The aim of this study on electronic commerce was to analyse market
and regulatory developments and the socio-economic impact with
the aim of defining policy options.
Regulatory and policy issues
There are many things that countries might reasonably want to
regulate on the Internet. They include not just child pornography
and incitement to racial hatred, but consumer protection, the
defence of intellectual property rights, data protection and taxation.
These are all issues on which countries or the Community legislate
already. There is no obvious reason why a libel should be treated
differently because it appears on a web site, rather than in a
newspaper. There is no specific "nature of cyberspace:
some areas cannot be easily regulated and some definitely can.
Therefore the problem is not whether the Internet should
be regulated but how.
Ultimately the Internet could breed a new approach to regulation,
less paternalistic and more trusting in market forces and the
responsibility of the individual. Many markets have an incentive
to regulate themselves, competing to offer consumers protection
from unpleasant surprises. There is no total protection in the
off-line world, so why should it be set up for the on-line world?
Areas where government and EU intervention is needed include data
protection, intellectual property rights, harmful and illegal
content and taxation. In October 1998 the data protection directive
will have to be implemented by all Member States. There will certainly
be a need to examine remaining loopholes and new privacy issues.
Also, data protection legislation has a major impact on the position
of the EU in other domains such as encryption and digital signatures.
International intellectual property right agreements and treaties
including dispute settlement procedures are already in place.
The key for the functioning of the system is its world-wide enforcement
through co-operation between all players to implement effective
rules which take new technologies into account and deal with all
sides and concerns in a practical, technically feasible and economically
reasonable way. Regarding the particular issue of the Internet
domain name system, a Memorandum of Understanding on the Generic
Top Level Domain Name space (MoU-gTLDs) was agreed last year.
Incorporated in it is a dispute mechanism administered by the
WIPO Arbitration and Mediation Centre. Despite its participation
in the international negotiations, at the end of January 1998
the US government published its own proposal that keeps the domain
name system under US control. The national approach of the green
paper is contradictory to the joint EU-US Statement on electronic
commerce of December 1997 and calls the fate of the MoU-gTLD plan
The developing Information Society makes significant changes of
the EU tax system unavoidable. A key question will be the modification
of the definition of "permanent establishment, as firms
can be very mobile on the Internet. However there is the precedent
of telecommunication services, where the place of establishment
of the recipient is decisive for the determination whether the
service falls within the scope of Community VAT. When the determination
of the establishment location becomes more difficult VAT might
generally need to be applied where the service is consumed. And,
without changes, local retailers may be swept away by non-EU competitors.
It will be of major importance to strike a balance between ensuring
a revenue base without moving to a more regressive tax system
and avoiding the stifling of electronic commerce by creating unnecessary
bureaucracy and additional taxes or leaving legal uncertainty.
Other areas such as competition, commercial communications, encryption
and payment systems need a more liberal approach, i.e. a minimalist
regulatory approach that however provides a minimum legal security
which the market can develop. Electronic commerce is an emerging
and pro-competitive market, which is not an issue for competition
policy yet. However in the future issues could arise regarding
software, browsers, payment systems and de facto standards, and
telecom operators moving into the Internet market. Major challenges
are expected for the international competitive environment both
as regards the rush for the control of access to the Internet,
as well as for control of the Internet backbone, where some operators
seem to acquire such a major role that attention of competition
regulators will be necessary.
As for commercial communications, the Commission is in the process
of setting up a system of experts and procedures including an
acceleration of the complaint procedure. The approach tries to
strike a balance between the creation of a single market for communication
services and public interest objectives. This approach leaves
room for self-regulation and dispute resolution by intermediaries.
Economically the restrictions the US authorities have put on strong
encryption are a great opportunity for European business. Europe
has a potential for developing a strong and competitive industry.
It is leading in smart card development and a growing number of
European companies are offering advanced cryptography products.
One needs to ask whether it is necessary to criminalise a large
section of the network-using public to control activities of a
very small minority of law breakers. The recent debate has highlighted
the tension between confidentiality and law enforcement. Trusted
Third Party architectures appear to offer a way of providing both
key delivery and data recovery services to their clients and -
subject to legal process - key delivery to law enforcement agencies.
However, the system of key escrow is questioned world-wide. Critical
points of such a system are doubts that it could really stop criminal
activities and that the organisation of sufficiently secure key
escrow systems on a large scale is possible.
The US is undertaking a huge marketing campaign promoting their
market-led approach for electronic commerce. There are, however,
sources which believe that the non-regulated approach sounds good
but will ultimately stop electronic commerce from taking off due
to a lack of trust. It would be valuable for the EU to define
a common position before negotiating a global level, thereby also
avoiding contradicting positions of Member States that weaken
the position of the Community as a whole in international fora.
The EU and the US are undertaking bilateral negotiations which
led, in December 1997, to a joint statement on electronic commerce.
A different approach is the International Communications Charter
initialised by Commissioner Martin Bangemann, which could be agreed
in the course of 1999. It is, however, debatable whether it is
not too late for an International Charter defining the organisation
of a process of strengthened international co-operation, as there
are already well-established frameworks such as WTO, OECD or WIPO
that deal with different aspects of the Information Society and
electronic commerce. The question arises why there is need for
an International Charter if existing frameworks and declarations
are already ignored by certain parties. Rather, the work of international
organisations such as WIPO should be strengthened and agreements
should be implemented.
Whereas in some Eastern European countries a good number of Internet
activities are developing, others such as Romania and the non-EU
Mediterranean countries are lagging more and more behind. For
the Southern Mediterranean countries Europe is the number one
investor, exporter and importer of goods and services. By failing
to adapt to electronic commerce techniques, trade activities between
South and North Mediterranean countries will be largely affected
over the next decade. There is, therefore, a political responsibility
of the EU to support Internet and electronic commerce development
in these regions. The appropriate frameworks and financial instruments
for a co-operation with the non-EU Mediterranean countries and
the CEE countries in electronic commerce are already available.
Existing programmes (MEDA, PHARE) should include projects that
stimulate electronic commerce in these regions. Within the Fifth
Framework Programme participation of CEE and non EU-Mediterranean
organisations needs to be further increased.
Organisations committing to electronic commerce need also to commit
to new organisational structures. Fast-growing organisations have
far fewer staff, and rely far more on outsourced activity. These
fast-moving and flexible organisations will naturally seek to
optimise their advantage in the markets by aggressive use of electronic
commerce. The lifespan of a successful corporation may be significantly
reduced, with a successful virtual corporation defining, developing
and dominating a global market within a few years. When a market
stabilises it is likely that they will be overtaken by another
new competitor, or that they transfer the stable business into
the portfolio of a multinational.
Although jobs can be created in the short term, longer-term employment
growth will only be achieved if the workforce has a skill set
that is needed in a global market. Sustained employment will only
be achieved if those skills are maintained. In general terms Europe
does not lack the technical skills, but more the entrepreneurial
skills and mechanisms to allow them to flourish. Despite the efforts
of many national and regional initiatives to promote innovation,
it would appear that European Industry is less willing to support
start up businesses than many of Europe's competitors.
There is a clear case for ensuring that cultural and intellectual
assets are not wasted, as these provide the raw material of the
post-industrial society. The mixing of cultures has tended to
produce innovation, as often through a process of constructive
conflict as through integration.