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Section 2 Shift to the platform business model and a change in the industrial structure
As a result of the development of information and communications technology, the volume of global
data flow136 is expanding at a breakneck annual pace of double-digit growth137 (Figure I-3-2-1). There
are also signs of a change in the industrial structure. For example, IT companies, mainly in the United
States, which have developed platforms equipped with rapidly advancing information and
communications technology, are not only operating in the information and communications sector but
also actively moving into other sectors, including autonomous driving, healthcare, finance and music.
In addition, the expansion of the sharing economy that was triggered by the shift to the platform business
model is starting to have an impact on society. This paragraph will explore the trends of such rapid
changes and their impact.
Figure I-3-2-1 Volume of global data flow and estimates for the future
Note: The figure for 2015 is an estimated value.
Source: "Digital Globalization: The New Era of Global Flows" (McKinsey Global Institute) (2016)
1．Impact of the shift to the platform business model
As a result of the development of information and communications technology, such as the evolution
of big data analysis, IoT and artificial intelligence in recent years, it has become possible to analyze data
136 While estimates of the future global volume of information and communications have been issued by
various organizations, the estimates by TeleGeography and the McKinsey Global Institute are cited here.
Among other estimates is the Cisco Visual Networking Index: Forecast and Methodology (CISCO). 137 While studies have been conducted on the impact of the growing data flows on the macroeconomy as a
whole, there is no established theory. Although there is an estimate that international data flows will boost
GDP by 3% in the long term, it is also said that the expansion of the sharing economy will rather slow down capital stock formation. The estimate of the GDP boosting effect was formulated by the McKinsey
Global Institute (2016). But as the ｐvalue, which indicates the level of statistical significance, is not
sufficiently high, a precision improvement of the model is hoped for.
0
10
20
30
40
50
60
70
80
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
20
05
20
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08
2009
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2012
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Volume of data flow Growth rate (right axis)
(Terabytes per second) (%)
296
collected from various products and significantly improve their functions and performance by feeding
back the results to them. Consequently, products’ value is shifting from the products themselves to
services obtained from their functions and performance. Therefore, data obtained from products have
become the source of value.
IT companies, mainly in the United States, have developed platforms that collect, analyze and utilize
data that is the source of value added and formed eco systems that contain various industries based on
the platforms, thereby enhancing their cross-border competitiveness (Figure I-3-2-2).
Figure I-3-2-2 Changes in overseas sales of innovative industries in the United States
Note: Bars drawn with dotted lines are estimated values (assuming that each category will maintain its
recent growth rate for the future)
Source: United States Department of Commerce
Digital platforms developed equipped with rapidly evolving information and communications
technology is expanding new business trends through the above-mentioned indirect effects.
Against the backdrop of the progress in the shift of products’ value to services, the sharing economy
in which products are shared, rather than owned, is expanding not only in the United States but also in
emerging countries due to a decline in the cost of supply-demand adjustments due to digital platforms.
In particular, platforms originating in emerging countries have also arrived because of loose regulation
and the diffusion of smartphones, among other factors (Table I-3-2-3 and Figure I-3-2-4).
76,710
(91,601 )
(102,232 ) 105,941
125,328
148,330
(168,659 )
(193,844 )
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2006 2007 2008 2009 2010 2011 2012 2013
Sales of overseas affiliates (search engines, etc.) Sales of overseas affiliates (software)
Services exports (information services) Services exports (computer services)
Services exports (fees for software-related IPs)
(Million dollars)
(Year)
297
Table I-3-2-3 Recent trends in digital platforms in emerging countries
Name Outline
WeChat An application in China. Provides P2P payment services.
DIDI A taxi-calling application in China. Connects drivers with passengers
GRABTAXI A taxi-calling application developed in Malaysia. It has expanded to other
Southeast Asian countries. Invested in by Softbank
Ola cabs A taxi-calling application developed in India. This app also allows users to
call auto rickshaws, in addition to ordinary taxies.
Alipay A Chinese version of Paypal. An online payment platform run by Alibaba
Group
M-Pesa A mobile payment platform run by Vodacom (Republic of South Africa)
GRABTAXI A car-sharing platform in China.
Tujia An accommodation platform in China. This app has also expanded to Europe.
eJiaJie Provides home helpers matching services in China. Has been acquired by
Tencent.
Source: Press releases, etc.
Figure I-3-2-4 Annual income of the users of major online platforms in the United States
51,900
8,000
7,700
3,000
1,400
0 20,000 40,000 60,000
Median household income in the US
Average income of Thumbtack users
Average income of Airbnb hosts in NYC
Average income among sellers on eBay
Average income among sellers on Etsy
(Dollars)
298
Increase in opportunities for individuals to gain income through online platform business
Flexibility of employment on online platforms
Source: "Internet Trend 2015" (Mary Meeker) (2015)
Airbnb hosts
Hosts lending rooms
to foreigners to make
extra money:
80-90％
Sellers on Etsy
Individuals working on Etsy as a part-time job in addition to their
main jobs82％
Uber drivers
Drivers using Uber to complement
fluctuating incomes from other jobs:
74％
Freelancers on Upwork
Freelancers
earning at least
half of their
household income
on Upwork
60％ or more
Sellers on Etsy
Individuals
who decided
to sell on Etsy
because of the
flexibility:
55％
Uber drivers
Drivers who see having control over their own
schedule as an attractive aspect of Uber
87％
Freelancers on Upwork
Freelancers seeking a
more flexible working
environment:
92％
299
On the other hand, the rise of the sharing economy has created intense competition with conventional
business models in some cases, so integrating changing technology into society in a well-balanced
manner has become a challenge. For example, in the United States, a major taxi company went bankrupt
due to the effects of competition with emerging car-dispatching service companies such as Uber and
poaching of employees by such companies.
Meanwhile, Airbnb has grown into an accommodation service business covering 190 countries
around the world, 138 whereas conventional hotels’ income is declining due to Airbnb’s growth,
according to a research report written by researchers at Boston University.139 The report points out the
benefits of a decline in hotel rates due to the impact of Airbnb are enjoyed not only by consumers taking
advantage of the sharing economy but also by other consumers. However, in the case of the
accommodation industry, it is said that existing businesses are losing market share amid intensifying
competition due to the sharing economy’s advantages, such as a much lower supply cost.
2．Platform business and the impact of IT
There are a variety of definitions of the platform business.140 This white paper broadly defines the
platform business as a type of business that provides a “place” to third-party persons and examines how
this is affected by the development of information and communications technology through micro-
economic approaches, such as economy of scale, direct network effect and indirect network effect, which
are presumed to be closely related to this business model.
The platform business model has existed from an earlier time not only in the IT industry but also in
other industries. Utility businesses, such as electric power, gas and tap water may be regarded as a type
of business that establishes a platform, such as a power transmission and distribution network or a gas
supply network, and use it to supply products, electricity or gas, to customers. Such utility businesses
require huge amounts of initial investment for the establishment of power stations and power
transmission and distribution networks, and with this requirement serving as a market entry barrier,
natural monopoly emerges. In this state of monopoly based on the economy of scale, in order to
maximize profit, the monopoly business operator reduces the supply volume to the point where the
marginal revenue matches with the marginal cost, thereby raising the price (Figure I-3-2-5).
138 According to the website of Airbnb (https://www.airbnb.jp/about/about-us). 139 Zervas, Proserpio and Byers (2016) 140 The definition of Multi-Sided Platforms (MSPs) was discussed in detail by Hagiu, A.i and Wright, J.
(2015). This research paper defines MSPs as platforms that possess the two following features: “they
enable direct interactions between two or more distinct sides” and “each side is affiliated with the
platform.”
300
Figure I-3-2-5 Supply and demand curves in the state of monopoly
Source: METI
In the case of fixed telephone and fax services and word processing software, a dynamic different
from the economy of scale works. When benefits for individual customers increase as a result of a rise
in the number of customers belonging to a platform, the diffusion of the platform will become explosive
if the number surpasses a certain threshold level, resulting in a monopoly. This is called a direct network
effect. When customers purchase a word-processing software, for example, whether what they write
can be read by other people is the critical determinant factor. As a result, a particular product tends to
attract a concentration of customers. Under the direct network effect, the demand curve and the
marginal revenue curve shift rightward due to an increase in benefits for customers, which means that
the price rises compared with the original state of equilibrium (state of monopoly) and the supply
volume also grows (Figure I- 3-2-6).
Figure I-3-2-6 Supply and demand curves under the direct network effect
Source: METI
When there are two markets with distinct customer groups and when a rise in the number of
customers in one market leads to an increase in benefits for customers in the other as is the case with
the credit card business’s relationship with consumers and retail stores, the platform provider can secure
a monopoly by lowering the price in one of the markets and pass the cost onto customers in the other
market by taking advantage of its control of the market. This is called the indirect network effect, and a
Supply and demand curves in the perfect market Supply and demand curves in the state of monopoly
Supply and demand curves in the state of monopoly Supply and demand curves under the direct network effect
Increase in prices
Increase in supply
Shifting of supply and demand curves and marginal revenue curve due to the direct network effect
301
market with such characteristics is called a two-sided market. For example, credit card users (namely,
consumers) prefer credit cards that can be used at more retail stores, while retail stores introduce
settlement systems for credit cards used by more consumers.
Under the indirect network effect, strategic discounting and a rise in the number of customers in one
of the two markets (Market A) lead to an increase in benefits for customers in the other market (Market
B), resulting in a rightward shift of the demand curve and the marginal revenue curve. As a result, the
price rises compared with the original state of monopoly and the supply volume also expands. Moreover,
discounting in Market A can be implemented to the maximum extent that the cost is at a level that can
be passed on to customers in Market B (Figure I-3-2-7, Table I-3-2-8 and Figure I-3-2-9).
Figure I-3-2-7 Supply and demand curves under the indirect network effect
Source: METI
Table I-3-2-8 Microeconomic background that supports platform businesses
Economic model Logic Example
Economies of scale (Economies of scope)
(Economies of density)
Natural monopoly where the requirement of enormous amount of initial investments works
as a barrier to entry
Electricity, gas, water, mobile
phones, optical fiber
Direct network effect
When benefits for individual customers increase as a result of increase in the number
of customers, the diffusion of the platform will become explosive if the number surpasses
a certain threshold level, which eventually creates a state of monopoly.
Fixed telephone and fax services, word processing
software
Indirect network effect
(Two-sided market)
When there are two markets with distinct customer groups and when a rise in the
number of customers in one market leads to an increase in benefits for customers in the other, the platform provider can secure a
monopoly by lowering the price in one of the markets and pass the cost onto customers in the other market by taking advantage of its
control of the market.
Credit card
Source: METI
Strategic discounting in Market A (discounting
to a price below the profitable line)
Increase in demand in Market B
Increase in prices
Increase in supply
Shifting of supply and demand curves and marginal revenue curve due to the indirect network effect
302
Figure I-3-2-9 Conceptual diagrams for the direct and indirect network effect
Source: METI
The development of information and communications technology can become a factor that strongly
promotes the platform business model by lowering the marginal cost. As for the economy of scale, IT
systems’ duplication cost is low compared with hard infrastructure such as electric power, gas and tap
water infrastructure, so general-use systems developed with exports in mind can be cost-competitive.
In other words, the supply volume increases through a shift of the marginal cost curve and the
monopoly price declines at the same time. As was mentioned in the previous paragraph, Estonia and
the ROK have enhanced the versatility of their government systems and are promoting export of such
systems as platforms (Figure I-3-2-10).
Figure I-3-2-10 Influence of the use of IT in the state of monopoly
Source: METI
A rise in the number of users increases benefits
for individual users
A rise in the number of users in Market A
increases benefits for the users in Market B
Market A
Market B
Direct network effect
Indirect network effect
Supply and demand curves in the state of
monopoly
Influence of the use of IT in the state of
monopoly
303
If a platform based on the direct network effect uses IT, the supply volume will grow through a shift
of the marginal cost curve and the monopoly price will decline as is the case with the economy of scale.
However, although the marginal cost of obtaining customers will decline, customers will need to bear
some cost except when the platform is operated by an NPO or the like, so it is presumed that there will
be limits to the scale of the market in many cases. (Figure I-3-2-11).
Figure I-3-2-11 Influence of the use of IT under the direct network effect
Source: METI
If the accumulation of data itself contributes to the quality improvement of service and becomes
valuable through rapid innovation of such technologies as IoT, big data and artificial intelligence, the
direct network effect will arise, causing the demand curve and the marginal revenue curve to shift and
resulting in increases in the price and supply volume (Figure I-3-2-12).
Figure I-3-2-12 Supply and demand curves under direct network effect in the AI sector
centered on data accumulation
Source: METI
In this case, a cross-sectoral platform with a business field expanded both vertically and
horizontally in the value chain may be created through technology-based cooperation between
companies. The creation of a platform like this may be either driven by technology or led by industry.
Supply and demand curves under the direct
network effect
Influence of the use of IT under the direct
network effect
Supply and demand curves in the state of
monopoly
Supply and demand curves under direct network
effect in the AI sector centered on data accumulation
Increase in prices
Increase in supply
Shifting of supply and demand curves and marginal revenue curve due to the direct network effect
304
In a technology-driven initiative, companies possessing advanced technology such as artificial
intelligence take advantage of their technology to create a platform by moving into a different sector.
Therefore, policy challenges are introducing, inviting and fostering innovative technologies and
companies and lowering market entry barriers through deregulation. On the other hand, in an industry-
led initiative, companies create a platform by using well-established products and services and existing
facilities as infrastructure, so the policy challenges may be changing companies’ mindset and matching
would-be platform operators with companies possessing advanced technologies and promoting
standardization. In both types of platforms, it is considered to be important for companies to actively
incorporate external technologies and resources by making use of open innovations instead of
internally owning all technologies and manufacturing and service processes (Figures I- 3-2-13 to 16).
Figure I-3-2-13 Creation of a cross-sectoral platform
Source: Material by the secretariat for the New Industrial Structure Committee, Industrial Structure
Council, METI (first meeting)
Value chain
Industries
Service fields
Mass customization
Enhanced efficiency
Changes in the
distribution of value
added
305
Figure I-3-2-14 Business model for a virtuous cycle to maintain and strengthen the competitive
advantage
Source: Material by the secretariat for the New Industrial Structure Committee, Industrial Structure
Council, METI (third meeting)
Table I-3-2-15 Example of platforms that lower the marginal cost through the use of IT
Economic model Influence of the use of IT Example
Economies of scale
(Economies of scope)
(Economies of
density)
IT systems’ duplication cost is low compared
with hard infrastructure such as electric power,
gas and tap water infrastructure, so general-use
systems developed with exports in mind can be
cost-competitive
Estonia’s
customs
system
ROK’s patent
system
Direct network effect
Although the marginal cost of obtaining
customers will decline, customers will need to
bear some cost except when the platform is
operated by an NPO or the like, so it is presumed
that there will be limits to the scale of the market.
If the accumulation of data itself becomes
valuable through technological innovations, the
direct network effect will arise.
Wikipedia, R,
Skype, 2ch,
UNIX
Autonomous
cars
Indirect network
effect
(Two-sided market)
If the marginal cost of obtaining customers is low
and can be passed on to customers in the other
market, services can be provided for free or at an
extremely low price, so the market can be easily
dominated at an early stage.
Google,
Facebook,
LINE,
Android,
Twitter, PDF
Source: METI
Collection, accumulation and utilization of data Establishment of a business model
A virtuous cycle to promote data
utilization (positive feedback)
Accumulation and utilization of
data are further advanced
(=enhancing the strengths)
Accumulation and
utilization of data
Creating a virtual monopoly over
the bottleneck of the business field
Establishing a business model
centered on data
Establishing a competitive advantage that allows companies to take various
strategies to maintain and strengthen the virtuous cycle
306
Figure I-3-2-16 Models for the creation of cross-sectoral platforms
Source: METI
Finally, if a platform based on the indirect network effect uses IT, it will become easy to set low
prices and substantially increase the number of customers in one of the two markets. As a result, in the
other market, the demand curve and the marginal revenue curve will shift, resulting in increases in the
price and supply volume (Figure I-3-2-17).
Figure I-3-2-17 Influence of the use of IT under the indirect network effect
Source: METI
In addition to promoting the diffusion of products in such areas as search engines, networking and
financial settlements, the indirect network effect contributes to the establishment of the foundation of
the so-called sharing economy141 by lowering the supply-demand adjustment cost.
In the IT sector, a new platform is created on top of an existing one in a layered pattern, so platforms
may continue to increase in the future with the development of technologies and services. Even when
141The economic impact of a decline in the marginal cost and the diffusion of the sharing economy was
studied by Rifkin, J. (2014), for example.
Direct network effect
Indirect network effect
Technologies that
give an impact on
industry, such as AI,
robotics and big data
Industry that contains
various sectors, such as
manufacturing (including
automobile
manufacturing),
agriculture, finance,
tourism and medical care
Technology Technology Industry Industry
Cross-sectoral
platform Cross-sectoral
platform
Strategic discounting in Market A (offering for free) Increase in demand in Market B
Increase in prices
Increase in supply
Shifting of supply and demand curves and marginal revenue curve due to the indirect network effect
307
there is a platform that is dominant in a certain layer (e.g., operating system), the platform’s dominant
power in the original layer may decline and commoditization may proceed if a different platform is
created through the addition of a new layer (e.g., search engine). 142 While the extent of such a
phenomenon will depend on business strategies and the strength of the original dominant power of
platform products, it can well be expected that the balance of power between platforms will continue to
undergo dynamic changes across layers.
As shown above, the use of IT in the platform business may drastically change existing business
models, and this may affect international rule-making as well. The next paragraph will look at debates
on and challenges for new international rule-making initiatives to deal with the advance of technology
in the digital era.
3．International rule-making adapted to the era of big data
The expansion of global supply chains, the shift of priority in the economy to services, and the
evolution of Internet businesses and IoT, among other things, have combined with the development of
cloud technology and the diffusion of mobile devices to increase the volume of cross-border data flow.
Data flowing across national borders via the Internet and other media forms the essential foundation of
the people’s daily lives, various activities of companies operating abroad and the growth of the world
economy. However, while the use of data that flows across national borders is growing, the means to
manage the relationship between the data flow on one hand, and countries’ domestic regulations and
various institutional systems, on the other, including the challenges to protect personal information and
security measures, is becoming more complicated. Such challenges increase the need to formulate
international rules in the information and communications sector that appropriately reflect the new
environment based on the advance of technology in the digital era.
(1) Discussions at the WTO and debates related to economic partnership agreements (EPAs)/free
trade agreement (FTAs)
(A)WTO
Against the backdrop of the evolution of electronic commerce due to the spread of the Internet,
which began to create new trade opportunities, the WTO, which is responsible for the formulation of
international trade rules as the core of the multilateral trade system, started to discuss how it should
respond to the situation in the second half of the 1990s.
At the second WTO Ministerial Conference in 1998, the declaration on global electronic commerce
was adopted and an agreement was reached on establishing a comprehensive work program to examine
all trade-related issues relating to global electronic commerce and on continuing the practice of not
imposing customs duties on electronic transmissions (so-called duty-free moratorium).
The work program on electronic commerce, which was established in September 1998 in response to
the declaration on global electronic commerce, defined electronic commerce as the production,
distribution, marketing, sale or delivery of goods and services by electronic means, and discussions on
142 The dynamism between platforms in the IT sector was discussed in detail by Kato (2016).
308
relevant points of debate were held at the Council for Trade in Services, the Council for Trade in Goods,
the Council for TRIPS and the Committee for Trade and Development. As a result, it was decided that
the General Council should wrap up the discussions at the individual councils.
The main points of debate that have been discussed at the WTO include (i) treatment of digital
contents under the WTO agreements and (ii) imposition of customs duties on electronic transmissions.
The point of debate (i) refers to the possibility that when products that were traded as goods in the
form of physical media before the diffusion of the Internet, such as music, video and software programs,
are distributed online as digital contents, the treatment may differ depending on the regulations applied.
In other words, if prices paid in trade of digital contents are regarded as prices for the purchase of goods,
the General Agreement on Tariffs and Trade (GATT) may be applicable, while if they are regarded as
fees for services, the General Agreement on Trade in Services (GATS) may be applicable. On the other
hand, if the prices are regarded as fees for the use of intellectual property, the Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS agreement) may also be applicable. In particular,
whether the GATT or GATS is applicable to trade of digital contents has become an issue of contention
because differences may arise with respect to such matters as the most-favoured-nation (MFN) treatment
and the national treatment (NT) depending on which of the two agreements is applicable.
In this respect, the United States, which has a competitive software industry, has stated its position
that digital contents should be treated as goods, to which the MFN and NT are generally applied.
Meanwhile, the EU, which has an audio and movie industry that needs cultural protection, has argued
that regulation applied to service for which the provision of NT may be reserved is sufficient and that it
does not recognize the concept of digital contents. Japan has argued that the application of the basic
principles of the WTO (e.g., MFN and NT) should be secured from the standpoint of promoting free
electronic commerce.
The point of debate (ii) refers to the problem that it is physically very difficult for customs duty-
collecting agencies to identify online trade in digital contents for the purpose of imposing duties. If an
attempt is made to subject the act of electronic transmission to customs duty based on the transmission
volume (calculated on the basis of communication logs, etc.), the duties would be imposed with no
regard to the actual value of the digital contents transmitted because the value is not necessarily
proportionate to the transmission volume. In addition to the presence of such technical problems
concerning the imposition of customs duties on electronic transmissions, there are growing voices
calling for the formation of an international consensus that customs duties should not be imposed on
Internet transactions from the viewpoint of the need to secure a free transaction environment for the
development of electronic commerce. As a result, the duty-free moratorium has been extended143 in
principle at each ministerial conference since it was agreed upon at the second WTO Ministerial
Conference in 1998. At the 10th WTO Ministerial Conference in 2015, it was agreed again to extend the
moratorium until 2017.
143 As the Third WTO Ministerial Conference (1999) and the Fifth WTO Ministerial Conference (2003)
ended with no agreement, there were several years during which an agreement on the moratorium did not
exist. But since the Sixth WTO Ministerial Conference (2005), the extension of the moratorium has been
renewed.
309
As shown above, the discussions at the WTO have been held mainly within the framework of
existing agreements and there are wide differences between countries concerning various points of
debate, so significant results have not been achieved until now.
(B) EPAs/FTAs
As a result of the slow progress in the discussions at the WTO, the regulation of electronic commerce
has evolved in the form of electronic commerce chapters of bilateral EPAs/FTAs, which are separate
from goods trade and services trade chapters, starting with the Australia-Singapore FTA (put into force
in 2003). In particular, it is notable that in relation to the classification of digital contents, an issue over
which no conclusion has been reached at the WTO, the U.S.-Singapore FTA (put into force in 2004)
contains a provision for non-discrimination against digital products (concerning the most-favored-nation
treatment and the national treatment). Under this FTA, digital products are defined as computer
programs, text, video, still pictures, audio recordings and other digitized products, and such products
include not only those delivered through electronic transmission but also CDs and other products stored
in recording media. Under the U.S.-Singapore FTA’s provision for duty-free treatment of digital products,
it is prescribed that digital products delivered through electronic transmission should be eligible for
permanent exemption from the imposition of duties and that the duty value of digital products imported
in the form of products stored on recording media should be determined based on the value or cost of
the recording media alone and should have no relation to the cost or value of the recorded digital
products. This provision thus goes a step further beyond the WTO’s principle of duty-free treatment.
Japan has also established an electronic commerce chapter since the Japan-Switzerland EPA (put
into force in 2009). In particular, Japan has been pursuing a set of regulations mainly featuring non-
discriminatory treatment of digital products and the adoption of a permanent duty-free moratorium. In
the electronic commerce chapter of the TPP, which was launched with the aim of achieving a high-level
trade liberalization in the Asia-Pacific region, comprehensive and high-level regulation has been
achieved compared with the electronic commerce chapters contained in the EPAs already concluded by
Japan. Specifically, in addition to non-discriminatory treatment of digital products and the adoption of
a permanent duty-free moratorium, the following provisions are contained.
(i) Cross-border transfer of information through electronic means: cross-border transfer of information
(including personal information) through electronic means should be permitted when conducted for the
implementation of business.
(ii) Installation of computer-related facilities: any party to the TPP should not require the installation of
computer-related facilities in its territory as a condition for executing business.
(iii) Source codes: any party to the TPP should not in principle require the transfer of or access to source
codes as a condition for importing, distributing, selling or using, in its territory, mass-market software
owned by a person of another party or products containing such software.
Regarding the requirements specified in (i) and (ii), it has been confirmed that the parties to the TPP
shall not be prevented from adopting or maintaining measures that are not in accordance with the
requirements in order to fulfill legitimate public policy objectives.
It is expected that the introduction of such regulations will ensure the safety and reliability of
310
electronic commerce transactions conducted through computer networks using the Internet technology
and lead to the development of an environment that enables direct transactions with foreign consumers
and companies without a large amount of investment.
(2) Various challenges in the study on international rules adapted to the digital environment
A. Data localization
Free cross-border distribution of various types of data, which is essential to the global diffusion of
goods and services and to the creation of new value added, is gradually becoming a critical foundation
of the growth of the world economy.
However, in recent years, there have been moves to require data localization, which refers to the
prohibition on overseas transfer of data collected domestically, predominantly among emerging
countries. As part of such moves, a growing number of countries are requiring that companies install
computer-related equipment such as servers within their territories as a condition for conducting
businesses in their territory (Table I-3-2-18).144 While such requirements have a variety of objectives,
including protecting privacy, enhancing security, and protecting domestic industries, they impede global
corporate activities by becoming a de facto business constraint, particularly when the market size is not
commensurate with the installation of servers. Furthermore, there are also concerns that by causing the
installation of servers to be dispersed, such requirements make it difficult to conduct central control,
inadvertently weakening data security. As for the cost of the impact of such data localization, welfare
losses are estimated to amount to between 61.6 billion and 63.8 billion U.S. dollars in China, between
3.1 billion and 14.5 billion U.S. dollars in India, and between 2.7 billion and 3.7 billion U.S. dollars in
Indonesia, according to European Centre for International Political Economy. 145 Therefore, it is
necessary to consider measures to deal with this issue at the global level.
Table I-3-2-18 Example of data localization
Subject matter Country Source
Requires local storage of data Argentina, Australia, Canada, China, Greece, Indonesia, and Venezuela
BSA, BRT, Cate, Citi
Mandates or encourages local content
Australia, Brazil, China, India, and certain EU member states
USTR, BSA, BRT, MPAA
Provides government procurement preferences to local digital firms
Brazil, Canada, China, India, Nigeria, Paraguay, and Venezuela
USTR, BRT
Source: “Digital Trade in the U.S. and Global Economies Part 1” (United States International Trade
Commission) (2013)
B. Protection of personal information
One possible impediment to the free distribution of data is the leak and theft of personal information,
144 U.S. International Trade Commission (2013) (https://www.usitc.gov/publications/332/pub4415.pdf). 145 European Centre for International Political Economy (2014),
(http://www.ecipe.org/app/uploads/2014/12/OCC32014__1.pdf).
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and countries around the world are developing and enhancing domestic systems concerning the
protection of such information. In Japan as well, the revised Act on the Protection of Personal
Information was enacted in September 2015. The revised act clarifies the definition of personal
information, established the Personal Information Protection Commission and prescribes the
globalization of the treatment of personal information, including cross-border application.
As for the situation abroad, in Europe, it is notable that as the underlying prerequisite for the free
distribution of data, the protection of personal information is characterized as a basic right and strict
regulation of the protection of data has been introduced. Under the EU Data Protection Directive, which
was established in 1995, it is prescribed that personal data may be transferred from the EU area to a
third country only when the European Commission recognizes that an adequate level of protection of
personal data is ensured or other conditions are met (for the details, refer to the column). After many
years of discussions about the review of this Directive, an agreement was reached in December 2015
between the European Commission, the European Council and the European Parliament on a draft of
data protection rules that constitute a new directive that replaces the EU Data Protection Directive. The
new directive will be enacted as legislation if it is adopted by the Council and by the plenary session of
the Parliament.
On the other hand, the United States has no general law concerning the protection of personal
information and is conducting regulation in individual sectors, including government, healthcare, credit
information and child privacy. The U.S. is thus maintaining a stance based on voluntary regulation as a
principle that is different from the European approach. The safe harbor agreement concluded in 2000
between the United States and the European Commission was an arrangement to facilitate transfer of
personal information by U.S. companies out of Europe, but it has been reviewed in recent years, and a
new agreement called the EU-U.S. Privacy Shield was concluded in February 2016. Thus, attention
should be paid to how this will be implemented (for the details, refer to the column).
As excessive measures to protect personal information could become a factor that impedes smooth
cross-border distribution of data, it will be necessary to deepen international debates on implementing
necessary protection measures and ensuring smooth distribution and use of data at the same time. APEC
is promoting a certification system called the Cross Border Privacy Rules System (CBPR) from the
viewpoint of protecting data and ensuring smooth distribution and use of data at the same time, but few
countries have adopted the system. Therefore, there is room for considering further usage of the system,
such as mutual operation with the system based on the EU Data Protection Directive.
Column 8 EU regulation of the protection of personal data and the EU-US Privacy Shield
In the EU, privacy rights and the protection of personal data are regarded as part of the basic rights.
Against the backdrop of the expansion of electronic commerce, strict regulation is imposed on business
operators in treating personal data under the EU Data Protection Directive that was established 1995
and the ePrivacy Directive that was established in 2002. In addition, strict restrictions are imposed on
the transfer of personal data out of the EU area for the purpose of protecting the rights concerning
personal data even when personal data belonging to EU citizens are transferred out of the area.
Specifically, the transfer of personal data out of the EU area is prohibited except (i) when an adequate
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level of protection is ensured in the third country concerned, (ii) when there is a clear consent from
individual persons to whom the data belongs, (iii) when the company concerned complies with the
Binding Corporate Rules that have been approved by the data protection authority of a EU member
country and promises to conduct strict management of data outside the EU area, and (iv) when the parties
involved in the transfer of personal data have concluded a specific contract concerning the treatment
method of personal data based on the standard contractual clauses (SCC) and approval has been obtained
from a data protection authority.
In 2000, the U.S. Department of Commerce concluded a safe harbor agreement with the European
Commission under which the transfer of personal information from the EU to the United States is not
recognized as a violation of the EU Data Protection Directive if the company concerned promises to
comply with the privacy principles developed by the U.S. Department of Commerce. U.S. companies
can use this system if they declare compliance with the principles concerning the protection of privacy,
announce a privacy policy and submit a letter of confirmation to the U.S. Department of Commerce. As
of 2015, 4,000 companies were eligible for the system.
As a legal framework for the transfer of data through simpler procedures than the procedures usually
required for a third country was established as described above, no major business problem arose.
However, following the disclosure in 2013 that the United States was secretly collecting massive
amounts of personal information (so-called Snowden incident), calls for reviewing the safe harbor
agreement grew, and negotiations were continued. In 2015, the European Court of Justice ruled that the
existing agreement was invalid, and eventually, in February 2016, the United States and the European
Commission agreed on the EU-US Privacy Shield, which is a new framework for enabling the transfer
of personal data from Europe to the United States. Specifically, this framework is comprised of such
measures as (i) enhancing enforcement by the U.S. side, including monitoring by the U.S. Department
of Commerce and the Federal Trade Commission, (ii) submission of written commitments ruling out
indiscriminate, mass surveillance by the United States to the EU and (iii) enhancement of the protection
of the rights of EU citizens, such as filing of complaints and inquiries by the EU authorities with the
U.S. Department of Commerce and the Federal Trade Commission and free of charge provision of
Alternative Dispute Resolution. This system is scheduled to enter into force by the end of 2016.
Column 9 Cross Border Privacy Rules system (CBPR)
APEC established the APEC Privacy Principles in 2004 and is recommending that individual
economies formulate domestic systems to protect personal information based on the principles. In order
to ensure cross-border protection of personal information in the situation of frequent cross-border
transfer of personal information, since February 2008, the APEC Electronic Commerce Steering Group
has been considering a system to protect personal information in the case of cross-border transfer based
on the APEC Privacy Principles and has established (i) the Cross Border Privacy Rules System (CBPR)
and (ii) the Cross-border Privacy Enforcement Arrangement (CPEA).
The CBPR system certifies initiatives related to cross-border protection of personal information by
companies for compliance with the APEC Privacy Principles. Under the system, an applicant company
conducts self-assessment concerning internal rules and systems concerning cross-border protection of
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personal information and undergoes certification examination by an authorized neutral certification
agency with respect to the contents of the assessment.
Currently, four countries, the United States, Mexico, Canada and Japan, are participating in the
CBPR system. In Japan, JIPDEC was recognized as a certification agency in January 2016. Although
the number of participating companies is limited, it is expected that an increase in the use of this system
will make it possible to ensure appropriate protection of personal information and smooth use of
information at the same time.
C. Security measures
One of the reasons why governments, mainly those of emerging countries, require the disclosure of
source codes and other data important for companies and restrict overseas transfer of data is to ensure
security protection, including national security. In particular, in line with the increasing use of IT, it has
become an important policy challenge for countries to take countermeasures against cyber attacks on
critical infrastructure, including electricity and gas infrastructure, and the theft of business secrets from
companies possessing personal information and technologies which are sensitive in terms of security or
which are important for industrial competitiveness. Thus, international debates need to be held on the
balance between the truly necessary measures and excessive measures, such as the data localization
requirement merely used as a cover for an ulterior motive.
As shown above, while points of debate on how to ensure free cross-border distribution of data are
becoming more and more complex as they are intertwined with various domestic policies, there are
concerns that the free distribution of data may be excessively restricted by using the excuse of protecting
personal information and enhancing security measures. Formulating international rules that are well-
balanced, that is: compatible with, security policies, is expected to create a stable environment for and
lay a stable foundation for the use of data.
4．Summary
In the United States, where eco systems equipped with information and communications technology
and based on platforms are actually operating, the industrial structure is starting to change, and the
sharing economy is starting to have an impact on actual society. For example, IT companies are not only
operating in the information and communications sector but are also actively expanding into other
sectors, including autonomous driving, healthcare, finance and music. As this trend is starting to expand
on a global scale, the industrial structure around the world may change rapidly.
In order to build platforms that maintain and strengthen the competitive advantage, it is necessary
to develop business models that create a virtuous circle using data as a new source of value added.
Although Japan has strengths, mainly in terms of hardware and physical systems, it is said that the
country is facing challenges in terms of software and intangible systems, as shown by a lack of strategic
thinking concerning the use of IT for business, for example.
As new trends like this pose challenges that transcend the boundaries of conventional trade rules,
such as data localization and the protection of personal information, there are hopes for international
rule-making initiatives in such fields.
