and interoperability between jurisdictions with sufficiently high data protection standards.

 

  1. Commit to removing data localisation measures, without prejudice to legitimate national security public policy objectives.

 

  1. Commit to ensuring protection of intellectual property enforcement and increasing transparency regarding the remuneration of copyright and related rights in the digital environment.

 

What does the UK-Japan Agreement indicate about the UK’s approach to digital trade and data provisions in future trade negotiations?

 

  1. FSB’s 2019 report The representation of SME interests in free trade agreements, written in conjunction with the University of Sussex UK Trade Policy Observatory, identified four key areas that future FTAs should address in order to benefit small businesses:
    1. A comprehensive Small Business Chapter to improve small business utilisation of FTAs;
    2. A comprehensive Digital Trade chapter, enabling small businesses to utilise e-commerce;
    3. Strengthening and protection of intellectual property rights to protect small business innovation;
    4. Proper trade facilitation, minimising small business exposure to burdensome customs red tape.

 

  1. FSB welcomes the approach taken by Government to the e-commerce and data provisions in the UK-Japan Agreement, which reflect many of FSB’s asks and should be seen as a benchmark for the UK’s future trade agreements.

 

  1. The UK’s approach reflects the ambition set out in the Government’s National Data Strategy of securing a pro-growth and trusted data regime which removes barriers to international data flows, raises standards and drives interoperability.

 

  1. The comprehensive and ambitious provisions on e-commerce will benefit small businesses that will be able to reach wider markets and transfer data across borders more easily. Provisions concerning new technologies such as artificial intelligence and encryption technology, as well as commitments on the prohibition on unjustified data localisation requirements, net neutrality, and the protection of source code are significant steps forward that will help facilitate data flows and drive innovation.

 

  1. The agreement demonstrates a clear commitment to promoting innovation and digital trade, and is a strong foundation for the UK on which to build future agreements with partners that take a similar approach to digital trade. FSB encourages Government to maintain this approach in its ongoing and future trade negotiations.

 

  1. The Government should also continue to ensure that all stakeholders’ voices are heard during future trade negotiations through inclusive stakeholder dialogue, with a particular focus on small businesses.

 

What approach should the UK take towards renewing the WTO’s moratorium on customs duties on electronic transmissions?

 

  1. Small businesses operate on tight margins, whereby the smallest increase in duties or tariffs can reduce the competitiveness of their product or service in certain markets.

 

  1. FSB therefore fully supports the renewal of the WTO moratorium, which promotes the free flow of information essential to the expansion of electronic commerce across borders.

 

  1. The introduction of tariffs on electronic transmissions would cause negative economic consequences for small businesses. According to FSB’s 2017 report Keep Trade Easy, tariffs play a role in determining where over half of current and potential exporters decide to trade.[14] The introduction of tariffs on electronic transmissions could severely discourage many small firms from trading internationally in goods or services that rely on these transmissions.

 

What objectives should the UK have when negotiating digital and data provisions during its accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)?

 

  1. The CPTPP is one of the most advanced FTAs that supports SMEs currently in force. According to FSB’s 2020 report The representation of SME interests in FTAs, the CPTPP represents an important region for future exporting for nearly half of SME exporters (45 per cent).[15]

 

  1. Membership of the CPTPP would be a hugely welcome development to UK small businesses looking to expand or begin their trading journeys, and would improve access to an extremely valuable market.

 

  1. FSB supports the ambitious provisions of the CPTPP on data and digital trade, including the non-discriminatory treatment of digital products, the use of electronic authentication and signatures, broad prohibitions on data localisation, and comprehensive provisions in most categories of intellectual property protection and enforcement.

 

  1. In light of recent discussions regarding the future of the WTO moratorium on customs duties on electronic transmissions, the legal certainty provided by the related provisions in the CPTPP is also beneficial to small businesses.

 

  1. As noted above, a comprehensive Small Business Chapter, as included in the CPTPP is essential to help small businesses maximise the benefits of free trade agreements. The provisions contained in the CPTPP small business chapter on information sharing and the exchange of best practice would be valuable to UK firms.

 

What domestic and international law is relevant to the Government’s approach to digital trade?

 

  1. Reflecting the importance of the EU as UK small firms’ largest and closest market, EU data protection legislation including the GDPR and the forthcoming e-Privacy Regulation will continue to be extremely important for small businesses. The UK should therefore intensify efforts to secure a data adequacy agreement with the EU to ensure the continued free flow of data between the UK and the EU.

 

  1. Although a tiny minority of FSB members had renegotiated contracts prior to the end of the transition period to insert Standard Contractual Clauses (3 per cent), the vast majority did not. FSB research from 2019 showed that over half (62 per cent) of small businesses were not aware of the ICO’s Standard Contractual Clauses.[16]

 

  1. Failure to secure an adequacy agreement from the EU would therefore have a significant impact on the large number of small businesses that transfer data between the UK and EU or store data within an EU Member State. In the UCL-New Economics Foundation report The Cost of Data Inadequacy, to which FSB contributed qualitative and quantitative data, the cost of the EU not granting an adequacy decision to the UK was estimated to be up to £1.6 billion.[17]

 

  1. Further EU legislation that will shape the international digital economy should also be factored into the Government’s approach to digital trade. This includes forthcoming EU legislation on artificial intelligence, the regulation of online platforms such as the Digital Services Act and Digital Markets Act, and ongoing discussions on a digital levy.

 

  1. When approaching future trade negotiations, the Government should look to best practice examples of digital trade provisions in existing agreements such as CPTPP, USMCA and CEPA.

 

  1. Dedicated information points are instrumental in addressing a lack of awareness of and poor utilisation of FTAs by SMEs. These one-stop-shops should provide comprehensive information that includes, amongst others, customs regulations and procedures, regulations concerning IPRs, technical regulations and standards, and taxation information.[18] Those found in CEPA Article 20.3 are an example of best practice that the Government should reflect in future trade negotiations.

 

  1. As noted above, the legal certainty provided by non-discrimination against digital products and the prohibition on customs duties on electronic submissions in the CPTPP is beneficial to small businesses, opening up tangible opportunities in signatory markets[19].

 

  1. Similarly, prohibitions on data localisation as included in CPTPP allow SMEs to take advantage of the opportunities of digital trade, potentially enabling small businesses to scale up to global markets more quickly or improve efficiency through employing cloud services.[20]

 

  1. More broadly, trade facilitation provisions to reduce red tape and improve market access for SMEs are crucial. Those contained within the CPTPP, such as the requirement for signatories to adopt or maintain expedited customs procedures for express shipments, are good practice.[21]

 

  1. Although the USMCA is yet to be ratified, the inclusion of a ‘Trilateral SME Dialogue’ is significant in enabling business representatives, NGOs, academics and others to provide their views to an SME Committee, will contribute to constructive stakeholder dialogue.[22]

 

 

 

February 2021

 


[1] Federation of Small Businesses (FSB), Destination Digital, 2019, p27

[2] Federation of Small Businesses (FSB), Destination Digital, 2019, p27

[3] World Economic Forum (WEF), Delivering the Goods: E-Commerce Logistics Transformation, October 2018, p11  

[4] Federation of Small Businesses (FSB), Destination Digital, 2019, p27

[5] Federation of Small Businesses (FSB), Destination Digital, 2019, p27

[6] International Trade Centre, New Pathway to E-Commerce: A Global MSME Competitiveness Survey, September 2017, p18

[7] Federation of Small Businesses (FSB), Spotlight on Innovation: How Government Can Unlock Small Business Productivity, July 2018, p12

[8] World Trade Organisation (WTO), World Trade Report 2018, October 2018, p138

[9] Federation of Small Businesses (FSB), Lost Connection: How Poor Broadband & Mobile Connectivity Hinders Small Firms, October 2019, p37

[10] Federation of Small Businesses (FSB), Learning the Ropes: Skills & Training in Small Business, December 2017, p8

[11] Federation of Small Businesses (FSB), Spotlight on Innovation: How Government Can Unlock Small Business Productivity, July 2018, p11

[12] Federation of Small Businesses (FSB), Destination Digital, 2019, p16-17

[13] Federation of Small Businesses (FSB), Destination Digital, 2019, p20

[14] Federation of Small Businesses (FSB), Destination Digital, 2019, p32

[15] Federation of Small Businesses (FSB) and the UK Trade Policy Observatory (UKTPO), The Representation of SME Interests in Free Trade Agreements, 2020, p10

[16] FSB transition survey, August-September 2019

[17] UCL European Institute with the New Economics Foundation, ‘The Cost of Data Inadequacy: The economic impacts of the UK failing to secure an EU data adequacy decision’, November 2020

[18] Federation of Small Businesses (FSB) and the UK Trade Policy Observatory (UKTPO), The Representation of SME Interests in Free Trade Agreements, 2020, p6

[19] Federation of Small Businesses (FSB) and the UK Trade Policy Observatory (UKTPO), The Representation of SME Interests in Free Trade Agreements, 2020, p15

[20] Federation of Small Businesses (FSB) and the UK Trade Policy Observatory (UKTPO), The Representation of SME Interests in Free Trade Agreements, 2020, p15

[21] Federation of Small Businesses (FSB) and the UK Trade Policy Observatory (UKTPO), The Representation of SME Interests in Free Trade Agreements, 2020, p30

[22] Federation of Small Businesses (FSB) and the UK Trade Policy Observatory (UKTPO), The Representation of SME Interests in Free Trade Agreements, 2020, p29