Executive summary

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 into question.

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.

International co-operation

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.

Socio-economic impact

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.