Canada lacks the data to make sound policy decisions on digital economy: Conference Board of Canada report

Canada lacks the data on cross-border digital trade needed to make sound government policy and business investment for the nation’s digital economy, says the author of a new report by The Conference Board of Canada.

Despite the growth of digital trade in Canada and globally, there are challenges in accurately measuring its size and impact or even establishing a clear definition of what digital trade is, said Swapna Nair, a senior economist who leads the Global Commerce Centre at The Conference Board of Canada.

“Although digital trade is growing rapidly, government statistics are failing to reflect its value and importance to the Canadian economy,” she said in an interview.

“We don’t have a comprehensive picture of how valuable digital trade is, how significant cross-border trade is — the imports, the exports, the role of digital intermediaries,” Nair said.

The lack of representative data on digital trade makes it difficult to shape government policy accurately, Nair said in her report, “Choosing the Right Ruler: Approaches to Measuring Digital Trade.”

The consequences, according to her report, are that policies are based on incomplete evidence, taxes may not be accurately collected, businesses may not be allocating capital optimally, and the lack of comparable statistics internationally makes it difficult to benchmark the Canadian economy globally.

When it comes to taxes, for example, a report by the Office of the Auditor General of Canada found that based on publicly available data, Canada lost an estimated $169 million in taxes on GST alone on foreign digital products and services sold in Canada in 2017.

Moreover, Canadian vendors’ products and services are more expensive — and therefore less competitive — compared with foreign rivals who paid no GST or HST. “According to the Department of Finance Canada, the situation could have encouraged domestic vendors to move their operations abroad and could have discouraged foreign investment in Canada,” the report from the auditor general’s office said.

That report, Nair noted, led to Canada’s new GST tax regulations, effective on July 1, 2021, that made foreign companies subject to GST/HST on cross-border digital sales and services.

COVID-19 pandemic spurred digital trade

There’s no universally accepted definition of digital trade, Nair said. However, there is growing consensus internationally on a proposed framework from the Organisation for Economic Cooperation and Development (OECD), World Trade Organization and International Monetary Fund. They define digital trade as “all trade that is digitally ordered and/or digitally delivered.”

The COVID-19 pandemic was a significant factor in increasing the volume of digital trade, Nair said.

Domestic retail e-commerce sales increased by 70.5 percent in 2020 compared with the previous year, according to a survey by Statistics Canada.

In April this year, Statistics Canada released experimental Canadian Digital Supply and Use Tables to provide an overview of basic economic transactions related to the digital economy from 2017 to 2019.

The contribution of the digital economy to Canada’s total GDP amounted to 5.5 percent, or $118 billion, in 2019 — up from 5.2 percent, or $103 billion, in 2017, according to Statistics Canada.

Between 2010 and 2017, nominal GDP (GDP evaluated at current market prices and accounting for inflation) for the digital economy grew by 40.2 percent, more than the 28-percent growth rate in the total economy.

According to Statistics Canada, the digital industries accounted for 5 percent, or $205 billion of total gross output in 2019. That year, there were 882,000 jobs associated with digital economic activities, representing 4.5 percent of all jobs in Canada.

In 2019, the digital economy made the largest contributions to the economies of Ontario (6.8 percent), Quebec (5.6 percent) and British Columbia (5 percent).

Value of Canada’s digital economy is underestimated

While the Digital Supply and Use Tables are a significant step forward, they underestimate the value of Canada’s digital economic activities because of the challenges in accurately measuring digital trade, Nair said.

Statistics are fragmented and limited on the value of cross-border e-commerce exports and imports; on exports and imports of digitally delivered services; on trade facilitated through large digital intermediaries; and on cross-border movement of data, she said.

Two distinguishing features of digital trade are its use of technology and the flow of data, Nair said. “Both features increase innovation and productivity in a very significant and different way from just the movement of traditional goods and services across borders.”

Being able to accurately measure all components of digital trade would help policymakers provide an enabling environment for Canadian businesses, such as better and more targeted support for digital infrastructure and digital skills training, Nair added.

“There is potential for most industries to take advantage of these digital trends,” she said. “But they also need to know what international competition they’re facing in digital services.”

Nair’s report recommends that Canada should implement a program of digital trade measurement innovation to inform and focus the effort to accurately measure digital trade. Her report also recommends that the country continue working under the OECD framework to improve measurements, expand data collection and integrate data.

The federal government, with key agencies such as Statistics Canada, Canadian Border Services, and Global Affairs, should lead implementation of the domestic digital trade measurement innovation program in collaboration with businesses, she said.

“We need to definitely measure this accurately and we also need to have our policies in place,” Nair said. “We need to be ahead or we stand to lose.”

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