International Electronic Commerce: Definitions and Policy	 
Implications (01-MAR-02, GAO-02-404).				 
                                                                 
The recent, rapid growth in Internet-based computer technologies 
has significant implications for the United States. The ability  
to conduct business via the Internet has brought about changes in
the way companies do business with each other and in how they	 
interact with consumers. The Internet allows businesses and	 
consumers from different countries to interact as easily as if	 
they were physically close to each other. This borderless aspect 
of international electronic commerce creates a wider marketplace 
that facilitates new transactions and business relationships.	 
However, the potential for widespread adoption of international  
electronic commerce raises questions from the technical to the	 
policy-related. This report provides information on emerging	 
electronic commerce issues, including: (1) what is being done to 
remove obstacles and facilitate international electronic	 
commerce, (2) efforts to adopt a legal framework for		 
international electronic commerce transactions, and (3) how	 
international trade agreements and negotiations address barriers 
to international electronic commerce.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-404 					        
    ACCNO:   A02936						        
  TITLE:     International Electronic Commerce: Definitions and Policy
Implications							 
     DATE:   03/01/2002 
  SUBJECT:   Electronic commerce				 
	     International economic relations			 
	     Electronic data interchange			 
	     Internet						 
	     Information resources management			 
	     Information technology				 


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GAO-02-404
     
A

Report to the Ranking Senate Minority Member of the Joint Economic Committee

March 2002 INTERNATIONAL ELECTRONIC COMMERCE Definitions and Policy
Implications

GAO- 02- 404

Preface The rapid growth in the use of Internet- based computer technologies
over the past several years has significant implications for the United
States. In particular, the ability to conduct business via the Internet has
brought about important changes not only in the way companies

do business with each other but also in the way they interact with
consumers. The Internet allows businesses and consumers from different
countries to interact as easily as if they were physically close to each
other. This borderless aspect of international electronic commerce creates a
wider marketplace that facilitates new transactions and business
relationships. However, the potential for widespread adoption of
international electronic commerce by businesses and consumers raises a
number of questions, from the technical to the policy- related. These fall
into several areas, including the following: (1) What is international
electronic

commerce? (2) What data on international electronic commerce (IEC) does the
U. S. government collect? (3) What is being done to remove obstacles and
facilitate consumer and business use of international electronic commerce?
(4) What are some of the efforts being made to adapt the legal framework for
international electronic

commerce transactions? and (5) How do international trade agreements and
negotiations address barriers to international electronic commerce? This
report provides information on these emerging electronic commerce issues.
Overview Despite widespread use of the term ?international electronic
commerce,? it has no commonly accepted definition. Different institutions
use the term electronic commerce to describe different things. For example,
some definitions imply use of the Internet, while others define electronic
commerce more broadly to include transactions that involve devices such as
facsimile (fax) machines, telephones, and computer- based systems. However,
for measurement purposes, there is general agreement that the on- line
commitment to sell a good or

service is necessary for any transaction to be categorized as electronic
commerce. International electronic commerce, as a subset of total electronic
commerce, generally involves an on- line commitment to sell that results in
the import or export of goods and services. The U. S government does not
produce an official statistic for the value of international electronic
commerce. Current government statistics for electronic commerce are drawn
only from selected industries: namely, manufacturing, merchant wholesale
trade, selected services, and retail trade. However, these

statistics do not distinguish between domestic and international electronic
commerce. Although statistics on international trade in goods and services
cover many major types of international electronic commerce transactions,
these statistics do not distinguish between

electronic and traditional types of transactions. Policymakers are working
on how to facilitate consumer use of international electronic commerce. They
recognize that the adoption of international electronic commerce will depend
in part on consumers? confidence that they will be treated fairly in on-
line transactions and that their personal information will be protected.
Therefore, the efforts to adopt international electronic commerce address
the problems of coordinating consumer protection measures internationally
and protecting data privacy on line. In addition, policymakers consider that
ensuring the security of financial information on computer networks is
important to ensuring consumer confidence, and that concerns about existing
payment mechanisms for some international consumers is a challenge to the
future growth of international electronic commerce.

International electronic commerce also creates new challenges for the legal
regimes governing cross- border

commerce. For example, although international electronic commerce offers the
potential to execute contracts electronically, only a few countries
currently have laws in place that recognize the validity of the electronic
signatures and contracts that would make this possible. Several U. S.
government departments and agencies, as well as U. S. businesses and civil
society groups, are working through international forums to adapt the
existing legal, intellectual property, and

taxation regimes to remove the obstacles that hinder international
electronic commerce from thriving. However, many of these actions are still
in the early stages.

Finally, while the Internet facilitates electronic commerce across national
boundaries, some steps in an electronic transaction still face physical or
legal barriers at the frontier (such as delivering a physical product
ordered on line). Ongoing trade negotiations are addressing barriers that
reduce the efficiency of conducting business and consumer transactions in
Internet services, information technology products,

express shipments, and other components of international electronic
commerce. We undertook this review at the request of the ranking Senate
minority member of the Joint Economic Committee. As arranged with that
office, unless the contents are publicly announced earlier, we plan no
further distribution of this report until 30 days after its issue date. At
that time, we will send copies to interested congressional committees and
the Honorable Paul

O?Neill, secretary of the treasury; the Honorable Donald Evans, secretary of
commerce; the Honorable Colin Powell, secretary of state; the Honorable John
Ashcroft, attorney general; and the Honorable Robert Zoellick, U. S. trade
representative. Copies will also be made available to others upon request.

In this report, we provide general information. For readers who are
interested in more detailed information on the topics covered here, we have
included relevant sources and Web site addresses. If there are any questions
regarding this report, please contact Loren

Yager at (202) 512- 4347. Additional GAO contact and staff acknowledgments
are listed in appendix IV. Loren Yager Director, International Affairs and
Trade

Preface 1 Section 1: 9 Defining International Electronic

Commerce Section 2: 14 Collecting U. S. Government Data on International
Electronic

Commerce Section 3: 22 Removing Obstacles and Facilitating

International Electronic Commerce

Section 4: 51 Adapting Commercial and Legal Frameworks

Section 5: 69 Addressing Barriers through

International Trade Agreements and Negotiations Appendixes Appendix I:
Objectives, Scope, and Methodology 76

Appendix II: Definitions and Measurement of Electronic Commerce 79 Appendix
III: U. S. Government Collection of International Trade Statistics 89
Appendix IV: GAO Contact and Staff Acknowledgments 93

Related GAO 94

Products

Section 1: Defining International Electronic Commerce International
electronic commerce (IEC) involves crossborder transactions through computer
networks. It is a subset of electronic commerce (E- commerce), which itself
generally involves buying or selling on line. Definitions of IEC vary
widely, although general agreement exists that an international electronic
commerce transaction must involve an on- line commitment to sell a product
that results in the import or export of goods or services. The value of IEC
is not generally measured, as only one private research firm has made an
estimate of its size. The estimate suggests

that IEC accounts for a small portion of overall international trade.

Q. How Is International Electronic Commerce Defined?

There is no widely accepted, specific definition for international
electronic commerce. Nevertheless, several government and private- sector
entities have developed functional definitions of electronic commerce so
that they can collect useful statistics. 1 These efforts have led to a
general acceptance of transaction- based definitions, many of which require
an on -line commitment to sell a good or service for an activity to be
categorized as electronic commerce. In a transaction- based definition,
electronic commerce is restricted to buying and selling, as distinct from

conducting E- business. E- business includes all aspects of on -line
business activity- purchasing, selling, tracking inventory, managing
production, handling 1 Institutions such as Statistics Canada, the U. S.
Department of Commerce, the Organization for Economic Cooperation and

Development (OECD), and several U. S. private research and consulting firms
have pioneered this work. The Department of Commerce?s E- business steering
group was initiated in 1998 and drew heavily from previous work by
Statistics Canada. The OECD is an

international organization representing 30 countries that researches a
variety of economic, social, and governance issues to help member states
better address the challenges of a global economy.

logistics, and supplying communications and support services. Therefore,
international electronic commerce, as a subset of overall electronic
commerce, can be generally defined as any transaction that involves an on-
line commitment to purchase and results in the import or export of goods and
services.

Q. What Are Some Examples of International Electronic Commerce and Non-
electronic Commerce Transactions?

Although a variety of definitions exist, the following transactions would
likely be considered international electronic commerce, provided the on-
line orders generate the cross- border movement of goods or services: (1)
the purchase of a book ordered over the Internet from Amazon. com by a
French customer, for delivery in Paris; (2) the reservation of a hotel room
or rental car over the Internet by a U. S. citizen traveling to

Italy; (3) the purchase of the rights to download software by a manufacturer
in Moscow from a California- based company; or (4) the purchase of office
supplies from a U. S. company, using an on- line auction service, for
delivery to a business in Canada. Other E- business transactions that
generate disagreement over whether they qualify as E- commerce under this
definition include international transactions

that (1) occur over non- Internet applications or private networks or (2) do
not involve an on- line commitment to engage in a transaction. Examples of
these transactions include (1) the conducting of research by a Mexican car
dealership on car prices on the Web site of a Detroitbased

manufacturer that leads to an off- line purchase; (2) the purchase of raw
materials by a Belgium- based company from a U. S. manufacturer using the
latter?s private, interactive network; (3) the purchase of catalog items by
a U. S. citizen from a London- based company

using an interactive telephone system; and (4) the

withdrawal of money from an automated teller machine in Nigeria from an
offshore account in New York. See appendix II for a more detailed discussion
of electronic commerce definitions.

Q. What Is the Value of U. S. International Electronic Commerce?

Forrester Research, an independent research firm that analyzes technological
trends and their impact on business, industry, and the economy, estimates
that U. S. on- line exports accounted for $7. 4 billion and on- line imports
for $16. 2 billion in 2000. These figures amount to just 0. 69 percent of
total U. S. exports and 1. 12 percent of total U. S. imports. Forrester
defines international electronic commerce as international trade in goods
and services in which the buyer places the final order over the Internet.
The U. S. government does not collect statistics specifically on
international electronic commerce (see section 2), and Forrester Research,
Inc., is the only research firm that produces estimates and forecasts for
international electronic commerce. 2 Although international electronic
commerce accounts for a small fraction of international trade at present,
Forrester predicts that international electronic commerce will experience
rapid growth, ultimately making up 20. 5 percent of total U. S. exports and
25. 6 percent of total U. S. imports by 2004. 2 We met with researchers from
Forrester Research, Inc. However, we did not independently analyze the
quality of the company?s methodology for developing international electronic
commerce estimates. The methodology used to arrive at the company?s
estimates relies on a mix of quantitative and qualitative analysis. (See
appendix

I.)

Forrester Research?s international electronic commerce forecasts for 2000-
2004 indicate that there was a small Internet trade deficit (the amount by
which imports into the United States exceed exports from the United States)
in 2000 and that even larger deficits will develop

in subsequent years (see figure 1). Forrester?s finding that on- line
imports dominate on- line exports is consistent with existing aggregate
trade patterns. At present, aggregate imports of goods and services exceed
exports in U. S. trade. However, because there are no comparable official
government statistics and GAO has not done a systemic analysis of
Forrester?s methodology, we cannot evaluate the reliability of these
estimates.

Figure 1: Estimates of U. S. International Electronic Commerce, 2000- 2004

Source: Forrester Research, Inc. (2001).

(See appendix II for a more thorough presentation and discussion of
electronic commerce measurement, including the Census Bureau?s electronic
commerce measurement program.) Web sites for more information on electronic
commerce measurement U. S. Bureau of the Census: www. census. gov/ estats
eMarketer: www. emarketer. com

Section 2: Collecting U. S. Government Data on International Electronic
Commerce

The Commerce Department?s U. S. Census Bureau and Bureau of Economic
Analysis (BEA) collect general trade statistics. The focus of these
agencies? programs is on complete coverage of international transactions,
not on separate data for international electronic commerce. Collecting such
data is difficult, because electronic

commerce is a recent and rapidly evolving phenomenon and because additional
surveys would be needed. In some cases, the phenomenon would require
agencies to reassess their methodologies and data- gathering techniques and
to devise new techniques to fill the gaps in their statistics. In other
cases, the agencies would need to expand the detail collected on existing
surveys of services and on the administrative records used to compile the
statistics on goods. The Census and the BEA have been attempting to improve
the quality of their

aggregate international trade statistics. Over the last several years the
BEA has added new surveys and made others mandatory to provide estimates of
previously unreported services.

Q. What Other Data Does the U. S. Government Collect on the Value of
International Electronic Commerce?

Currently, the United States collects no separate, official data on the
value of international electronic commerce. The Census Bureau and the Bureau
of Economic Analysis provide aggregate trade data but do not collect
statistics specifically on international electronic commerce. (See appendix
III for a discussion of international trade statistics collection.) The
Census Bureau also conducts a measurement program that focuses on total
electronic commerce activity in selected sectors of the U. S. economy.
However, international electronic commerce statistics are not among the
electronic commerce statistics that the bureau provides. 1 In its
measurement program, the bureau produces baseline measurements of electronic
commerce, and some consider the Census Bureau to be

the definitive source for this information. Figure 2 shows U. S. electronic
commerce retail sales from 1999 through 2001. These statistics show that
electronic commerce represented only a small share

(approximately 1 percent) of overall U. S. retail sales. U. S. Department of
Commerce officials believe that the vast majority of electronic commerce
transactions are captured in the aggregate international trade statistics.
However, Commerce officials also acknowledge that some significant gaps may
exist in the coverage of international transactions because of unresolved
data collection challenges posed by international electronic commerce (see
next question), and that ongoing efforts

are necessary to ensure that the data collection system responds to new
developments. 2 1 Although the U. S. Census Bureau surveys generally do not
allow a separation of international from domestic transactions, data from a
1999 bureau retail survey provide a rough ?guess- estimate? about the size
of electronic commerce- related international trade. In that survey, the
bureau attempted to get an estimate for international electronic

commerce by asking companies to check the percentage range for electronic
commerce sales that were generated by foreign customers. While a large
number of companies did not report, the respondents typically noted that
international electronic commerce sales

accounted for less than 5 percent of total E- retail sales. If this
percentage were applied to the entire sample, it would imply that
international E- retail sales were less than $264 million for the fourth
quarter of 1999 (a small portion of an already small number). One Census
Bureau official noted that from this rough estimate it appears that the
leading electronic commerce retailers are channeling international E- sales
through foreign subsidiaries in lieu of conducting cross- border trade in
goods and services.

2 See Barbara Fraumeni, ?Electronic Commerce: Measurement and Measurement
Issues,? American Economic Review 91 (May 2001): 318- 22; Ralph Kozlow,
?International Accounts Data Needs: Plans, Progress, and Priorities,?
prepared for presentation to BEA Advisory Committee, Washington, D. C.
(November 17, 2000); and Barbara

Fraumeni, Ann Lawson, and Christian Ehemann, ?The National Accounts in a
Changing Economy: How BEA Measures Electronic Commerce,? presented at the
Brookings Workshop on Measuring Ecommerce, Washington, DC (September 1999).
Likewise, the president?s 2003 budget submission to Congress states that the
growth of electronic commerce presents challenges to the statistical
agencies and threatens the accuracy and timeliness of the nation?s key
statistics.

Figure 2: U. S. Electronic Commerce Retail Sales, 1999- 2001

Source: U. S. Bureau of the Census.

Q. What Challenges Does International Electronic Commerce Present for
Collecting Statistics?

Collecting statistics on IEC poses several challenges, as listed below:

 Accounting for the growth of low- value exports. The rise of electronic
commerce may lead to an increase in the volume of low- value goods exports
(valued at less than $2,500), including exports shipped out in small parcels
through the postal service. Because the

Census Bureau does not directly count low- value shipments but rather
estimates them on the basis of information from 1989, this export-
undercounting problem is likely to intensify (see appendix III for a
discussion of low- value shipments and the undercounting problem). 3 
Dealing with transactions that are underreported.

International electronic commerce, if it leads to an increase in small-
scale services, may exacerbate problems with collecting data on service
transactions that fall below the threshold requirements set by the BEA for
businesses reporting on their transactions. For several types of services,
such as legal services, the exemption levels are so high ($ 1 million) that
the BEA has to indirectly estimate some types of transactions.  Providing
coverage for new services. Use of the

Internet results in new, electronic commerce- related services that are not
covered in current BEA surveys, such as on- line auction services. Figure 3
shows the steady increase in the net revenues of eBay Inc., an international
on- line marketplace, from 1997 to 2001.

Unless these electronic commerce activities fall within the scope of
existing service categories, aggregate trade statistics may not include
those transactions. For example, in 1989 BEA discovered an additional $20
billion in net receipts for U. S.

service transactions for 1985- 1987 by improving the 3 There is some
skepticism about whether electronic commerce will lead to an explosion in
low- value exports, since the Census Bureau?s estimates indicate that
business- to- business manufacturing and wholesale trade dominate electronic
commerce activities and are more likely to consist of higher- valued goods.
Forrester?s research also suggests that international electronic commerce
consists primarily of large packages, with low- value transactions making up
a

tiny portion of this commerce. Moreover, analysts and government officials
maintain that because the electronic commerce- related portion of
international trade is very small, the quality of the international trade
statistics is not compromised. However, as the volume of electronic commerce
trade increases, the undercounting of

low- value transactions may worsen, if the information used to value them is
not updated.

coverage of its surveys on travel and adding new surveys on other selected
services. 4 The BEA has added new Internet- related services to its surveys
as

it has become aware of them, either as separate categories or as examples
given in definitions and instructions for existing categories. Some new
categories, including auction services, have been added to BEA surveys,
beginning with data for 2001. 5 4 National Research Council, Behind the
Numbers (Washington, D. C.: National Academy Press, 1992).

5 The president?s 2003 budget submission to the Congress highlights the U.
S. Department of Commerce?s request for funding to generally strengthen
federal statistics, especially in light of the growth of Ecommerce. For
example, Commerce requested funds to improve measurement of services in the
new economy, mainly through new quarterly surveys.

Figure 3: eBay Net Revenue, 1997- 2001

Source: eBay, Inc.

 Quantifying the amount of service transactions.

Electronic commerce increases the output of ?difficult- to- measure service
sectors? such as the finance, insurance, and real estate industries. To the
extent that the Internet facilitates international banking, insurance, and
brokerage services as well as other on- line service activities, data-
collection will be more difficult. Electronic commerce may also result in an
increase in transactions conducted by individuals and smaller companies
that, according to

BEA officials, are inherently difficult to survey in a detailed fashion. 6

 Determining which transactions to record as international. Electronic
commerce may result in transactions occurring between domestic and

foreign parties that may not be recorded as international transfers. This
situation may arise because it can become difficult at times to establish
the residency of buyers and sellers of services over the Internet. As a
result, U. S. companies and individuals may not be aware that they are
conducting transactions with foreign parties. The BEA has attempted to
mitigate this problem by adding new instructions to its existing surveys and

indicating that Internet transactions are to be reported according to who is
involved in the transactions, not according to where the buyer and seller
are located.  Distinguishing between a good and a service.

Electronic commerce also blurs the distinction between international goods
and services. When a book or a magazine is transmitted electronically, has
the person received a good or a service? Electronic books and magazines
include features such as

searching capabilities that may resemble services. While the distinction
between goods and services has always been problematic, with electronic
commerce the line can become even fuzzier. This issue affects domestic
measurement as well. However,

conventions have been adopted for data collection purposes. Electronically
transmitted items do not pass through customs or enter into tabulations of
goods trade, and are therefore collected in the BEA?s

surveys as trade in services. 6 Kozlow, ?International Accounts Data Needs,?
November 2000.

 Locating new service providers. Electronic commerce poses additional
measurement challenges, because E- businesses can expand their product lines
and enter into entirely new kinds of activities at a much faster rate than
companies

previously could do. 7 Because the BEA must locate new service providers in
order to survey them and to obtain trade information, identifying and
monitoring electronic commerce imposes additional challenges to ensuring the
comprehensiveness of international trade statistics.

7 Fraumeni et al., ?National Accounts in a Changing Economy.?

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Although international electronic commerce provides consumers with many
benefits, including a 24- hour global marketplace and convenient shopping
from their own homes, it also may create new opportunities for

fraud, abuse, and invasions of privacy. If buyers find that they do not have
effective consumer protections, that their personal data are not
safeguarded, that their transmissions are not secure, or that shopping on
line is more cumbersome than purchasing off line, then they may be less
likely to use the Internet to make purchases. For example, a 1998 survey
found that 61 percent of those who had never made an on- line purchase cited
concerns about credit card security as a reason. 1 The United States, the
European Union, and other government, business, and consumer interests have
placed a high priority on fostering confidence in electronic commerce by
addressing concerns in four areas: (1) on- line consumer protection, (2)
data protection and privacy, (3) security, and (4) payment methods. However,
constructing a coherent international framework for addressing these issues
is challenging because national approaches differ and technologies continue
to evolve.

Q. How Does International Electronic Commerce Affect Consumer Protection
Efforts?

International electronic commerce complicates consumer protection activities
because most efforts have traditionally focused on handling domestic
complaints, providing enforcement, and disseminating education. Prior to the
development of the Internet, most consumers did not directly interact with
foreign 1 See Pew Research Center for the People and the Press, ?The
Internet News Audience Goes Ordinary,? at http:// www. peoplepress.

org/ tech98sum. htm.

retailers when making consumer purchases. 2 Therefore, consumer protection
activities did not require international coordination. However, as
international electronic- commerce transactions increase, consumers may
experience greater problems with fraud and

deception from foreign- based enterprises. Although international consumer
complaints still make up a small share of the total number of electronic
commerce- related consumer complaints that the U. S. Federal Trade
Commission (FTC) receives, the FTC has seen an

increase in both the number and percentage of them in the past five years.
To meet this growing challenge, efforts are under way to better coordinate
activities among different countries? national authorities. In the following
pages, we answer several questions related to how international electronic
commerce complicates consumer protection efforts:  What is the U. S.
government doing to foster on- line consumer protection internationally? 
How has the private sector tried to promote consumer confidence?  What
problems do consumers and businesses face in

resolving on -line disputes?  What alternatives exist outside of the court
system for resolving international on -line disputes?

Q. What is the U. S. government doing to foster online consumer protection
internationally?

The United States attempts to protect consumers on line by coordinating with
other countries? authorities on education and enforcement. The Federal Trade
2 Exceptions to this general pattern of consumers dealing only with domestic
retailers include cases such as going on foreign travel or

using international mail order catalogs. However, because these were not
widespread activities compared with those in the overall economy,
authorities focused primarily on handling domestic complaints.

Commission and the U. S. Department of Justice are the principal government
agencies tasked with enforcing consumer protection laws and preventing fraud
for domestic and international electronic commerce. 3 Besides providing
consumers with information on

common Internet fraud schemes and tips for on- line shopping, the FTC and
Justice also bring law enforcement actions to discourage fraud and deception
on the Internet. 4 Both the FTC and Justice pursue Internet fraud cases
regardless of whether they are domestic or international in scope. In
addressing international electronic commerce issues, the United States
collaborates with other national consumer protection and law enforcement
agencies both

bilaterally and through multilateral forums. On enforcement issues, the
Federal Trade Commission participates with 28 other countries in the
International Marketing Supervision Network, which seeks to improve
cooperation and information sharing among law enforcement agencies and to
address deceptive international marketing practices. In 2001, the FTC began
hosting a pilot Web site for consumers from the

United States and 12 other countries in the Network to file electronic
commerce complaints (http:// www. econsumer. gov). 5 Consumer protection and
law enforcement agencies can use this site to track 3 For certain types of
products, other regulatory agencies may also provide consumer protection.
For instance, the Food and Drug

Administration is involved in addressing international pharmaceutical sales
over the Internet. 4 For example, the FTC has brought more than 140 law
enforcement actions since 1994 against more than 490 companies and
individuals. Similarly, Justice has brought a number of criminal
prosecutions against individuals and groups involved in Internet fraud,
including auction schemes, investment schemes, and credit card fraud.

However, most of these cases involved domestic issues. 5 This effort built
upon FTC?s existing database, Consumer Sentinel, which collects consumer
complaints from the United States as well as Canada and Australia.

complaints and identify patterns of fraud. In addition, Justice (through the
Federal Bureau of Investigation) and the National White Collar Crime Center
(a national network for law enforcement agencies) jointly established the
Internet Fraud Complaint Center (www. ifccfbi. gov) to receive on- line
complaints, analyze them to identify the types of fraudulent schemes, and

refer the complaints to law enforcement agents. 6 (See figures 4 and 5 for
the Internet home pages of both econsumer. gov and the Internet Fraud
Complaint Center).

6 Both the Internet Fraud Complaint Center and econsumer. gov receive on-
line complaints from consumers. Information can be shared from both sites,
depending on the relevancy to each site?s mission. FTC?s econsumer. gov
addresses consumer complaints broadly, while Justice?s Internet Fraud
Complaint Center focuses on criminal activity whether or not it involves
consumers.

Figure 4: The U. S. Federal Trade Commission?s Econsumer. gov on the
Internet

Source: Econsumer. gov at www. econsumer. gov.

Figure 5: The Internet Fraud Complaint Center on the Internet

Note: The Internet Fraud Complaint Center is a joint effort of the Justice
Department?s Federal Bureau of Investigation and the independent National
White Collar Crime Center.

Source: The Internet Fraud Complaint Center at www. ifccfbi. gov.

To coordinate consumer protection policies, the Federal Trade Commission and
the Department of Commerce collaborate with the other 30 member countries of
the OECD in the Committee for Consumer Policy. In 1999,

the OECD adopted international guidelines for consumer protection. According
to the guidelines, online shoppers should be afforded protection that is not
less than the protection afforded offline. Although not legally binding, the
guidelines provide a blueprint for governments, the private sector, and
consumers about

fair business practices on line. The United States also has addressed
coordination of international consumer protection through the Asia- Pacific
Economic Cooperation forum. This group of 21 economies from the Pacific Rim
area, including Australia, China, Japan, and the United States, provides a
forum for sharing information on government policies and is also currently
developing a set of voluntary consumer protection principles.

Q. How has the private sector tried to promote consumer confidence?

Private- sector groups have been seeking ways to improve consumer confidence
in electronic commerce through developing guidelines and codes of conduct
for on- line transactions. Some businesses that comply with these principles
can choose to post seals, or ?trustmarks,? on their Web sites indicating
that they

adhere to the principles. These trustmarks provide consumers with an
indication of the types of policies with which a business complies and may
increase consumers? confidence in dealing with a particular Web site. For
example, the Better Business Bureau?s BBBOnline (http:// www. bbbonline.
org/) has a set of good business guidelines. If businesses comply with these
guidelines, they can display the bureau?s reliability seal on their Web
site. Other organizations also provide trustmarks to enable businesses to
demonstrate to potential customers that they abide by guidelines that
promote fair business practices. Some examples shown in figure 6 are
SquareTrade (http:// www. squaretrade. com), and CPA WebTrust (http:// www.
cpawebtrust. org/). 7 7 The Global Business Dialogue provides an inventory
of trustmarks at http:// consumerconfidence. gbde. org/ t_ inventory. html.

Figure 6: Examples of Trustmarks for BBBOnline, SquareTrade, and CPA
WebTrust

Note: The trustmarks shown above are graphical representations indicating a
Web site's compliance with the providers? principles and criteria. They are
reproduced here for illustrative purposes only.

Source: BBBOnline, SquareTrade, and CPA WebTrust.

Q. What problems do consumers and businesses face in resolving on- line
disputes?

Currently, consumers and businesses may face uncertainty in seeking legal
redress for problems arising in electronic commerce. First, there are
concerns about

the appropriate jurisdiction to adjudicate the dispute: Can the consumer sue
the business in the consumer?s home court? Second, there are concerns about
applicable law: Which country?s laws will govern a crossborder E- commerce
transaction? Finally, there are concerns about enforcement: Even if the
consumer sues in his or her home court and obtains a favorable judgment, can
the judgment be enforced against the business in its home country? There has
been an ongoing public policy debate about the first two issues of
jurisdiction and applicable law.

U. S. courts generally allow consumers to sue businesses in the consumers?
home forum, as long as it is fair and reasonable to do so. They also
generally apply the consumers? home country law, based on the application of
several factors. European law gives, if a number of requirements are met,
consumers the right to sue businesses in the consumer?s home country and for
the consumer protection laws of the consumer?s home country or key aspects
of those laws to be applied in

determining the dispute. Generally, consumer groups favor a ?country of
destination? approach, under which consumers can rely on their home country
protections and sue in their home country courts. They argue that this is
the only way to

ensure adequate consumer protection. Some industry groups favor a ?country
of origin? approach, under which companies would be subject only to the laws
and courts of their home country. They argue that this approach is needed to
encourage the growth of electronic commerce, as the ?country of destination?
approach would be too costly for businesses. The U. S.

government has been involved in discussions on these issues and has been
promoting alternative dispute resolution as a method of providing practical
and costeffective

dispute resolution for E- commerce transactions, and it continues to engage
in the public policy debate on these issues. The issues of jurisdiction and
enforcement of consumer judgments are being discussed in negotiations on a
Hague Convention for Jurisdiction and Judgment Recognition. The negotiations
under the Hague Conference have been under way for several years, and no
deadline has been set for when they will be completed.

Q. What alternatives exist outside of the court system for resolving
international on- line disputes?

Some organizations have been developing new mechanisms for resolving
international on- line disputes between businesses and consumers outside of
the court system. Given the costs and difficulties that both consumers and
businesses face in pursuing international litigation, government, consumer,
and business interests are discussing how to develop alternative dispute
resolution mechanisms. The goal of these efforts is to create mechanisms
that can provide practical and

inexpensive redress for consumers without unduly burdening business. For
example, a U. S. consumer who purchases a product from a French business and
experiences a problem could file a complaint through an on- line alternative
dispute resolution system. The

complaint could be examined by a neutral third party, with the business
responding on line, so that neither party has to travel. Currently, most on-
line alternative dispute resolution mechanisms for consumers primarily
address domestic complaints. However, some organizations have begun
operating international alternative dispute resolution mechanisms, and
others have announced plans to develop them. 8 There have

also been discussions in many forums on ways to promote and develop
alternative dispute resolution mechanisms. Businesses and consumer groups
tend to disagree on certain aspects of the mechanisms. For

example, consumer groups argue that consumers should never be bound by the
outcome of alternative dispute mechanisms and should always be permitted to
go to court. Business groups disagree. Nevertheless, both

8 For example, the Better Business Bureau has announced partnerships with
European, Japanese, Korean, and Chinese associations to offer international
alternative dispute resolution with compatible complaint resolution
procedures and technologies. See www. BBBOnline. org.

businesses and consumer groups support voluntary alternative dispute
resolution.

Web sites for more information on consumer protection issues

U. S. Federal Trade Commission: www. ftc. gov/ ftc/ consumer. htm U. S.
Department of Justice Internet Fraud: www. usdoj. gov/ criminal/ fraud/
Internet. htm U. S. Department of Justice Consumer Litigation: www. justice.
gov/ civil/ ocl/ index. htm European Union Consumer Affairs:

www. europa. eu. int/ comm/ consumers Organization for Economic Cooperation
and Development: www. oecd. org Asia- Pacific Economic Cooperation: www.
apecsec. org. sg and www. apec. org

Hague Conference on Private International Law: http:// www. hcch. net

Q. How Does International Electronic Commerce Affect the Privacy of Personal
Data?

Technology has enhanced the capacity of on- line companies to collect and
analyze vast amounts of data from and about consumers who visit their Web
sites, which raises concerns about how this information is treated.
Businesses worldwide routinely collect a variety of information about their
customers in order to better understand their clients, target special
offers, and improve their business operations. Whereas before the creation
of the Internet, a company could track an

individual customer?s purchases, now a company can also track what a
customer looks at by recording what pages of a Web site a customer chooses.
Such information can be compiled with data from other

sources to construct a profile of individual customers. The increase in the
collection and use of data has raised public awareness and consumer concerns
about on- line privacy. 9 Governments have responded by using

different approaches, including establishing and enforcing laws and
regulations and encouraging business self- regulation. However, these
different approaches have led to different national standards and may create
difficulties for companies that transmit personal data between operations
located in different jurisdictions. In the following pages, we answer
questions related to how international electronic

commerce affects the privacy of personal data:  How does the United States
foster the protection of individuals? personal data and privacy?  How does
the EU?s approach to data privacy differ from that of the United States? 
What international principles exist for ensuring data protection?

Q. How does the United States foster protection of individuals? personal
data and privacy?

The United States has generally promoted industry selfregulation,
supplemented by government laws and regulation in certain sectors, as the
best approach to ensuring data privacy in an evolving area like electronic

commerce. Specifically, U. S. privacy laws provide 9 Consumer surveys have
found that consumers are also concerned about government access to and
monitoring of their personal information on line. However, law enforcement
agencies? ability to deter and prosecute criminal activity on line requires
some degree of access to personal information.

protection for personal health and financial information and for all
personal information about children (see table 1). However, different
interests in the United States, including consumer groups, businesses, and

various FTC commissioners, have debated the need for more comprehensive
legislation. In some countries, these laws are comprehensive, covering all
types of personal data; in other countries, such as the United States, the
laws are specific to certain types of information.

Table 1: U. S. Laws Governing Privacy of Personal Information Name of law
Purpose of law

Fair Credit Reporting Act Covers communication of an individual?s personal
information by (1970) consumer reporting agencies (CRAs), such as credit
bureaus. This was the nation?s first major privacy protection law that seeks
to strike a balance between privacy and the use of consumer information and
allows for disclosure of information by CRAs only for ?permissible
purposes.? The law provides consumers with avenues for learning the
information about them in the files of CRAs, and for correcting erroneous
information.

Health Insurance Portability Provides certain rights for consumers in terms
of the use of their and Accountability Act (1996) personal health
information.

Identity Theft and Assumption Makes the FTC a central clearinghouse for
identity theft complaints, Deterrence Act (1998) which occur when an
individual?s personal information is used

fraudulently to create new financial accounts, such as credit cards. Makes
identity theft a federal crime with substantial penalties. Children?s On-
line Privacy Prevents the collection of personally identifiable information
from young Protection Act (1998) children without their parents? consent.
Self- regulatory programs can

set up their own compliance mechnanisms for the act and apply to the FTC for
safe harbor status. If approved for such status, companies that adhere to
safe harbor programs will be deemed in compliance with the

law. Gramm- Leach- Bliley Act Provides certain rights for consumers in terms
of the use of their (1999) personal financial information, requires
financial institutions to notify

customers about their privacy practices, and allows consumers to "opt out"
of having their nonpublic personal information disclosed to nonaffiliated
third parties. Also outlaws ?pretexting? (calling a financial institution
claiming to be a customer to get personal information). Note: Except for the
Children?s On- line Privacy Protection Act, the above laws are not specific
to the Internet or international electronic commerce. However, these laws do
affect how personal information is treated, including data transferred
electronically.

Source: The U. S. Federal Trade Commission and the Department of Health and
Human Services.

In addition to these laws, the FTC can provide further protections to
consumers under the 1914 FTC Act when businesses violate their own stated
privacy statements.

Many businesses state their privacy policies on their Web sites. In fact,
the FTC and several business and consumer groups seek to have businesses
post such privacy policies to provide consumers with information on their
practices. For example, see figure 7 for the General Accounting Office?s
(GAO) privacy statement

on the Internet. If a business violates its stated practices, the FTC may
challenge the company for using deceptive business practices. Recently, the
FTC has brought several legal actions against on- line companies who sold
consumers? personal information in violation of their posted privacy
policies. 10 The FTC has also brought a recent law enforcement action
against a company that did not adhere to its stated privacy and

security policies. 11 The FTC has noted an increase in the number of on-
line companies adopting and posting privacy policies, including the majority
of the most popular websites. 10 See, In the Matter of Geocities, File No.
982 3051 (1998), available at http:// www. ftc. gov/ opa/ 1998/ 9808/
geocitie. htm; FTC v. Liberty Financial, File No 982 3522 (1999), available
at http:// www. ftc. gov/ opa/ 1999/ 9905/ younginvestor. htm; FTC v.
Toysmart. com, LLC, and Toysmart. com, Inc. (Civ. Action No. 00- 11341RGS)

(D. Mass. 2000), available at http:// www. ftc. gov/ opa/ 2000/ 07/
toysmart2. htm. 11 See, In the Matter of Eli Lilly, File No. 012 3214
(2002), available at http:// www. ftc. gov/ opa/ 2002/ 01/ elililly. htm.

Figure 7: GAO?s Privacy Statement on the Internet

Source: U. S. General Accounting Office at www. gao. gov/ privacy. html.

Q. How does the EU?s approach to data privacy differ from that of the United
States?

In the European Union, data protection legislation is comprehensive,
covering how a company in any field may collect, store, and process personal
information. The 1995 EU Data Protection Directive became effective in 1998
and stipulates that if a company transfers personal information outside the
European Union, the country in which the receiving company resides or the
company itself must have adequate data protections in

place. 12 When the directive first came into force, there were concerns
about how these requirements would affect data regularly transferred between
U. S. and EU companies, because the United States has a different approach
to privacy protection than the European Union has. Negotiations began
between the European Commission and the U. S. Department of Commerce. A

framework, known as the Safe Harbor, went into operation in 2000 to bridge
the gap between the U. S. and EU approaches. The Safe Harbor framework
allows data from subjects of EU member states to be transferred to U. S.
companies that self- certify with the Department of Commerce that they
comply with the Safe Harbor framework (see www. export. gov/ safeharbor). 13
The

framework has allowed data transfers to continue between the United States
and the European Union, and the functioning of the framework is currently
under European Commission review. More than 150 companies have self-
certified under the Safe Harbor framework, including Microsoft, Intel,
Hewlett- Packard, Proctor & Gamble, and DoubleClick. The European Commission
has also adopted its own draft of model

contract clauses that could be used as an alternative means for U. S.
companies to comply with the EU directive. However, the U. S. Departments of
Commerce and the Treasury, as well as U. S. industry, have criticized the
European Commission version as being overly

12 A country is considered to have ?adequate? data protections if the
European Commission certifies that its laws and regulations maintain the
same levels of protection as the EU law. A company can be considered to have
adequate data protections if the commission

certifies it individually or if a special arrangement is made (such as a
model contract) that is considered adequate by the commission.

13 The Safe Harbor is available to companies subject to enforcement of their
privacy commitments by the Federal Trade Commission of the Department of
Transportation. At the time the Safe Harbor framework

was concluded, both sides agreed to continue discussions on the financial
sector. The U. S. Treasury will lead these discussions.

burdensome for U. S. companies and not a practical alternative for ensuring
compliance. The International Chamber of Commerce has proposed an
alternative to the European Commission?s clauses, but this alternative has
not yet been certified by the European Commission. Several countries,
including Canada, Australia, New Zealand, and Argentina, have also adopted
comprehensive data privacy legislation. So far, the United States has not
adopted agreements with these

countries similar to the Safe Harbor framework with the European Union.

Q. What international principles exist for ensuring data protection?

Internationally, the 30 member countries of the Organization for Economic
Cooperation and Development agreed in 1980 to the principles in the OECD?s
Guidelines Governing the Protection of Privacy and Transborder Flows of
Personal Data (see table 2). These principles were developed by government
agencies in the United States, Canada, and Europe.

Table 2: Summary of Basic Principles of Data Privacy and Protection Laws in
the OECD Guidelines

Principle Definition

Notice/ awareness Data collectors (such as Web sites) should provide
consumers with clear and conspicuous notice of their information practices,
including what information they collect; how they collect it; how they use
it; and how they provide choice, access, and security to consumers.

Choice/ consent Data collectors should offer consumers choices about how
their personal identifying information may be used beyond the use for which
the information was provided (for example, to consummate a transaction).
Consumers should have the choice of whether the information could be used
internally, as well as whether it could be disclosed to outside firms.

Access/ participation Data collectors should offer consumers reasonable
access to the information a Web site has collected about them, including
giving them a reasonable opportunity to review information and to correct
inaccuracies or delete information.

Integrity/ security Data collectors should take reasonable steps to protect
the security of the information they collect from consumers.

Enforcement/ redress Some entity should have authority to enforce the above
principles, and consumers should have avenues for redress when the
principles are violated.

Source: The U. S. Federal Trade Commission?s summary of the basic principles
embodied in the OECD guidelines (http:// www1. oecd. org/ dsti/ sti/ it/
secur/ prod/ PRIV- EN. htm) and other privacy laws.

Specific legislation will vary on how countries implement the components.
For example, on ?choice/ consent,? the Gramm- Leach- Bliley Act requires
financial institutions to provide customers the

opportunity to ?opt out? of having their nonpublic personal information
shared with nonaffiliated third parties, with certain exceptions. 14 If the
individual does not respond to the opportunity, the company then may share
the individual?s personal information. The Children?s On- line Privacy
Protection Act, however, requires on- line companies to first gain the
consent of 14 A financial institution is obligated to comply with the opt-
out

provisions under Subtitle A only with respect to individual consumers who
obtain a financial product or service to be used primarily for personal,
family, or household purposes.

the child?s parent before collecting information. This is known as an opt in
requirement. It is a more stringent privacy requirement than an opt out,
because an individual is not required to do anything in order to keep his or
her personal information from being collected.

Web sites for more information on data privacy

U. S. Federal Trade Commission: www. ftc. gov/ privacy/ index. html

U. S. Department of Commerce Safe Harbor Web site: www. export. gov/
safeharbor

European Union Data Protection: www. europa. eu. int/ comm/ internal_
market/ en/ dataprot/ i ndex. htm

Canadian Commissioner for Privacy: www. privcom. gc. ca

Organization for Economic Cooperation and Development: www. oecd. org

Q. How Does International Electronic Commerce Affect Security Efforts?

There are several security threats to consumers? transactions that may
affect consumer adoption of international electronic commerce. Criminals in
foreign

countries have successfully penetrated computer systems of major U. S.
financial institutions, and numerous cases of credit, debit, and ATM card
fraud, telemarketing fraud, and copyright piracy have caused significant
losses for U. S. individual and corporate victims. Equally important as
these well- publicized cyber attacks are traditional crimes committed by
means of the Internet, such as theft of proprietary

information and content, fraud, money laundering, and

identity theft. Specifically, some of the challenges that law enforcement
faces on the international front include improving cooperation in locating
and identifying perpetrators across borders, securing electronic evidence of
their crimes so that they may be brought to justice, and overcoming
differences in countries? criminal laws. As with other aspects of
international electronic commerce, jurisdictional issues arise at each step.
In the following pages, we answer some questions

related to how international electronic commerce affects security efforts: 
What are some of the security challenges for IEC?  To what extent are new
security arrangements for

IEC being developed?  How are security challenges being addressed by the

private sector?

Q. What are some of the security challenges for IEC?

 Cooperation. National laws apply to the Internet and other global
networks. But while the enactment and enforcement of criminal laws have
been, and remain, a national responsibility, the nature of modern
communications networks makes it impossible for

any country acting alone to address this emerging high- tech crime problem.
For example, consider a computer hacker in Paris on the left bank of the
Seine who disrupts a corporation's communications network on the right bank.
Before accessing his

victim's computer, he routes his communication through service providers in
Romania, Australia, and Argentina. In this case, French police will need
assistance from law enforcement authorities in Bucharest, Canberra, and
Buenos Aires before discovering that the criminal is right in their midst.
Because of the perishability of evidence and the mobility of people,
evidence must be gathered

quickly to minimize the chances that the data will be unavailable or lost. 
Legislation. The failure of a country to criminalize

computer- related offenses is one such obstacle. When one country's laws
criminalize certain activities on computers and another country's laws do
not, effective cooperation in solving a crime and prosecuting the
perpetrator may not be possible. The investigation of the "Love Bug" virus
provides an example. Although U. S. investigators worked closely

with investigators in the Philippines, international coordination would have
proceeded more quickly and effectively had there existed common computer
crime laws between the two countries.

Q. To what extent are new security arrangements for IEC being developed?

 Council of Europe. The U. S. government is working with foreign
governments through many channels to address global threats related to
computer crime. For example, the United States has participated in the
drafting of the Council of Europe (COE)

Convention on Cyber- Crime since the project began in 1997. 15 Specifically,
the United States, represented by the Departments of Justice, State, and
Commerce,

in close consultation with other U. S. government agencies, has actively
participated in the negotiations in both the drafting and plenary sessions,
working closely with both COE and non- COE member states. Among other non-
COE states participating in the negotiations were Canada, Japan, and South
Africa. 15 The Council of Europe (website: www. coe. int) consists of 43
member states, including all of the members of the European Union. It was
established in 1949 primarily as a forum to uphold and strengthen human
rights and to promote democracy and the rule of law in Europe. Over the
years, the COE has been the negotiating forum for a number of conventions on
criminal matters in which the United States has participated.

By virtue of their having participated in the convention?s elaboration, the
United States and these other non- COE states will have the right to become
parties to the convention if they choose to do so. On June 29, 2001, the
Council of Europe released the

final text of the draft Convention on Cyber- Crime, which is the first
multilateral instrument to address the problems posed by the spread of
criminal activity on computer networks. The Convention makes progress in
this area by (1) requiring signatory countries to establish certain
substantive offenses in the area of computer crime, (2) requiring parties to
adopt domestic procedural laws to investigate computer crimes, and (3)
providing a solid basis for international law enforcement cooperation in
combating crime committed through computer systems. On November 23, the
United States signed the treaty. Criminals, including terrorists, can cause

large economic losses and threaten our infrastructure through computer-
related attacks (for example, hacking, viruses, and denial- of- service
attacks). Criminals around the world are also increasingly using computers
to commit traditional crimes, such as fraud, child pornography, and
copyright piracy. The Cybercrime Convention is expected to be of
considerable benefit to the United States, because it will help remove
procedural and jurisdictional obstacles to international cooperation

that can delay or endanger law enforcement investigations and prosecutions
of computer- related crime.

 EU Forum. The European Commission intends to establish and chair an EU
Forum, similar to forums that exist in certain EU member states. The EU-
wide forum would bring together law enforcement agencies, service providers,
network operators, consumer groups, and data protection authorities. Their
aim would be to enhance cooperation by raising public awareness of the risks
posed by criminals on the Internet, promoting best practices

for information technology security, developing effective counter- crime
tools and procedures, and encouraging further development of early warning
and crisis management mechanisms. In addition, the European Commission
promotes security and trust through a number of programs. 16

 OECD Security Guidelines. The OECD has convened an Experts group to review
the 1992 OECD Guidelines for the Security of Information Systems (the
Security Guidelines). The Experts group is charged with the mission of
reviewing the Security Guidelines and reporting their recommendations to the
OECD Working Party on Information Security and Privacy (WPISP). Delegates to
the Experts group include government representatives from OECD member
countries and representatives of industry and consumer interests. The U. S.
delegation

is made up of representatives from the FTC and the Departments of State,
Commerce, Justice, and the Treasury. The original Security Guidelines,
adopted in 1992, were issued prior to the explosive growth of the Internet
and E- commerce. Their provisions have become particularly relevant since
the tragedies of September 11.

Q. How are security challenges being addressed by the private sector?

The private sector is trying to address security challenges through the use
of security- enhancing technologies. For example, the common use of Secure
Socket Layer (SSL) technology provides the benefit of 16 These programs
include, but are not limited to, the eEurope

initiative (http:// cybercrime- forum. jrc. it/ default/), the Internet
Action Plan (http:// www. europa. eu. int/ information_ society/ programmes/
iap/ index _en. htm), the Information Society Technologies IST Program (www.
cordis. lu/ ist ) and the next framework program for Research, Technological
Development and Demonstration (RTD).

encryption for information exchanged with certain Web sites. Software
solutions to address security challenges include applications that look for
patterns of questionable behavior or other indicators of irregularity.
Address verification services (AVS), conducted by payment processors, help
ensure that a payment

cardholder?s billing address matches the shipping address. Payment card
companies have also tried to address security concerns. Visa has recently
rolled out a new service to its U. S. customers that allows consumers to add
personal passwords to existing Visa cards (? Verified by Visa?). Recently,
some issuers have also

introduced ?disposable? card numbers that can be used only once. In
addition, others use smart cards that embed card data in a microchip.

Web sites for more information on security issues related to IEC

Council of Europe: press. coe. int/ cp/ 2001/ 893a( 2001). htm

Council of Europe: www. coe. int/ T/ E/ Communication_ and_ Research/ Press/
Themes_ Files/ Cybercrime

U. S. Department of Justice: www. cybercrime. gov/ Federal Trade Commission:
www. ftc. gov/ bcp/ menuinternet. htm

U. S. Department of Commerce: www. ciao. gov/ National Institutes of
Standards and Technology: http:// csrc. nist. gov/

Q. How Does International Electronic Commerce Affect International Payment
Methods for Consumers?

International electronic commerce gives consumers the ability to search for
goods and services around the world. In some cases, however, consumers may
have difficulty finding a reasonable way to pay for the product. American
consumers are generally able to purchase goods from foreign sites using
credit cards but may be deterred by security and fraud concerns (see the
section on security). However, foreign consumers shopping for goods and
services from U. S. sites are less likely to use credit cards and therefore
may face expensive or time- consuming payment options that could deter
purchases. In the following pages, we answer questions related to how the
IEC affects

international payment methods for consumers:  What are the limitations of
existing payment mechanisms?  To what extent are new payment mechanisms for
IEC consumer transactions being developed?

Q. What are the limitations of existing payment mechanisms?

As table 3 shows, traditional payment mechanisms can have significant
limitations for low- value, international electronic commerce transactions.
For example, a German consumer in Berlin can search for goods on a

Web site from a small U. S. company based in Minnesota. But if the consumer
finds a product he or she likes, how can he or she pay for it? Ideally, the
German consumer would be able to send a payment to the U. S. company
electronically.

Table 3: Limitations of Existing Payment Mechanisms Payment mechanism
Limitations

Cash A U. S. retailer probably will not accept an envelope full of euros,
and it would be costly and timeconsuming for a German consumer to exchange
euros for dollars and then send the dollars via the mail.

Check A U. S. company may not accept a check drawn on a foreign bank because
of concerns about fraud and the possible extra expense of depositing a euro-
denominated check in its local bank.

Credit card A credit card could work, if a German consumer has one and a U.
S. company accepts it. However, consumers in many other countries do not use

credit cards as often as American consumers do. In addition, some U. S. on
-line retailers will not accept foreign credit cards because of concerns
about fraud.

Wire transfer Most banks offer international wire transfers. However, the
fees that banks charge for this service (typically $20-$ 40 per transaction)
could exceed the cost of the item being purchased. a

a A September 2001 EU study of 1,480 credit transfers of $93 found that the
average feewithin the European Union was $22.35. Source: GAO analysis.

Q. To what extent are new payment mechanisms for IEC consumer transactions
being developed?

The global reach of the Internet, combined with the limitations of existing
payment mechanisms, creates market pressure for alternative ways to pay for
purchases that can quickly, cheaply, and safely transfer small amounts of
money across borders. However, the development of new, international,
Internet- based payment systems is still in its early stages. For example,
in November 2001, the Bank for International Settlements reported that so-
called electronic money

was in use or being planned in 82 countries. 17 Most electronic money
systems allow the user to add money to a smart card that can be used to
purchase items from certain vendors. Some even allow users to ?download?
money to their cards or account via the Internet (see figure 8 below).
However, most forms of electronic

money cannot be used across borders. The few that do allow international
purchases are generally linked to a preexisting credit card account. An
official from the U. S. Federal Reserve Bank told us that E- money
alternatives that are not linked to existing payment mechanisms face
significant barriers to entry because of uncertainties about cost, potential
market, and profitability. 18

17 The Bank for International Settlements defines electronic money as ?a
stored- value or prepaid product that allows consumers to make small- value
transactions using a chip or smart card or over computer networks such as
the Internet.? Internationally, the bank has been researching the potential
policy implications of electronic money since

1996. The bank issues an annual report on the current status of electronic
money development in countries around the world.

18 Within the U. S. government, the Federal Reserve takes the lead on
tracking issues associated with the development of alternative payment
systems. According to one Federal Reserve official, the issue is still too
small to be of much concern. However, the Fed tracks the issue quite
closely, because it could someday directly affect the Fed?s primary mission
of conducting monetary policy and providing oversight of the country?s
banking system.

Figure 8: Example of an Electronic Money Transaction

Source: GAO analysis.

Because development of new international payment mechanisms is still in the
very early stages of growth, discussion of the policy implications is
largely based on speculation about what could happen in the future. Also,
creating new forms of payment to ease

international transfers of funds raises potential concerns about money
laundering and the financing of international criminal activity. In fact,
the ability of private companies to ?issue? money or provide payment
services could someday pose challenges to banking supervision and the
applicability of banking laws. 19

Web sites for more information on payment methods

Federal Reserve Board: www. federalreserve. gov U. S. Treasury: www. fms.
treas. gov/ payments. html NACHA, the Electronic Payments Association: www.
nacha. org

Bank for International Settlements: http:// www. bis. org/ cpss/ index. htm

European Union: http:// www. europa. eu. int/ comm/ internal_ market/ en/
ind ex_ ob. htm

19 In one domestic example, when Florida State University initially
developed an E- money system to allow students to pay for books, fees, and
other items from local vendors state banking regulators found the university
was improperly engaging in banking without a license.

Section 4: Adapting Commercial and Legal Frameworks The continued growth in
international electronic commerce is creating new complications for the
legal system governing international commercial transactions. As businesses,
consumers, and governments develop new and innovative ways to interact,
existing commercial frameworks are under increasing pressure to adapt. For
example, international commercial transactions have long created legal
complexities in the areas of contracts, intellectual property rights, and
taxation. The development of entirely new ways of conducting business,
coupled with the jurisdictional uncertainties arising from international
electronic transactions, makes dealing with long- standing legal
complexities in international

commerce even more complex. In this section, we discuss some of the efforts
under way to adapt existing regimes in three areas: (1) commercial law, (2)
intellectual property rights, and (3) taxation.

Q. What Are the Implications of International Electronic Commerce on
Commercial Laws?

The ability to conduct transactions on line as easily as those traditionally
conducted off line is integral to fully exploiting the potential of
international electronic commerce. Commercial laws differ considerably from
country to country, and as discussed previously in the section on consumer
protection, there is uncertainty with respect to which country?s laws will
apply and where disputes will be adjudicated. For example, businesses and
consumers cannot be certain that electronic signatures and contracts will be
considered legally binding. In the following pages, we address

specific areas closely related to international electronic commerce
transactions:  Is there a global E- signature policy?  What are some of
the U. S. and EU efforts to facilitate electronic transactions?

 What international initiatives promote electronic contracting? Q. Is there
a global E- signature policy?

Harmonizing the use of electronic signatures is important to the growth of
international electronic commerce, but there are difficulties in achieving
international harmonization. For example, E- signature policies vary by
degree of technological neutrality (the degree to which the policy requires
or assumes a specific technology) and regulation. Developing and other
countries may follow very different models, thereby creating multiple E-
signature policies. This situation could lead to disputes over contract
authenticity in the future.

Q. What efforts have the United States and the European Union made to
facilitate electronic transactions?

 Electronic signatures. On June 30, 2000, the Congress passed the
Electronic Signatures in Global and National Commerce Act (ESIGN Act). 1 The
ESIGN Act is intended to promote electronic commerce by providing a
consistent national framework for electronic signatures and transactions. It
is also intended to eliminate legal

barriers to the use of electronic technology to form and sign contracts,
collect and store documents, and send and receive notices and disclosures.
Specifically, section 101( a) of the act places electronic records and
signatures on a legal par with their paper and ink counterparts. In the
European Union, most member states have already recognized the equivalence
between electronic and handwritten

1 Public Law No. 106- 229, 114 Stat. 464 (2001).

signatures and have recognized the admissibility of electronic signatures as
evidence in court proceedings. The European Union has also adopted a 1999
Electronic Signatures Directive that lays out the framework for the use of
electronic signatures for reliable and legally valid communication by
electronic means. 2 Under this directive, electronic

signatures accompanied by a valid certificate will now be considered
equivalent to handwritten signatures throughout the European Union. 
Electronic contracts. In the United States, the legal rules governing
contracts and commercial transactions have traditionally been established by
the state governments, working through an organization of legal experts
called the National

Conference of Commissioners on Uniform State Laws (NCCUSL). In July 1999,
NCCUSL approved the Uniform Electronic Transactions Act (UETA) and sent it
to state governments for adoption. This measure builds on the international
consensus established by the UNCITRAL Model Law on Electronic Commerce and
contains specific provisions that the states can use to remove paperbased
barriers to electronic transactions. ESIGN and UETA are somewhat
complementary; ESIGN may apply in those states that have not adopted UETA.
It is likely, as electronic commerce and particularly international
electronic commerce grow, that more changes will be needed in existing legal
and regulatory frameworks to make these transactions as

convenient and reliable as traditional ones. The European Union has taken
several measures to facilitate the conclusion of contracts by electronic
means, such as the 2000 Electronic Commerce Directive. It provides, for
example, that any kind of contract may, in principle, be validly concluded 2
The EU ?Directive on a Community Framework for Electronic Signatures,? 1999/
93/ EC, dated December 1999.

electronically. EU member states are, however, permitted to exclude certain
categories of contracts from this general rule (for example, contracts
regarding real estate and contracts involving public notaries, public
authorities, or the courts, among others). Q. What international initiatives
promote electronic contracting?

Internationally, UNCITRAL has completed work on a model law that supports
using international electronic contracts for conducting business. This model
law  establishes rules and norms that validate and

recognize contracts formed through electronic means,  sets rules for
forming contracts and governing electronic contract performance,  defines
the characteristics of valid electronic writing

and of an original document,  provides for the acceptability of electronic
signatures for legal and commercial purposes, and  supports the admission
of computer evidence in

courts and arbitration proceedings. At its 33rd session, UNCITRAL in 2000
held a preliminary exchange of views regarding future work in the field of
electronic commerce. Three topics were suggested:

 Electronic contracting. Participants believed that additional work is
needed to develop uniform rules to govern dealings in services or ?virtual
goods?: that is, items (such as software) that might be purchased and
delivered in cyberspace.  Dispute settlement. Participants believed that in
order to improve IEC dispute settlement options, current laws might have to
be amended or

interpreted to authorize the use of electronic documentation and, in
particular, to do away with existing requirements regarding the written form
of arbitration agreements. In addition, new rules should be designed to
facilitate the increased use of on- line dispute settlement mechanisms. For
example, one such rule might deal with making dispute settlement techniques
such as arbitration and conciliation available to both commercial parties
and consumers.  Dematerialization of documents of title, in particular in
the transport industry. Participants believed that more has to be done by
way of establishing a uniform statutory framework to replace the
traditional, paper- based bills of lading with electronic messages. It was
widely felt that such work should not be restricted to shipping but should
also include other modes of transportation.

More recently, according to a State Department official, UNCITRAL has
prepared a draft convention on electronic contracting. As conceived, the
proposed treaty will address the rules on formation of contracts through
computer communications. It would apply to transactions in tangible goods
and would exclude

consumer contracts, licensing of software, and sales of ?virtual goods?
(where the products are data rather than tangible goods).

Web sites for more information on efforts to facilitate the use of
electronic signatures and contracting

UNCITRAL (Working Group IV on E- Commerce): www. uncitral. org/ en- index.
htm World Trade Organization: www. wto. org

Organization for Economic Cooperation and Development: www. oecd. org

European Union: www. europa. eu. int Hague Conference on Private
International Law: www. hcch. net/ e/

UNIDROIT: www. unidoit. org

Q. What Are the Implications of International Electronic Commerce on
Intellectual Property Rights?

Commerce on the Internet will often involve the sale and licensing of
intellectual property such as music, movies, and games. To promote this
commerce, sellers must have confidence that their intellectual property will
not be stolen, and buyers must have confidence that they are

obtaining authentic products. International agreements that establish clear
and effective copyright, patent, and trademark protection are therefore
necessary to prevent piracy and fraud. While technology, such as encryption,
can help combat piracy, an adequate and effective legal framework is also
necessary to deter fraud and the theft

of intellectual property and to provide effective legal recourse when these
crimes occur. In the following pages, we answer several questions related to
how IEC affects intellectual property rights:  How are intellectual
property rights protected

internationally?  What are the principles underlying these treaties?  What
are some of the European efforts under way to improve intellectual property
protection for IEC?

Q. How are intellectual property rights protected internationally?

The World Intellectual Property Organization (WIPO) is an important forum
for addressing the development of intellectual property protection. 3 The
organization currently administers 11 treaties that set out internationally
agreed rights and common standards for intellectual property protection. The
states that sign these treaties agree to apply those rights and standards
within their own territories. While the cornerstones of WIPO's treaty system
remain the Paris and Berne Conventions, subsequent treaties have widened and
deepened the protection they offer and have encompassed technological change
and new areas of interest and concern. Two recent examples are

the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty.
These treaties contain basic rules updating the international protection of
copyright and related rights to the Internet age. U. S. copyright law has
been modified to conform to the WIPO treaties. 4 While there is no such
thing as an international copyright, there is a set of international
treaties that establishes minimum standards for protecting the

copyrighted works of participating nations. The situation is complicated,
because worldwide there are different legal traditions applicable to the
protection of what the United States regards as copyrighted works. 3 WIPO
administers 23 treaties (2 of those jointly with other international
organizations) and carries out a program of work, through its member states
and secretariat, that seeks to: harmonize national intellectual property
legislation and procedures; provide services for international applications
for industrial property rights; exchange intellectual property information;
provide legal and technical assistance to developing and other countries;
facilitate the resolution of private intellectual property disputes; and
marshal information technology as a tool for storing, accessing, and using
valuable intellectual property information.

4 The United States ratified the World Intellectual Property Organization
Copyright Treaty and WIPO Performances and Phonograms Treaty following the
Senate?s advice and consent, after the enactment of the 1998 Digital
Millenium Copyright Act.

For example, under U. S. copyright law, sound- recording producers and
performers are regarded as joint authors of sound recordings. Under a
different legal system, such producers? and performers? rights would be
protected differently and may be protected at a lower level as entirely
separate and distinct from the rights

granted under the U. S. system. These differences in the rights granted
under various intellectual property systems are sometimes areas of conflict.

Q. What are the principles underlying these treaties?

The principle of national treatment is the cornerstone of many international
intellectual property treaties as well as international trade treaties such
as the General Agreement on Tariffs and Trade and the World Trade
Organization (WTO). The principle of national treatment means that under a
nation?s laws, a foreigner enjoys the same rights and benefits that a
citizen of that nation receives (subject to the specific terms of the
relevant international conventions). In copyright terms, it means, for
example, that a German work for which copyright enforcement is sought in the
United States would be treated under U. S. law exactly as if it were a

U. S. work. Q. What are some of the European efforts under way to improve
intellectual property protection for IEC?

The European Union has held a number of deliberations in various forums on
the treatment of intellectual property over the Internet. Among the recent
actions was the adoption in 2001 of a Directive on Copyright.

The directive is intended to ensure a uniformly high level of copyright
protection throughout the European Union for creators of copyright-
protected works and related entities (artists, music editors, broadcasting

companies, and so on) whose works are transmitted over the Internet. The
European Communities are a signatory to the WIPO Performances and Phonograms
Treaty. In addition, the European regulatory framework provides directives
on

 the legal protection of computer programs,  the legal protection of
databases,  the rights for rental and lending,  the rights related to
broadcasting by cable and satellite, and

 the term (length) of protection.

Web sites for more information on efforts to protect intellectual property

World Intellectual Property Organization: www. wipo. org World Trade
Organization: www. wto. org/ english/ tratop_ e/ ecom_ e/ ecom_ e. htm

U. S. Copyright Office: www. loc. gov/ copyright/ U. S. Patent and Trademark
Office: http:// www. uspto. gov/

Q. What Are the Tax Implications of International Electronic Commerce?

The taxation of international transactions involving U. S. companies and
consumers is currently based on (1) the statutory tax laws of the countries
in which each party to the transaction is a citizen and (2) a series of
bilateral tax treaties between the United States and its major trading
partners. The advent of international electronic commerce creates additional
complexities in the interpretation of these statutes and treaties, as well
as raises entirely new issues. The extent to which

international electronic commerce complicates taxation efforts depends on
the product and the transaction. According to a U. S. Treasury official,
existing tax regimes can in general be applied to international electronic
commerce without significant modifications being required, and without
raising significant new tax policy or administrative issues. For example,
with respect to physical products ordered on line and then shipped across
borders, IEC has not significantly complicated the implementation of
statutory provisions or international tax agreements. The only difference is

in how a product is ordered, not in how it is shipped or taxed. However, for
digital products such as books and magazines, authorities differ on whether
these should be considered goods or services. This distinction may have an
important effect on the tax levied. In the following

pages, we answer several questions related to how the taxation of
international electronic commerce is being addressed:

 How does IEC complicate international taxation?  What is the U. S.
position on IEC taxation issues?  How does the U. S. position differ from
the European Union?s position on taxation issues for IEC?

 What is the position of business groups?  Where are international
differences in IEC taxation

policy addressed?

Q. How does IEC complicate international taxation?

IEC creates new kinds of goods and services, including those that can be
?shipped? digitally. Adapting existing tax regimes to address these new
kinds of products has proven to be difficult and at times contentious.

 The borderless nature of electronic commerce can frustrate efforts to
define where income is earned, a product is purchased, or value is added. 5
There are many new ways to conduct business or trade that were not
envisioned several years ago, when many U. S. bilateral tax treaties were
negotiated and tax laws promulgated. As a result, it may be difficult to
determine under these rules at what point profits are being made and what
country is allowed to tax them.  The ability to access books, magazines,
music, and

video on line has led to disagreements about what tax rules to apply if a
consumer in one country downloads material from a Web site based in another
country. If taxation is based on where the consumer is located, businesses
face the technological challenge of determining where their users are
located and the administrative challenge of complying with tax regulations
from several different countries. Currently, a state or local government in
the United States cannot require a foreign company to collect taxes from U.
S. citizens downloading material if the company does not have a physical
presence in that government?s jurisdiction. 6

According to Treasury and EU officials, the decisions on these issues are
not likely to have much impact on tax revenue in the near term although
countries have concerns about setting precedents that will affect future
agreements and disadvantaging their corporations? ability to compete
globally. Taxation policies adopted today could have important implications
for future 5 Taxes in the United States are generally levied based on the
income earned or retail price of the product in question. In addition to
income taxes, EU member countries also collect taxes based on the value

added during each stage of the production and distribution process. 6 U. S.
local and state governments may, however, collect taxes on that material
directly from their own residents.

revenue streams and trade flows. How ongoing differences over the taxation
of IEC are resolved in the next couple of years will set the foundation for
future taxation of what is widely expected to be a much more

significant revenue stream.

Q. What is the U. S. position on IEC taxation issues?

The general U. S. policy on the federal taxation of international electronic
commerce has remained consistent since 1998, when the U. S. supported the
following principles articulated by the Organization for Economic
Cooperation and Development: 7  use existing tax treaties to the extent
possible;  do not discriminate between electronic and physical products:
that is, tax the digital version of a product in the same way as the
physical version;

 minimize compliance costs;  enact clear and simple tax rules;  provide
for effective and fair taxation;  set up flexible systems for taxation to
ensure that they keep pace with technological changes.

Q. How does the U. S. position differ from the EU?s position on taxation
issues for IEC?

The United States and the European Union agree on the six principles of
international electronic commerce taxation outlined above. However, they
disagree on how these principles should be applied in a number of cases. For
example, in early 2000, the European Union proposed that companies that
transmit digital products to consumers located in the European Union should
be 7 The OECD is an international organization representing 30 countries
that researches a variety of economic, social, and governance issues to

help member states better address the challenges of a global economy.

required to pay an EU value- added tax on the product. 8 In practice, this
would require U. S. companies to register with EU tax authorities and send
value- added tax proceeds to the European Union for purchases made by
consumers resident within the European Union (see figure 9).

8 In February 2002, the finance and economics ministers from all 15 member
states of the European Union agreed on the broad outlines of this approach.
The proposal will go into effect in July 2003.

Figure 9: Proposed EU Approach for Collecting Value- added Tax on
Transactions Involving EU Citizens

Source: GAO analysis.

The United States views this proposed tax regime as placing an unfair
compliance burden on U. S. firms, noting that companies cannot know for
certain where a consumer is resident. The United States also contends

that the proposed regime will discriminate against U. S. companies by
requiring them to collect EU value- added tax charged at a higher rate than
will be charged on sales

of identical products to the same consumers made by EU companies. The
European Union?s position is that the proposed tax was based on the desire
to harmonize rules within the European Union and to ensure fair treatment
for EU firms. Under the current system, EU firms that provide digital
products to EU consumers

must pay the value- added tax, whereas U. S. firms do not (see figure 10).
The European Union contends that this gives U. S. companies an unfair
advantage.

Figure 10: Current Approach for Collecting Value- added Tax on EU Citizens

Source: GAO.

Q. What is the position of business groups?

Business groups want clear, consistent rules that do not hinder
international commerce. 9 For example, the Global Business Dialogue?s
working group on taxation policy supports principles of taxation that are
similar to those articulated by the OECD and the U. S. government: 9 We
spoke with the European American Business Council, a business association
representing a large number of companies in North America and Europe, as
well as several individual U. S. companies involved with international
electronic commerce.

neutrality, simplicity, fairness, and enforceability. 10 The Global Business
Dialogue has worked with the U. S. government and the European Union to
ensure that electronic commerce continues to grow, and to avoid

competitive distortions and excessive compliance burdens.

Q. Where are international differences in IEC taxation policy addressed?

The Organization for Economic Cooperation and Development has been the
primary forum for discussing and resolving these and other tax- related
issues. In 1998, OECD member countries agreed to general principles on
taxation and created several working

groups to address technical issues. Since then, representatives from OECD
member countries have surveyed member states on various aspects of tax
policy and discussed potential approaches to the taxation of IEC in an
effort to build international consensus. Agreements reached at the OECD are
not binding on its

member states, although, according to U. S. Treasury officials, they do
carry weight in bilateral discussions.

Web sites for more information on taxation:

Organization for Economic Cooperation and Development: http:// www. oecd.
org Department of the Treasury, Office of Tax Policy:

www. treas. gov/ taxpolicy/ index. html 10 The Global Business Dialogue is a
business association representing companies from North America, Europe, and
Asia that works with national governments and international organizations to
further the development of a global policy framework for electronic
commerce.

European Union: www. europa. eu. int/ comm/ taxation_ customs/ taxation/ ta
xation. htm

Global Business Dialogue: www. gbde. org/ taxation/

Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

International trade agreements, such as those produced multilaterally
through the World Trade Organization, and negotiations, such as those
ongoing bilaterally and regionally with countries in the Western Hemisphere
and Asia, are deeply involved in addressing issues concerning IEC. These
agreements and negotiations discuss electronic commerce as it relates to
trade and attempt to expand the use of IEC through minimizing barriers to
bolstering its efficiency. The United States,

as a key developer and user of IEC, participates in these discussions in
order to foster an open trading environment.

Q. How Is International Electronic Commerce Affected by International Trade
Agreements?

International electronic commerce is affected by international trade
agreements because barriers to goods, services, and investment affect the
development of the structures and networks that facilitate international
electronic commerce transactions. Faced with expanded use of the Internet
and eager to foster its potential economic benefits, U. S. trade negotiators
have begun to consider how existing trade agreements cover electronic
commerce activities and whether new commitments are needed. These topics
include  tariffs on information technology products,  customs duties on
electronic transmissions,  existing trade agreements? coverage of
electronic commerce,  intellectual property protections for original works

on the World Wide Web,  improvements to customs facilitation,  removal of
barriers to Internet service providers. International electronic commerce
encompasses a wide variety of issues, because it can be used to facilitate
different steps in the production, distribution, and

payment of products across national borders using a variety of networks
(depending on the product). A bottleneck at any point in this chain of
operations- whether it is the imposition of high telecommunications costs,
restrictions on express shipments at airports, or placement of onerous
customs requirements- may reduce the benefits to consumers and businesses of
connecting to a global market. As a leading user and developer of electronic
commerce, the United States has a commercial interest in expanding its use
and maintaining an open trading environment for digital products and
services. The explicit trade policy of the United States is to expand market
opportunities for U. S. goods, services, and intellectual property by
keeping

electronic commerce free from trade barriers. 1 In the following pages, we
answer questions related to how international trade agreements and
negotiations address barriers to international electronic commerce:  What
has the World Trade Organization done to address IEC issues?  How have
bilateral and regional trade negotiations

addressed IEC?

Q. What has the World Trade Organization done to address IEC issues?

The WTO, a primary forum in which the United States has pursued its
electronic commerce agenda, has undertaken several initiatives that are
important to the development of electronic commerce. Figure 11 shows a time
line of key WTO agreements and decisions related

to electronic commerce. 1 See the president?s 2001 International Trade
Legislative Agenda at http:// www. ustr. gov.

Figure 11: Time Line of WTO Agreements and Decisions Related to Electronic
Commerce

Note: IT = information technology. Source: World Trade Organization.

As of 2000, 55 WTO members were participants in the Information Technology
Agreement, which covers 95 percent of trade in the $600 billion- plus global
market for information technology products. Also, 69 WTO

members made market opening commitments in 1997 under the Basic
Telecommunications Agreement, which liberalizes the telecommunications
services market- part of the infrastructure of the Internet and electronic
commerce. WTO members committed under the 1998 moratorium to continue the
current practice of not

imposing customs duties on electronic commerce transmissions. This
moratorium was extended again at the WTO Ministerial meeting in Doha, Qatar,
on November 14, 2001, until the next WTO Ministerial Meeting. In addition to
these commitments, several areas of importance to electronic commerce are
currently under discussion at the WTO. In 1998, WTO members began a work
program involving each of the major bodies of the WTO (the Council for Trade
in Goods, the Council for Trade in Services, the Council for Trade- related
Aspects of Intellectual Property Rights, and the Committee on Trade and
Development). Through this work program, WTO members have discussed the
classification of

digital products (such as electronic transmissions of books, music, and
software), the application of the existing WTO agreements to electronic
commerce, and other issues related to trade and electronic commerce.

In particular, the classification of digital products has been an important
area of disagreement among WTO members. Some members, such as the European
Union

and Singapore, argue that these digital products should be classified as
services, because their electronic qualities give them unique features more
similar to services. For example, digital newspapers, unlike their paper
versions, can be electronically searched, copied,

and manipulated. However, the United States and other members are concerned
that classifying all digital products as services may allow countries to
place higher trade barriers on digital products than on their physical
counterparts. 2 The United States believes that it is premature to reach a
definitive conclusion on the

classification of electronic commerce, given its evolving nature and the
uncertainty of how such a decision could affect market access and other
trade rights. 3 In addition to the work program, WTO members

recently initiated at the Doha Ministerial, a new round of trade
negotiations scheduled to be completed in 2005. The results of this round,
particularly in areas such as services and customs facilitation, could have
important ramifications for the development of electronic commerce, even if
new agreements do not address 2 Services are negotiated under a separate
agreement from goods, and

members are able to negotiate commitments in a way that may limit the
expansion of electronic commerce. For example, members may limit market
access for suppliers of telecommunications services, which could thereby
prevent the expansion of important services necessary for electronic
commerce. 3 As a general principle, the United States has proposed that
digital products should, at a minimum, receive the most liberal trade
treatment possible under existing trade rules.

electronic commerce directly. Greater trade liberalization and facilitation
could lead to removing some of the bottlenecks that international electronic
commerce currently faces in various markets. Q. How have bilateral and
regional trade negotiations addressed IEC?

The United States has pursued discussions on electronic commerce with other
trade partners through negotiations of free trade agreements. 4 One
potential benefit of these narrower negotiating arenas is that the United
States and the individual partners may be able to craft state- of- the- art
agreements that can then be used to promote U. S. objectives for electronic
commerce in wider forums, such as the WTO. The 2000 U. S.- Jordan Free Trade
Agreement was the first free trade agreement to include explicit language
covering electronic commerce. 5 In the agreement, both countries stated that
they would ?seek to refrain from? imposing customs

duties on electronic transmissions, creating unnecessary barriers on
electronic transmissions, and impeding the electronic supply of services
that were being liberalized under the agreement. In future free trade
agreements, such as those being negotiated with Singapore and Chile, U. S.
negotiators are seeking to develop these types of disciplines into more
concrete obligations that will maintain the current liberal trade
environment for electronic commerce.

4 Free trade agreements generally eliminate tariff duties and other barriers
on substantially all trade between the member countries and may include
other provisions covering subjects such as antidumping of goods, investment,
and government procurement.

5 For more information on U. S. trade agreements, see the Web site of the U.
S. Trade Representative at www. ustr. gov. For the text of the U. S.- Jordan
Free Trade Agreement, see www. ustr. gov/ regions/ eumed/

middleeast/ US- JordanFTA. shtml.

At the regional level, the negotiations on the Free Trade Area of the
Americas with 33 other Western Hemisphere countries include the presence of
a ?non- negotiating? committee on electronic commerce. 6 This committee
comprises both government and private- sector representatives and is tasked
with making recommendations to trade negotiators on how to increase and
broaden the benefits to be derived from the electronic marketplace. It also
provides a forum for

countries to share their experiences and initiate approaches to encouraging
the development of electronic commerce activities. The committee has issued
two public reports that made recommendations on topics such as increasing
the use of governments, smaller economies, and small businesses that engage
in

electronic commerce; clarifying the rules of the electronic commerce market;
developing on- line payment services; and addressing security issues.
Besides the Free Trade Area of the Americas, the United States has also been
involved in electronic commerce discussions through the Asia- Pacific
Economic Cooperation forum and the Organization for Economic Cooperation and
Development, focusing on trade as well

as consumer protection, privacy, and other areas.

Web sites for more information on international trade

U. S. Trade Representative: www. ustr. gov/ sectors/ electronic commerce.
shtml

Free Trade Area of the Americas: www. ftaaalca. org/ SPCOMM/ COMMEC_ E. ASP

6 Free Trade Area of the Americas negotiators established nine negotiating
committees to draft different components of the eventual trade agreement,
such as services, agriculture, and investment. In

addition, three non- negotiating committees, including electronic commerce,
were established to provide input to negotiators on broad, cross- cutting
issues.

World Trade Organization: www. wto. org Asia- Pacific Economic Cooperation
forum: www. ecommerce. gov/ apec

World Customs Organization: www. wcoomd. org Organization for Economic
Cooperation and Development: www. oecd. org/ ecommerce

Appendi Appendi xes x I

Objectives, Scope, and Methodology At the request of the Ranking Senate
Minority Member of the Joint Economic Committee, we undertook a review of
international electronic commerce. Specifically, our objectives were to
answer the following questions: (1) What is international electronic
commerce (IEC)? (2) What data on international electronic commerce (IEC)
does the U. S. government collect? (3) What is being done to remove
obstacles and facilitate consumer use of international electronic commerce?
(4) What are some of the efforts being made to adapt the legal framework for
international electronic commerce transactions? (5) How do international
trade agreements and negotiations address barriers to international
electronic commerce?

To define electronic commerce, we interviewed officials and reviewed
documents from the Bureau of the Census, the Bureau of Economic Analysis,
and the Departments of Commerce and the Treasury. In addition, we met with
representatives from electronic commerce and business consulting firms that
specialize in electronic commerce, including International Data Corporation;
Forrester

Research, Inc.; and eMarketer, Inc. These firms presented us with a general
overview of their methodologies and access to their estimates on electronic
commerce activity. However, we did not analyze the quality of the
methodologies, nor did we independently verify their estimates. The
methodology

use by Forrester to arrive at their estimates on international electronic
commerce transactions reported in section 1 of this report relies on a mix
of quantitative and qualitative analysis based on economic data and surveys.
To determine what data the U. S. government collects on international
electronic commerce, we interviewed officials from the Office of the U. S.
Trade Representative; the Board of Governors of the Federal Reserve; the
Departments of State, Commerce, and the Treasury; and the U. S. Federal
Trade Commission.

To examine efforts to remove obstacles and facilitate consumer use of
international electronic commerce, we interviewed officials from the Office
of the U. S. Trade Representative; the Board of Governors of the Federal
Reserve; the Departments of State, Commerce, Justice, and the Treasury; the
European Commission Delegation to the United States; the U. S. Federal Trade

Commission; and several representatives of privatesector firms and
organizations. In addition, we reviewed documents including papers and
articles, industry journals, and information available at various sites on

the World Wide Web from several U. S. government, international, and private
organizations, including the Departments of State, Commerce, Justice, and
the Treasury; the Office of the U. S. Trade Representative; the Board of
Governors of the Federal Reserve; the AsiaPacific Economic Cooperation
Forum; the Council of Europe; the European Commission; the Organization for
Economic Cooperation and Development( OECD); the Bank for International
Settlements; the International Marketing Supervision Network; the Global
Business Dialogue; and NACHA, the Electronic Payments Association.

To identify the efforts to adapt the legal framework for international
electronic commerce transactions, we interviewed officials from the Office
of the U. S. Trade

Representative; the Board of Governors of the Federal Reserve; the
Departments of State, Commerce, and the Treasury; the European Commission
Delegation to the United States; the U. S. Federal Trade Commission; and

several representatives of private- sector firms and organizations. In
addition, we reviewed papers and articles, industry journals, and
information available at various sites on the World Wide Web from the
Departments of Commerce and the Treasury, the Advisory Commission on
Electronic Commerce, the OECD, the European Commission, and the Global
Business Dialogue. Documents from these sources included former U. S. policy
and strategy documents for

approaching electronic commerce, research studies by the technology
practices of investment banks, law firms, and consulting firms, as well as
the research studies and publications firms specializing exclusively in
Internet or electronic commerce issues.

To determine the extent of efforts in international agreements and trade
negotiations, we interviewed officials from the Office of the U. S. Trade
Representative; the Departments of State, Commerce, and the Treasury; and
the European Commission Delegation to the United States. In addition, we

reviewed U. S. government, international organization, and private- firm
documents, reports, and articles; industry journals; and information
available at various

sites on the World Wide Web. International organizations included the World
Trade Organization (WTO), the Free Trade Area of the Americas, the
AsiaPacific Economic Cooperation Forum, the OECD, and the World Customs
Organization.

The information on foreign laws and regulations in this report is based on
secondary sources and interviews and does not necessarily reflect our
independent legal analysis.

We conducted our work in Washington, D. C., New York, and Boston between May
2001 and November 2001, in accordance with generally accepted government
auditing standards.

We requested comments on the technical accuracy of this report from
officials at the Departments of State, Commerce, and the Treasury; the
Office of the U. S. Trade Representative; the U. S. Federal Trade
Commission; and the European Commission Delegation to the United States.
Their comments have been incorporated where appropriate.

Definitions and Measurement of

Appendi x II

Electronic Commerce The definition and measure of international electronic
commerce (IEC) is dependent on how electronic commerce (E- commerce) is
defined and measured more broadly. This appendix presents information on
available definitions and measures of electronic commerce. The first portion
shows that there is no single definition of electronic commerce and that
available definitions differ in scope. The second section shows the
variation in the available estimates of the size of electronic commerce from
official government sources. The third section reports on private- sector
estimates of electronic commerce. As a consequence of the variation in
definition and measurement of electronic commerce, IEC, in turn, lacks a
single definition or measure.

Definitions of Despite the prevalence of the term ?electronic

Electronic commerce,? it has no widely accepted definition. Some Commerce

academics use very broad definitions, because their focus is primarily on
electronic commerce as a business model and on its impact on industrial
organizations. Policymakers at times employ equally broad definitions that
emphasize the impact of electronic commerce on all aspects of economic
activity. At other times, narrower definitions are used to address specific
policy areas,

such as taxation or intellectual property rights. Statisticians typically
use more precise definitions that focus on the transaction, where a product
or service is exchanged between two parties. Even for statistical purposes,
the definition used varies with the measurement objective and, in the case
of private

consulting firms, with particular client needs. Electronic commerce can be
separated into two broad categories: business- to- business (B- to- B) and
businessto- consumer (B- to- C). Other types of on- line interactions
involve governments and transactions between consumers (consumer- to-
consumer, or C- to- C).

While electronic commerce definitions can include all transactions,
including C- to- C transactions, measures of electronic commerce focus
primarily on B- to- B and B- toC electronic commerce. B- to- B and B- to- C
electronic commerce estimates are typically collected using narrow,
transaction- based definitions but differ with respect to the type of
activity that is considered to qualify as electronic commerce. Essentially,
these narrow electronic commerce definitions differ because of two key
elements: 1. Networks. Definitions for electronic commerce differ with
respect to what types of communications

networks are included. Many definitions include only transactions that occur
over the Internet (a worldwide system of public [open] computer networks,
through which users can access, send, and share information) as electronic
commerce. Although the Internet is in the public domain, recent adaptations
of the Internet technology, the Intranet and the Extranet, are private
(closed) networks. An Intranet computer network is internal to a

particular enterprise, while an Extranet is part of a company?s Intranet
that is extended to select users, including, for example, vendors outside
the firm. 1 Before the widespread adoption of the Internet,

electronic transactions between businesses were conducted via electronic
data interchange (EDI). 2 The main purposes of the Extranet and EDI are to
share confidential information with important 1 Intranet computer networks
are used to share confidential information and resources among an
enterprise?s employees without having the data available to everyone who has
Internet access. 2 EDI allows the direct communication of standardized
trading messages between computer systems. In the pre- Internet era, EDI
systems were used primarily by large businesses and were strictly
proprietary: that is, conducted over private networks. This interchange
required custom software and dedicated communication links and, at times,
strictly compatible equipment. With the advent of

the Internet, some EDI systems were transformed into open networks.

nonemployees such as suppliers, vendors, partners, and customers, including
basic orders and invoices. Given these different networks, electronic

commerce definitions vary according to whether they include Intranet,
Extranet, and EDI transactions or focus solely on the Internet. 3 2. Type of
transaction. Electronic commerce definitions also vary with respect to the
scope of the

transactions included. Some definitions broadly include all business
activity that involves any on line activity (including advertising and
research), while others include only transactions that involve on- line
processes at particular steps in conducting a transaction. Most definitions
agree that at a

minimum, an electronic commerce transaction must involve the on- line
commitment to buy or sell a good or service, emphasizing that the method of
payment or delivery of the good or service is immaterial. 4 Table 4
illustrates the variation in definitions of electronic commerce by selected
sources attributable to differences in their inclusion of different networks
and types of transactions. The variation in the definitions helps to explain
the wide range of estimates for

electronic commerce discussed in the following sections. 3 Some electronic
commerce definitions include transactions enabled by other electronic
communication media such as facsimile (fax) and automated teller machines.

4 The emphasis on commitment extends directly from the standard definition
for commerce itself. According to the American National Standards
Institute?s definition, commerce is ?the process by which an

order is placed or accepted, therefore representing a commitment for a
transfer of funds in exchange for goods or services.? Consequently, the
majority of the entities with electronic commerce- measurement programs
consider a transaction to be an electronic commerce transaction if the
commitment to buy a good or service is expressed on

line.

Table 4: Definition of Electronic Commerce Defining source Definition of
electronic commerce

Boston Consulting Internet- and EDI- based transactions Group eMarketer
Internet transactions in which the buyer completes the purchase order or
transactional contract via the Internet; includes only Web- based EDI

Forrester Research, Trade of goods and services in which the final order is
placed over the Internet; Inc. excludes EDI Gartner Group Sales of goods and
services for which the order- taking process is completed via the Internet;
includes Internet EDI, e- marketplaces, and Extranets, but excludes activity
over proprietary networks

International Data The process by which an order is placed or accepted via
the Internet, therefore Corporation representing a commitment to transfer
funds in exchange for goods and

services; excludes EDI transactions that do not use a Web- enabled gateway
Jupiter Media Metrix Any transaction where the terms or the majority of the
terms are agreed upon

on line, or where the majority of item features are configured on line
Keenan Vision Internet transactions that create a sale process that
ultimately performs an

electronic funds transfer between buyer and seller Organization for

Broad: The sale or purchase of goods and services conducted over
computermediated

Economic

networks; includes EDI; excludes Intranet transactions

Cooperation and Development

Narrow: the sale or purchase of goods and services conducted over the
Internet; includes Web- enabled EDI and any other Web- enabled application;
excludes Intranet transactions

U. S. Census Bureau The value of any monetary transaction completed over a
computer- mediated network that involves the transfer of ownership or rights
to use goods and services; includes Internet, Intranet, Extranet, and EDI
transactions a

Yankee Group Total value of goods and services exchanged electronically
between businesses a

a The Census definition includes propriety networks such as pure electronic
data interchange, which predates the Internet. However, most definition in
table 4 include EDI only if it is Web- enabled (for

example, if the business uses the Internet as the front end to the EDI
system. Sources: eMarketer, Forrester Research, Inc., IDC, U. S Bureau of
the Census.

Official Because electronic commerce is a relatively recent Government Data

development, the U. S. government?s statistical agencies on Electronic

are just beginning to collect information in this area. As Commerce a
result, U. S. official electronic commerce statistics exist only for
selected segments of the economy. The

U. S. Census Bureau first began in 2000 to collect the information necessary
to form estimates for electronic commerce retail sales, manufacturing
shipments, merchant wholesale trade, and electronic commerce revenues for
selected services. However, Census?s EStats

measurement program does not include the entire economy, only the sectors
and industries covered by its existing monthly and annual surveys with the
major emphasis on retail trade. 5 The Census estimates suggest that despite
rapid growth, electronic commerce accounts for only a small percentage of
total economic activity in the U. S. sectors surveyed. Section 2 of this
report showed that U. S. electronic commerce retail

sales between 1999 and 2001 made up only about 1 percent of total sales.

Electronic commerce accounts for an even smaller percentage of retail sales
in Europe than in the United States (see figure 12). This low level of
penetration reflects the fact that a limited number of consumers are using
the Internet for commercial purposes. OECD research shows that electronic
commerce (the percentage of individuals using and ordering goods over the
Internet) is unevenly developed in the OECD countries. Especially notable is
the difference between North America and northern Europe, on the one hand,
and the rest of the OECD countries, on the other. 6 The OECD reports that
the largest numbers of Internet 5 These include the Annual Survey of
Manufactures, the Annual Trade Survey, the Service Annual Survey, and the
Annual Retail Trade Survey. Census?s electronic commerce estimation program
does not cover agriculture, mining, construction, utilities, non- merchant
wholesale trade, or some parts of the service sector and therefore does not
measure the entire E- economy. 6 An important prerequisite for international
electronic commerce is that the population must have access to the Internet,
which in turn requires a personal computer. However, within the OECD, the
rates of home computer ownership and network connection differ dramatically
(see OECD, ?Measuring the New Economy: Trade and Investment Dimensions,?
Working Party of the Trade Committee, 2001).

transactions take place in the United States, and most frequently among U.
S. residents.

Figure 12: Electronic Commerce as a Percentage of Total Retail Sales, 2000:
An International Perspective

Source: OECD, "Business- to- Consumer Electronic Commerce,? 2001.

Although Census has primarily concentrated its electronic commerce
statistics collection (published quarterly) efforts on retail sales, it also
has annual estimates for 1999 for three other sectors- selected services,
manufacturing, and merchant wholesale trade.

(The 2000 figures for these three sectors are scheduled to be released in
March 2002.) Electronic commerce accounted for just 0. 6 percent ($ 25
billion) of the total selected services industry revenue in 1999. The
numbers for the manufacturing and merchant wholesale trade sectors suggest a
more significant role for electronic commerce, however. The Census data show
that electronic commerce accounted for 12 percent

($ 485 billion) of all manufacturing shipments and 5. 3 percent ($ 134
billion) of total merchant wholesale sales in 1999.

Census does not collect separate data on B- to- B and Bto- C electronic
commerce, so there are no official estimates. However, Census arrives at
1999 estimates

for both indirectly by assuming that all manufacturing shipments and
wholesale trade were entirely B- to- B and that all retail and service sales
were B- to- C. With this simplifying assumption, the numbers suggest that
about 90 percent of electronic commerce transactions occur

between businesses. 7 Private- sector Data In the absence of extensive
official statistics, the gap has on Electronic been filled by private
estimates and by forecasts from Commerce Internet organizations and
research, polling, and consulting firms. The resultant electronic commerce
estimates vary widely. Figure 13 shows that the statistics for U. S. B- to-
C electronic commerce in 2000 present a

high estimate of $200 billion and a low estimate of just $7 billion, a
difference greater than a factor of 10. eMarketer, a secondary research firm
that specializes in aggregating and analyzing information on various aspects
of the Internet, reported estimates for B- to- C electronic commerce that
ranged from $15. 9 billion to $61.1 billion for 2000 (see figure 14 for
seven estimates).

All these private- sector estimates of B- to- C electronic commerce are
dwarfed by the sales revenue of Wal- Mart Stores ($ 191. 3 billion in 2000).
8 The B- to- B electronic commerce estimates show greater variation than the
Bto- C estimates (see figure 14). Measurement problems such as double
counting are a serious concern in this area, to the extent that some deem
many of the estimates to be exaggerated.

7 See Thomas Mesenbourg, ?Measuring the Digital Economy,? http:// www.
census. gov/ estats. 8 eMarketer, Inc., eCommerce: B2C, 2001.

Figure 13: U. S. B- to- C Electronic Commerce Estimates, 1998- 2000 Sources:
Barbara Fraumeni, ?Electronic Commerce: Measurement and Measurement Issues,
? American Economic Review 91 (2001): 318- 22.

Figure 14: Seven Estimates of U. S. B- to- C and B- to- B Electronic
Commerce Revenue, 2000

Note: These numbers were reported in eMarketer?s March 2001 release (prior
to Census?s yearly estimate for retail E- sales). Some estimates may have
been revised since then. We are including just those data produced by the
research firms monitored by eMarketer, and for which we have definitions of
E- commerce.

a Census figures are for 1999. b IDC = International Data Corporation
Sources: eMarketer, Inc. (2001), U. S Bureau of the Census.

The wide variation in estimates produced by private firms is attributable to
several factors: 9

 Differences in client base. In serving the diverse needs of their
clientele, firms emphasize different indicators for the potential of
electronic commerce.  Differences 10 in methodologies and in varying sample
sizes (sometimes small).

 Differences in definition for electronic commerce,

as was discussed above.  Differences in coverage. For example, Keenan
Vision includes insurance and adult entertainment in its measure of B- to- C
electronic commerce- areas that are excluded in most other estimates. With
differences in definition, coverage, and methodology, it is difficult to
accurately compare and evaluate the conflicting estimates, even though they
purport to measure the same thing. Commerce officials

noted that they have not performed a systematic analysis of the various
private- sector estimates, but eMarketer holds many to be overly optimistic.
The client focus and the small sample sizes also imply that the data are not
always representative of the whole U. S. economy. 9 Differences in
definitions, methodologies that underpin the estimates, assumptions about
growth potential, and sample sizes guarantee not only a wide range of
estimates for electronic commerce

but also difficulty in comparing and evaluating those estimates. 10 GAO
economists were instructed on the methodologies used by Forrester Research,
IDC, and eMarketer by these firms, respectively. The differences between the
methodologies were significant, partly explaining the large discrepancies in
forecasts. However, there is debate over which of the many private- sector
estimates are more accurate, especially because for many estimates the
methodology, coverage, and survey questions underlying the estimates are not
transparent.

U. S. Government Collection of Appendi x II I International Trade Statistics
The Census Bureau and the Bureau of Economic Analysis (BEA) in the
Department of Commerce are the primary agencies responsible for compiling,
processing,

and publishing international trade statistics in the United States. Census
Census produces the statistics on the trade in goods, which are drawn from
import and export documents

that the U. S. Customs Service collects at various ports and points of entry
throughout the United States. In lieu of filing paper documents, exporters
and importers may file electronically through the Automated Export System
for exporters or the Automated Commercial System for

importers. Two- thirds of all U. S. exporters utilize the Automated Export
System filing procedure to declare their shipments, and 99 percent of all
import transactions are transmitted directly to Customs electronically,
resulting in more accurate trade estimates. The filing procedure is
mandatory only for exports shipped with a value greater than $2, 500 or for
those that require a license (for dual- use goods: that is, goods with
military and commercial applications, some textiles, dairy products, and
others). Likewise, the reporting threshold for importers? documents is $2,
000,

or $250 for restricted items (such as furs, leather, toys, and those under
quota). The Census Bureau estimates the value of ?low- value? international
goods and services transactions by using information on historical trade
patterns (the historical relationship between low- value shipments and total
shipments) rather than by counting

them individually. BEA BEA collects statistics for international trade in
several dozen types of services, using a variety of mandatory

surveys that vary in frequency, extent of coverage, level of detail, and
level of exemption from reporting requirements. BEA uses a periodic survey
methodology,

because there are no official locations or ?checkpoints,? such as ports- of-
entry, where service transactions can be recorded, and therefore there is no
official record of customs documentation. Thus, an important difference
between the data- collecting programs conducted by Census and BEA is that
BEA must actually locate

service providers in order to survey them to get the relevant data. To
accomplish this task, BEA mails surveys to potential respondents- those who
reported previously and those identified as potentially having engaged in
covered transactions, based on various government sources. Full coverage is
difficult, because it is hard to locate all possible providers of a service,
including new companies. Respondents who engage in

transactions that fall below the varying exemption levels are not subject to
mandatory reporting requirements on the sample surveys. Low- value
international service transactions are collected using BEA?s extensive 5-
year benchmark survey (essentially a census), which has a lower dollar
reporting threshold and more detail than the sample surveys. In this
benchmark survey, U. S. firms are still exempt from reporting data by
service but must provide information on the aggregate value of transactions.
For periods not covered by a benchmark survey, low- value transactions are
estimated indirectly by extrapolating forward the data reported on the
benchmark survey, based on growth in the data reported on sample surveys.

Problems with international trade statistics have been well documented by
the statistical agencies themselves, GAO, and others. 1 Numerous
improvements have been made in recent years to enhance the quality of the
international trade statistics, but some problems remain unresolved. One
major problem is the undercounting of exports, partially attributable to the
use of outdated information to estimate low- value shipments. The Census
Bureau estimates that the actual undercount ranges from 3 percent to 10
percent of the published

export value. The Census Bureau has not collected data on exports valued
below $1,000 in more than 10 years. Information on transactions valued at
between $1, 500 and $2, 500 has not been reported since 1989. 2 Although it
is widely held that the data on imports are of higher quality because
tariffs, quotas, and other enforcement

1 For example, see ?U. S. Merchandise Trade Statistics: A Quality Profile,?
on the Census Bureau?s Web site (www. census. gov); Ralph Kozlow,
?International Accounts Data Needs: Plans, Progress and Priorities,? (2000);
J. Steven Landefeld and Barbara Fraumeni, ?Measuring the New Economy,?
Survey of Current Business (March

2001); U. S. Trade Deficit Review Commission, ?The U. S. Trade Deficit:
Causes, Consequences, and Recommendations for Action,? www. ustdrc. gov;
November 2000; National Research Council, Behind the Numbers (Washington, D.
C.: National Academy Press, 1992); U. S. General Accounting Office, Economic
Statistics: Measurement Problems Can Affect the Budget and Economic
Policymaking,

GAO/ GGD- 95- 99 (Washington, D. C.: May 1995); and Peter Hooper and J.
Richardson, International Economic Transactions (Chicago: University of
Chicago Press, 1991).

2 U. S. Census Bureau, ?Understatement Export Merchandise Trade Data,?
(Washington, D. C.: 1998); www. census. gov/ foreigntrade/ aip/ expunder2.
html.

activities are involved, GAO and others have reported problems in this area
as well. 3 Additionally, our previous work has indicated that statistics
agency officials and users of trade statistics have stated that statistics
on service transactions lacked adequate detail and coverage. BEA has taken
numerous steps to improve the comprehensiveness and detail of its

data on trade in services in general, instituting new surveys and making
some existing surveys mandatory under strengthened legal authority.
Nevertheless, complete coverage of international services has not been
obtained, and a number of data improvement tasks

remain. Web sites for more information on trade statistics collection and
methodology

U. S. Bureau of the Census: www. census. gov Bureau of Economic Analysis:
www. bea. doc. gov 3 See, U. S. General Accounting Office, Measuring U. S.-
Canada Trade: Shifting Trade Winds May Threaten Recent Progress, GAO/ GGD-
94- 4 (Washington, D. C.: January 1994); U. S. General Accounting Office,
Customs Service: Trade Enforcement Activities Impaired by Measurement
Problems, GAO/ GGD- 92- 123 (Washington, D. C.: September 1992); U. S.
General Accounting Office, Federal Trade Statistics- Some Observations, GAO/
OCE- 89- 1BR (Washington, D. C.: April 1989); U. S. Census Bureau, ?U. S.
Merchandise Trade Statistics: A Quality Profile? (Washington, D. C.:
December 1998); www. census. gov/ foreign- trade/ aip/ qprofile121198. html;
National Research Council, Behind the Numbers.

Appendi x V I GAO Contact and Staff Acknowledgments GAO Contact Emil Friberg
(202) 512- 8990 Acknowledgments In addition to those named above, Claude
Adrien, Mark Dowling, Lawrance Evans Jr., Gifford R. Howland, David

Maurer, Rona Mendelsohn, Timothy Wedding, and Michael Zola made key
contributions to this report.

Related GAO Products General Telecommunications: Characteristics and Choices
of Internet Users (GAO- 01- 345, Feb. 16, 2001).

Telecommunications: Technological and Regulatory Factors Affecting Consumer
Choice of Internet Providers (GAO- 01- 93, Oct. 12, 2000).

Internet Census and Use Estimates (GGD- 97- 102R, May 12, 1997).

Banking Electronic Banking: Enhancing Federal Oversight of Internet Banking
Activities (GGD- 99- 91, July 6, 1999).

Electronic Banking: Experiences Reported by Banks in Implementing On- line
Banking (GGD- 98- 34, Jan. 15, 1998).

E- Government Electronic Commerce: Small Business Participation in Selected
On- line Procurement Programs (GAO- 02- 1, Oct. 29, 2001).

Electronic Government: Better Information Needed on Agencies' Implementation
of the Government Paperwork Elimination Act (GAO- 01- 1100, Sept. 28,

2001).

Electronic Government: Challenges Must Be Addressed with Effective
Leadership and Management (GAO- 01- 959T, July 11, 2001).

Electronic Government: Selected Agency Plans for Implementing the Government
Paperwork Elimination Act (GAO- 01- 861T, June 21, 2001).

Internal Revenue Service: 2001 Tax Filing Season, Systems Modernization, and
Security of Electronic Filing (GAO- 01- 595T, Apr. 3, 2001).

Information Management: Electronic Dissemination of Government Publications
(GAO- 01- 428, Mar. 30, 2001).

USDA Electronic Filing: Progress Made, but Central Leadership and
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Electronic Government: Government Paperwork Elimination Act Presents
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Defense Management: Electronic Commerce Implementation Strategy Can Be
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Internet: Federal Web- based Complaint Handling (AIMD- 00- 238R, July 7,
2000).

Electronic Government: Federal Initiatives Are Evolving Rapidly, but They
Face Significant Challenges (T- AIMD/ GGD- 00- 179, May 22, 2000).

Labor- Management Reporting and Disclosure: Status of Labor's Efforts to
Develop Electronic Reporting and a Publicly Accessible Database (HEHS- 99-
63R, Mar. 16,

1999).

Internet and Electronic Dial- up Bulletin Boards: Information Reported by
Federal Organizations (GGD97- 86, June 16,1997).

World Wide Web Sites: Reported by 42 Federal Organizations (Supplement to
Internet and Electronic Dial- up Bulletin Board System Activities:
Information

Reported by Federal Organizations) (GGD- 97- 86S, June 1, 1997).

Social Security Administration: Internet Access to Personal Earnings and
Benefits Information (TAIMD/ HEHS- 97- 123, May 6, 1997).

Electronic

Bank Regulators' Evaluation of Electronic Signature

Signatures

Systems (GAO- 01- 129R, Nov. 8, 2000).

Electronic Signature: Sanction of the Department of State's System (AIMD-
00- 227R, July 10, 2000). Infrastructure Telecommunications: Characteristics
and Competitiveness of the Internet Backbone Market

(GAO- 02- 16, Oct. 16, 2000). International Trade Trade with the European
Union: Recent Trends and

Electronic Commerce Issues (T- NSIAD- 00- 46, Oct. 13, 1999).

Internet Department of Commerce: Relationship with the

Governance

Internet Corporation for Assigned Names and Numbers (OGC- 00- 33R, July 7,
2000).

Law Enforcement

Internet Pharmacies: Adding Disclosure Requirements and Regulation

Would Aid State and Federal Oversight (GAO- 01- 69. Oct. 19, 2000).

Commodity Exchange Act: Issues Related to the Regulation of Electronic
Trading Systems (GGD- 00- 99, May 5, 2000).

Securities Fraud: The Internet Poses Challenges to Regulators and Investors
(T- GGD- 99- 34, Mar. 22, 1999).

Postal Service U. S. Postal Service: Update on Electronic Commerce
Activities and Privacy Protections (GAO- 02- 79, Dec. 21, 2001).

U. S. Postal Service: Postal Activities and Laws Related to Electronic
Commerce (GGD- 00- 188, Sept. 7, 2000).

Privacy Internet Privacy: Implementation of Federal Guidance for Agency Use
of Cookies (GAO- 01- 424, April 27, 2001).

Internet Privacy: Federal Agency Use of Cookies (GAO01- 147R, Oct. 20,
2000).

Internet Privacy: Comparison of Federal Agency Practices with FTC's Fair
Information Principles AIMD- 00- 296R, Sept. 11, 2000).

Internet Privacy: Agencies' Efforts to Implement OMB's Privacy Policy (GGD-
00- 191, Sept. 5, 2000).

Security Information Security: Weaknesses Place Commerce Data and Operations
at Serious Risk (GAO- 01- 751,

Aug. 13, 2001).

Information Security: IRS Electronic Filing Systems (GAO- 01- 306, Feb. 16,
2001).

IInformation Security: Software Change Controls at the Department of
Commerce (AIMD- 00- 187R, June 30, 2000).

Critical Infrastructure Protection: ?ILOVEYOU? Computer Virus Highlights
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and Coordination Capabilities (GAO/ T- AIMD- 00181, May 18, 2000).

Information Security: ?ILOVEYOU? Computer Virus Emphasizes Critical Need for
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Taxation Update on State and Local Revenue Loss From Internet Sales (GAO-
02- 83R, Nov. 6, 2001).

Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses
Are Uncertain (GGD/ OCE00- 165, June 30, 2000).

(320055) Lett er

GAO United States General Accounting Office

Page 1 GAO- 02- 404 International E- Commerce

Preface Page 2 GAO- 02- 404 International E- Commerce

Preface Page 3 GAO- 02- 404 International E- Commerce

Preface Page 4 GAO- 02- 404 International E- Commerce

Page 5 GAO- 02- 404 International E- Commerce

Contents

Page 6 GAO- 02- 404 International E- Commerce

Page 7 GAO- 02- 404 International E- Commerce

Tables Table 1: U. S. Laws Governing Privacy of Personal Information 33

Table 2: Summary of Basic Principles of Data Privacy and Protection Laws in
the OECD Guidelines 38 Table 3: Limitations of Existing Payment Mechanisms
46

Table 4: Definition of Electronic Commerce 81 Figures Figure 1: Estimates of
U. S. International Electronic Commerce, 2000- 2004 12

Figure 2: U. S. Electronic Commerce Retail Sales, 1999- 2001 15 Figure 3:
eBay Net Revenue, 1997- 2001 18 Figure 4: The U. S. Federal Trade
Commission?s Econsumer. gov on the Internet 25

Figure 5: The Internet Fraud Complaint Center on the Internet 26 Figure 6:
Examples of Trustmarks for

BBBOnline, SquareTrade, and CPA WebTrust 28 Figure 7: GAO?s Privacy
Statement on the

Internet 35 Figure 8: Example of an Electronic Money

Transaction 48 Figure 9: Proposed EU Approach for

Collecting Value- added Tax on Transactions Involving EU Citizens 63 Figure
10: Current Approach for Collecting Value- added Tax on EU Citizens 65
Figure 11: Time Line of WTO Agreements and

Decisions Related to Electronic Commerce 70 Figure 12: Electronic Commerce
as a Percentage of Total Retail Sales, 2000: An International Perspective 83

Figure 13: U. S. B- to- C Electronic Commerce Estimates, 1998- 2000 85

Page 8 GAO- 02- 404 International E- Commerce Abbreviations

BEA Bureau of Economic Analysis EU European Union EDI Electronic Data
Interchange FTAA Free Trade Area of the Americas FTC Federal Trade
Commission IEC International Electronic Commerce OECD Organization for
Economic Cooperation and

Development NCCUSL National Conference of Commissioners on Uniform State
Laws

UETA Uniform Electronic Transactions Act UNCITRAL United Nations Commission
on International Trade Law

USTR U. S. Trade Representative WIPO World Intellectual Property
Organization WTO World Trade Organization

Page 9 GAO- 02- 404 International E- Commerce

Section 1: Defining International Electronic Commerce Page 10 GAO- 02- 404
International E- Commerce

Section 1: Defining International Electronic Commerce Page 11 GAO- 02- 404
International E- Commerce

Section 1: Defining International Electronic Commerce Page 12 GAO- 02- 404
International E- Commerce

Section 1: Defining International Electronic Commerce Page 13 GAO- 02- 404
International E- Commerce

Page 14 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 15 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 16 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 17 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 18 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 19 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 20 GAO- 02- 404 International E- Commerce

Section 2: Collecting U. S. Government Data on International Electronic
Commerce Page 21 GAO- 02- 404 International E- Commerce

Page 22 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 23 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 24 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 25 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 26 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 27 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 28 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 29 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 30 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 31 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 32 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 33 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 34 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 35 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

Page 36 GAO- 02- 404 International E- Commerce

Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 3: Removing Obstacles and Facilitating International Electronic
Commerce

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Section 4: Adapting Commercial and Legal Frameworks Page 52 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 53 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 54 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 55 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 56 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 57 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 58 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 59 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 60 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 61 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 62 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 63 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 64 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 65 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 66 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 67 GAO- 02- 404
International E- Commerce

Section 4: Adapting Commercial and Legal Frameworks Page 68 GAO- 02- 404
International E- Commerce

Page 69 GAO- 02- 404 International E- Commerce

Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

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Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

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Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

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Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

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Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

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Section 5: Addressing Barriers through International Trade Agreements and
Negotiations

Page 75 GAO- 02- 404 International E- Commerce

Appendix I

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Appendix I Objectives, Scope, and Methodology

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Appendix I Objectives, Scope, and Methodology

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Appendix II

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

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Appendix II Definitions and Measurement of Electronic Commerce

Page 87 GAO- 02- 404 International E- Commerce

Appendix II Definitions and Measurement of Electronic Commerce

Page 88 GAO- 02- 404 International E- Commerce

Appendix III

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Appendix III U. S. Government Collection of International Trade Statistics

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Appendix III U. S. Government Collection of International Trade Statistics

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Appendix III U. S. Government Collection of International Trade Statistics

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Appendix IV

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Related GAO Products Page 95 GAO- 02- 404 International E- Commerce

Related GAO Products Page 96 GAO- 02- 404 International E- Commerce

Related GAO Products Page 97 GAO- 02- 404 International E- Commerce

Related GAO Products Page 98 GAO- 02- 404 International E- Commerce

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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