E-commerce in Latin America: The Regulatory Gap

Redacción: Kathia Michalczewsky y Alejandro Ramos



E-commerce is a form of trade that emerged as the internet developed, one that takes place via online devices—ones that give us access to cyberspace.[1] According to a preliminary estimation from the Ecommerce Foundation, the value of B2C (business to consumer) online transactions grew by 17% in 2016, reaching a total of US$2.67 billion. This performance is exceptional given the lackluster state of the global economy and trade: the latter is estimated to have fallen 5% in current prices over the last year.

The Ecommerce Foundation also announced that the total share of e-commerce in global GDP reached 3.1% in 2015. In Latin America, e-commerce transactions totaled US$50.4 billion, just 0.9% of the regional product and 2.2% of the global total for e-commerce. These numbers are not low because Latin Americans are offline: the region accounts for 10.5% of global internet users although its population only represents 8.5% of the total.[2] Instead, they are low because Latin Americans use the internet but buy and sell relatively little through it.

We can infer that multiple factors explain this gap in Latin America: low relative income levels per inhabitant, less drive for innovation in digital technologies, substandard transportation and logistics, and, undoubtedly, factors relating to the region’s trade and financial infrastructures, such as low banking penetration rates and low levels of confidence in electronic payment systems.

This lack of confidence is due to a serious lag in regulation: the rules are not clearly established or are not well understood, nor is it clear who is responsible for enforcing them and how.

This article looks at specific aspects of the regulatory challenges that the region is facing in connection with e-commerce, with a specific focus on cross-border transactions. It comments on benchmark instruments which could be used as a basis for a better regulatory superstructure for this dynamic segment of global trade.

The Digital Market Revolution and Regulatory Challenges

As a relatively new phenomenon, e-commerce poses huge regulatory challenges that affect both the domestic and international spheres. E-commerce is one of the most visible outcomes of the technological revolution that has come hand-in-hand with globalization, which makes it hard to disentangle the domestic aspects from the global ones. Given that the internet has been a system of global connection from its very beginnings, it is only natural that it would give rise to as many cross-border commercial ties as domestic ones.

The regulatory challenges mentioned above include, among other factors, the much-needed updating of many of the legal underpinnings for commercial transactions. In the precyberspace world, a commercial contract needed to be put down on paper, but the internet has enabled another type of physical support for contracts: electronic documents, including electronic signatures. Likewise, payment mechanisms, dispute settlements, and devices to ensure that contracts are upheld are all areas in which the legal structure of trade needs to adapt to the new ways of trading that this revolutionary technology has brought.

The history of e-commerce regulation already includes a range of regulatory initiatives that were generated in multilateral environments or through regional trade and integration agreements.

The First Steps: The Model Law and the United Nations Convention

As early as 1996, the United Nations Commission on International Trade Law (UNCITRAL) published its Model Law on Electronic Commerce, which was then amended in 2005 by the Convention on the Use of Electronic Communications in International Contracts.

The UNCITRAL Model Law seeks to establish an internationally acceptable set of rules that overcome legal obstacles and make e-commerce more predictable by putting digital data on a par with paper-based data. The Model Law also establishes standards for the creation and validity of contracts that were entered into by electronic means.

The Convention amended some of the provisions in the Model Law. It aims to facilitate the use of electronic communication in international trade, guaranteeing that contracts entered into by electronic means and electronic communications are equally valid and enforceable as paper-based contracts and communications. The Convention promotes the harmonization of the rules applicable to e-commerce and promotes uniformity in the adoption of domestic instruments based on the Model Law, and also updates and complements certain provisions.

Repercussions in Latin America

The impact of these instruments on the regulatory frameworks portrayed in Latin America has been limited. Few countries have passed domestic legislation based on or inspired by the Model Law: Colombia, the Dominican Republic, El Salvador, Guatemala, Honduras, Panama, Paraguay, and Venezuela.[3] To date, only Honduras has ratified the Convention; Colombia, Panama, Paraguay, and Mexico are among the signatory countries to it.[4]

In other words, many countries in the region have made little progress toward the (much-needed) passing of domestic legislation to regulate e-commerce. This is striking given that the Model Law is now over 20 years old and e-commerce is undoubtedly a reality of life in large areas of the market throughout the world.

A WTO Path to Up-To-Date Standards?

E-commerce offers enormous opportunities for regional exports: trade platforms are global almost by definition and thus function as a window on supply that an immense number of consumers could potentially access. Of course, this would require investment, access to infrastructure, legal guarantees for transactions such as those mentioned above, and other factors.

In this regard, Meltzer (2016) argues that the opportunities arising from online cross-border data flows depend on three factors:

  1. Regulation: giving consumers and companies the confidence to take part in cross-border online transactions; for example, a consumer protection law, dispute settlement mechanisms, electronic payment systems, data security.
  2. Freedom of data flows: nonapplication of regulations that limit the free flow of data through the internet.
  3. Cooperation between countries to control the negative externalities that might arrive and which could lead to protectionist measures.

 

To achieve these requirements, Meltzer refers to the multilateral legal acquis and proposes policy options to update and optimize WTO regulations.[5] A possible route to this would be the negotiation of a plurilateral agreement on e-commerce that included commitments on matters such as market access for online services, freedom of data flows, data localization, protection systems for intellectual property, regulatory cooperation, and the work of governments, companies, and nongovernmental organizations.

However, the prospects for negotiation within the WTO have been less dynamic in recent years when compared with the proliferation of preferential agreements.[6] In fact, if we take the issues that Meltzer lists as a general frame of reference, it is clear that the regulation of both domestic and cross-border e-commerce within existing regional agreements has been weak.

In a certain sense, this is unsurprising given the enormous complexity of adapting a legal structure for trade to the revolutionary changes sweeping through the sphere because of the internet. The incorporation of these changes into domestic legislation and their subsequent convergence and harmonization in the global sphere are, necessarily, slow processes that are shaped by a series of negotiations and decisions and which require a progressive accumulation of experience.

The TPP Approach and the Lag in Latin America

It is only natural that a negotiation within a more limited, regional sphere will be less complex: firstly, when there are fewer countries at the negotiating table it is easier to reach a consensus; if, in addition, these countries have more experience in the matter, the exercise is more likely to be successful and bear tangible fruit. This also holds true when the aim is reaching harmonious instruments that support e-commerce. In any case, taking a regional approach to an issue that is inherently global—as is the case with e-commerce—could fragment the regulatory space if it is not tackled in a way that complements multilateral agreements.

The Trans-Pacific Partnership (TPP) is possibly the agreement with the broadest coverage of regulatory issues that are connected to cross-border e-commerce—indeed, it includes several of those suggested by Meltzer. The recent uncertainty around its entry into force, given the USA’s withdrawal from it, does not diminish its properties as a point of reference. It is thus of interest to analyze how far Latin American countries have come with both their intra- and extraregional agreements in comparison with the TPP.

E-commerce is essentially regulated by chapter 14 of the TPP, which covers 15 areas. How do Latin American agreements measure up? The sample we have analyzed here includes the MERCOSUR, the Pacific Alliance (PA), and the Central America–European Free Trade Association (EFTA),[7] Central America–European Union, the Dominican Republic and Central America–USA (DR–CAFTA), and Central America–Mexico agreements (Table 1).

Table 1. Provisions on E-Commerce in Selected Regional Agreements

Contents of the Trans-Pacific Partnership MERCOSUR PA CA–EFTA CA–EU CA–Mexico DR–CAFTA
Internal legislation with influence over cross-border transactions Domestic legal framework for online transactions        
Consumer protection      
Protection of personal data          
Facilitation of e-commerce and freedom of data flows Tariff-free trade in digital products  
Nondiscrimination      
Internet access and use for e-commerce            
Electronic transfer of data between countries      
Localization of data centers            
Paperless trade        
Dispute settlement          
Cooperation
Security Authentication and electronic signatures    
Unsolicited electronic messages (antispam)        
Cybersecurity            
Source codes            

Notes: CA: Central America; EFTA: European Free Trade Association; EU: European Union; DR–CAFTA: Free Trade Agreement between the Dominican Republic, Central America, and the USA.

Source: Compiled by the authors using data from INTrade-IJI and national sources.

The fifteen issues covered by the TTP can be grouped into three main areas:

  1. Domestic e-commerce legislation that influences the regulation of cross-border transactions: the parties to the TTP are obliged to have a domestic regulatory framework that is coherent with international principles and—most importantly—have laws on online consumer protection and the personal data generated during each transaction. None of these requirements were found in any of the regional agreements analyzed, except the PA, which requires its parties adopt a legal framework providing protection for the personal data of e-commerce users.

 

Only some agreements include articles on transparency in domestic laws: the Central America–Mexico agreement and DR–CAFTA required that parties make public their laws, regulations, or other e-commerce–related measures; and the PA does so for existing consumer protection systems in each country and for suppliers that have been fined for infringing consumer protection laws for e-commerce. Finally, the Central America–EFTA agreement only suggests maintaining an open dialogue between parties on this issue.

 

  1. Provisions that facilitate and promote e-commerce: These include traditional requirements such as not applying tariffs, maintaining the principles of nondiscrimination, creating a dispute settlement mechanism, and cooperating in different fields. They also include more novel aspects on internet access, data transfer between countries, the localization of data servers, and the recognition of electronic documents.

 

In terms of the traditional requirements mentioned above, all the regional agreements analyzed except the MERCOSUR include provisions on the nonapplication of tariffs for digital products; the principles of nondiscrimination are present in the PA and the Central America–Mexico and the DR–CAFTA agreements. Only the PA contains specific dispute settlement mechanisms for online transactions. Cooperation is the factor that appears most frequently in the agreements analyzed, although none of them covers all the aspects mentioned in the TPP: assistance for SMEs, information exchange on regulatory aspects, participation in regional forums, and incentives for the private sector.

 

The new aspects, in contrast, are almost entirely absent from regional agreements in Latin America and the Caribbean. The only exceptions are commitments to future negotiations on international data transfer by electronic means in the PA and in the Central America–Mexico and DR–CAFTA agreements, and a suggestion on the acceptance of electronic documents in the Additional Protocol to the PA.

 

  1. Security aspects that are specific to e-commerce: such as the use of authentication and electronic signatures, regulations on unsolicited electronic messages (spam), cybersecurity, and bans on requiring access to source codes. Despite the importance of these factors in online transactions and particularly in cross-border trade, only authentication and the use of electronic signatures are regulated in four of the six agreements analyzed: the MERCOSUR, the Central America–European Union agreement, the Central America–Mexico agreement, and the PA. Of the remaining points that the TPP includes, only the regulation of unsolicited electronic messages (spam) features as a commitment for future negotiations in the PA and the Central America–European Union agreement.

Where Is Latin America? What Can It Do?

The countries of Latin America are lagging behind in matters of e-commerce regulation and this can be seen both within and beyond their borders. Only eight countries in the region have domestic legislation that is in line with international guidelines and only one has ratified the instrument proposed by the United Nations.

Of all the regional agreements, the PA contemplates the greatest number of e-commerce-related issues although it does leave some important ones out. The PA replicates ten of the fifteen standards contained in the TPP, which could be related to two factors: the fact that the two agreements were negotiated at the same time and that three of the four PA members are also party to the TPP. However, the PA does not include core issues such as a suitable domestic legal framework, guaranteeing freedom of internet access, and avoiding measures that could increase transaction costs (localization of data servers, source codes). It also leaves out cooperation around cybersecurity, a key factor in building the confidence needed for consumers and companies to get involved in online transactions.

Despite the clear disparities in the provisions on e-commerce in the agreements that are currently in force, they all seek to encourage cooperation between parties and as such are a basis for the ongoing construction of regional standards on this issue.

Given the lag in Latin America’s approach to this and the complexity of the global scenario, the key point is to deepen negotiations on this issue, understanding them as an instrument for diversifying and promoting trade that will help launch regional exports. If perspectives on e-commerce within the region were to converge, it would be a major milestone on the road to a trade instrument that until recently was almost entirely absent from negotiation agendas. The involvement of export promotion agencies, the private sector, and nongovernmental organizations could help bridge this gap.

Considering how dynamic e-commerce has become despite the context of great uncertainty and the widespread downturn in trade, the countries of Latin America have a chance to gain some momentum in their trade relations. Bridging this substantial regulatory gap and encouraging cooperation to guarantee the free flow of data have become key policy tools for stimulating this new side of trade.

 

References

Asociación Mexicana de Internet (2016). Estudio de Comercio Electrónico en México 2016. Developed by comScore.

Baker, J. (2017). European Commission Eyes an End to Data Localization in EU. The Privacy Advisor.

Ecommerce Foundation (2016). Global B2C Ecommerce Report 2016. Light Version. Amsterdam.

Giordano, P. (ed.) and Ramos, A. (2015). Trade and Integration Monitor 2014: Facing Headwinds: Policies to Support a Trade Recovery in the Post-Crisis Era. Integration and Trade Sector, Inter-American Development Bank. Washington.

Meltzer, J.P. (2016). Maximizing the Opportunities of the Internet for International Trade. E15 Expert Group on the Digital Economy – Policy Options Paper. E15Initiative. Geneva: International Centre for Trade and Sustainable Development (ICTSD) and World Economic Forum.

Scotti, l. (2011). Comercio electrónico internacional y procesos de integración regional: un binomio deseable, in Stersi Dos Santos, R. y Negro, S. (editors), Relações Internacionais, Comércio e Desenvolvimento, Florianopolis: Fundação Boiteux, Federal University of Santa Catarina, pp. 167–202.

United Nations (1999). UNCITRAL Model Law Model Law on Electronic Commerce with Guide to Enactment, 1996, with additional article 5bis as adopted in 1998. United Nations Commission on International Trade Law, New York.

Tuthill, L. (2016). E‐commerce and the WTO. MIKTA Workshop on Electronic Commerce. July. Geneva.

______ (2007). United Nations Convention on the Use of Electronic Communications in International Contracts. United Nations Commission on International Trade Law, New York.

UNCTAD (2016). Study on the Harmonization of Cyberlegislation in Latin America. Science and Technology and Information and Communication Technology Branch and TrainforTrade Programme of the Division of Technology and Logistics, New York and Geneva.

[1] There is a more detailed discussion of this definition in “E-Commerce and the Factors Affecting Its Development”, also in this edition of INTAL Connection.

[2] Data from Internet World Stats, June 30, 2016. Available at: http://www.internetworldstats.com/

[3] Colombia signed in 1999 and the Dominican Republic in 2002 (not including the provisions on electronic certification and signatures); El Salvador in 2015 (with local legislation inspired by the Model Law and the principles on which it is based); Guatemala in 2008 (local legislation also includes substantial provisions from the United Nations Convention on the Use of Electronic Communications in International Contracts); Honduras in 2015; Mexico in 2000; Panama in 2001; Paraguay in 2010; and Venezuela in 2001. Source: UNCITRAL. Current status at

http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model_status.html

[4] Source: UNCITRAL. Current status at http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention_status.html

[5] See the article on “The WTO’s Work on E-Commerce,” also in this issue of INTAL Connection, for more on the regulatory framework and WTO work plans on e-commerce.

[6] See Giordano (ed.), 2014.

[7] Only valid for Costa Rica and Panama.