Technical Standards in Services and Trade Governance

Against the backdrop of the digital transformation of services and recently agreed multilateral disciplines on domestic regulation in services, this blog explains the role of standards in supporting services markets.

Standards help make markets work 

A few hundred years ago trading with strangers was risky. One could not be sure that buyer and seller had a shared concept of the quantity and quality of the product to be traded, and one could not be sure that the contract between the parties could be enforced by a third party should a dispute arise. Common measurement systems, product standards, contract law and enforcement thereof solved these problems for merchandise trade. Today, we have no qualms about trading goods with strangers both within and across national borders.

Services traders, however, still face some of the problems that merchants of goods did centuries ago. Many services cannot be measured, let alone with a common measure. Therefore, services transactions often take place between parties that know each other through established contractual relations or commercial networks. To facilitate market transactions, licensing by national professional bodies or government agencies is common. Licenses typically set a minimum quality standard for the service provider. Digital platforms are another way of creating services markets by matching sellers and buyers while offering a framework for contracts and secure payments. Common standards could support open markets and bring transaction costs for services closer to those for goods.

A standard is a formula for the best way of doing something

The International Organization for Standardization (ISO) describes standards as a formula for the best way of doing something. This is an intuitive definition suitable for services, which are indeed about doing something. ISO and other private international standard setting bodies develop standards through a bottom-up process where technical committees draft a standard based on a proposal from any stakeholder. The drafted standard is evaluated, voted over, revised as needed, and adopted when and if consensus is reached.

A standard is not adopted once and for all, however. Bearing in mind that technology and norms may change over time, standards are reviewed, normally every five years, and extended, updated, replaced, or removed depending on the outcome of the review. Thus, during periods of rapid technical changes, standards have the potential to lower transaction costs and exploit economies of scale while avoiding locking in ways of doing something that are no longer the best.

Standards can also be useful complements to regulation. For instance, laws and regulations that outline principles and rules leave to firms to find ways to comply with them. On the one hand this leaves room for cost-effective and innovative ways of complying. On the other hand, perceived ambiguity may increase financial and legal risks. Standards can potentially resolve this trade-off between regulatory certainty and space for innovation, provided they are recognized and accepted by law enforcement bodies.

The trade-off between regulatory certainty and predictability on the one hand and space for innovation on the other has not been fully resolved for the European Union’s privacy regulation. The fines for breaching EU privacy rules are substantial while there are grey areas where compliance cannot be ascertained ex ante. Thus, a services supplier that is certified as meeting international standards on data management such as ISO 27001 with the 27701 privacy extension is not guaranteed to be found in compliance with privacy legislation. A recent study found that the EU’s privacy regulations have shifted the direction of innovation from radical to incremental innovations in services industries. Furthermore, incremental innovations were often directed towards better IT management systems.

Enter artificial intelligence

Today the services trade governance community faces an unprecedented challenge. The digital transformation of services is in full swing. Furthermore, we may find ourselves at the foot of the steep part of an S-shaped adoption path of artificial intelligence (AI) in services. As technological revolutions go, the increasingly AI-enabled digital transformation may radically change the ways we produce and consume services.

While the boundaries between services sectors and modes of delivering them change with technology, regulation and trade governance are typically sector specific. Furthermore, consensus on the best way of governing services markets during the digital transition is still some way off.  At the same time, demand for regulation and standards are growing louder, partly to mitigate AI-related risks and partly to protect services suppliers from disruption.

The recorded music industry has been at the eye of the storm of the digital transformation from the early days of the Internet. Regaining its footing after unauthorized file sharing in the early 2000s brought it to the brink; the industry is weathering the emerging AI revolution well. It has developed a set of private international standards that underpin seamless global streaming services, from recording to the final consumer. Furthermore, AI applications help trace songs and recordings such that copyright holders can be compensated.

Architecture, engineering and construction, the so-called AEC industry is plagued by frequent rework, cost overruns and delays.  Such problems stem from the sheer complexity of building projects with multiple stakeholders, professions and firms that need to coordinate complementary activities.  Building Information Management (BIM) is a system for end-to-end coordination of the links in the building supply chain. It uses integration platforms where information is standardized, and regulators as well as clients have access. BIM has the potential to vastly improve the quality and reduce costs in the AEC industry, not least in public works. Alas, so far, BIM has yet to reach its potential.

Where the music industry has successfully introduced standards for the automated exchange of information along the value chain including all stakeholders, the AEC industry struggles to do the same. Conceptually, the information exchange systems and file sharing standards between the different parties involved are similar. Therefore, the seemingly far-fetched idea that the AEC industry could draw lessons from the music industry in its effort to make BIM work should not be dismissed out of hand.[1]

What should policy makers do?

What should policy makers do to align services trade governance and domestic regulation with the objectives of a sustainable, inclusive digital transformation? The new disciplines that resulted from the Joint Initiative on Services Domestic Regulation which entered into force following the 13^th Ministerial Conference of the WTO are a first step at the multilateral trade governance level. The initiative covers disciplines on transparency, nondiscrimination, reasonableness, and fairness in government standard setting procedures, including how governments consult with private standard setting bodies and other stakeholders. However, the substance of the standards as well as the activities of private standard setting bodies are not in scope. Still, a wide adoption of the new disciplines on services domestic regulation is a step in the right direction.

APEC sees harmonized standards as an important vehicle for facilitating trade. Guidelines for the preparation, adoption, and review of technical regulations recommend that mandatory standards be used sparingly and only after other options have been considered. Where justified, mandatory standards should be performance-based rather than prescriptive, address and rectify the market failure that triggered the need for a mandatory standard in the first place and align with international standards wherever relevant. The APEC Guidelines are non-binding, but economies both within and outside APEC could benefit from adopting them unilaterally and gather experience for further progress.

Performance-based standards and principles such as the OECD AI principles and ISO’s international standard on AI management systems are helpful in aligning national standard setting bodies, be they private or public, to international best practice in a manner that facilitate adjustments as the technology and best practice evolves. AI raises particular challenges for the scope and enforcement of copyright. Next generation standards in this space are therefore urgently needed for digital services such as recorded music, media, architecture, or design to adopt AI in a predictable regulatory environment.

Finally, the Technical Barriers to Trade (TBT) agreement in the WTO and many free trade agreements include rules and procedures for the development and adoption of voluntary as well as mandatory product standards. So far, these mainly apply to goods. With the recent advancement of services-related standards, the TBT provisions should be extended to, and where necessary adapted to, services as well.

With these policy measures in place, strangers can confidently trade services across borders.

[1] See a recent APEC study for an in-depth analysis.

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