ARCHIVED—Creating an Enabling Environment

Background Document
The Challenge of Change: Building the 21^st Century Economy
e-Commerce to e-Economy: Strategies for the 21^st Century
Industry Canada
September 27-28, 2004
Ottawa, Ontario

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The exchanges that take place between buyers and sellers of goods and services are the lifeblood of an economy, just as the exchanges that take place between citizens, their elected representatives and providers of public services are the lifeblood of a polity.

For an economy or polity to work well, the parties to these different kinds of exchanges must trust each other and have confidence that the institutional framework within which they are operating is stable and that it will yield consistent, reliable and predictable results. Given this context, made-in-Canada approaches should work in concert with general international cooperative initiatives.

In this respect, the e-economy is no different from the economy that preceded it. The task of creating trust and establishing confidence, however, is complicated by several factors:

• Global nature of the e-economy. It is impossible to build an enabling environment solely within the borders of a single country. Trading arrangements in the e-economy, both domestic and international, need to be at least as transparent and trustworthy as in the non-online world.
• Participation rates of trading partners. To facilitate the full development of the e-economy, this environment must include all countries that have electronic trading relationships. Ideally, it should extend to all the countries in the world.
• Verification of trading partners and redress of problems. Dealings are facilitated by electronic networks linking parties who may not know each other and may never meet, who may live in countries that have different legal regimes and business norms, and who may have no independent means of verifying what is presented on the Internet, or of seeking redress if problems arise.
• Network vulnerability. The networks linking these parties – particularly the public Internet – are vulnerable to all kinds of threats, ranging from spam and viruses, to theft and fraud, to attacks intended to disrupt service and undermine the security, integrity and reliability of networks.
• Intangible nature of products and transactions. Many of the goods and services exchanged are intangible, payments are generally made in intangible forms, and the identities of parties to transactions are usually intangible. In the e-economy, at the moment when commitments are made and promises given, there is rarely anything tangible to hold.

In all these ways, the e-economy raises new challenges in building trust and confidence, even though similar issues have always existed.

A. Issues for Canadian consumers, businesses, and citizens

If the e-business models and practices described in the previous chapter are akin to an iceberg afloat in the e-economy sea, e-commerce is its tip – the part that is visible to ordinary Canadians and to most SMEs in their day-to-day activities, either as participants in Internet-based buying and selling, or as users of automated payment systems in more traditional kinds of transactions.

Canadian consumers and businesses are well positioned to participate in e-commerce activities, and in similar kinds of transactions with governments and public service providers. Canada's rates of Internet penetration, broadband access, and Internet use are among the highest in the world. However, surveys consistently show that although a high percentage of Canadians use the Internet to window shop for information about products and services, a much smaller percentage is willing to make purchases online.

As shown in Figure 8, concern about privacy and the security of personal information are the main obstacles to using networks to make financial transactions, and are among the main reasons Canadian firms have been slow to implement IBS. Similar concerns about privacy and security are an important obstacle to implementing government services online, particularly for transactions that involve the exchange of personal information and financial payments. ¹²

To overcome these obstacles, it is necessary to develop strategies that address these concerns and create an environment of trust in which consumers, businesses and citizens can have confidence in the honesty and integrity of the e-economy.

B. Strengthening confidence and trust in the e-marketplace

One of the key objectives of Canada's Electronic Commerce Strategy was to create an environment of trust in which individuals and businesses would have as much confidence in the workings of the e-economy as they have in the workings of the traditional industrial economy.

Creating this environment is a complex challenge. Among other things, it involves measures to:

• authenticate and authorize parties to transactions;
• assist individuals in managing their identities online;
• protect the privacy of personal information and the confidentiality of corporate information communicated or stored electronically;
• ensure that networks operate reliably;
• protect intellectual property rights in electronic goods and services, including developing the appropriate polices, practices and tools for digital rights management;
• establish a legal framework for contracts to function electronically;
• develop dispute resolution mechanisms that function effectively in an e-business environment; and
• protect individuals and businesses against annoying or abusive practices, such as unsolicited bulk e-mail (spam).

To a large extent, the creation of an environment of trust involves the application of existing laws, regulations and commercial norms to the electronic environment, through the amendment or extension of existing instruments or through judicial interpretation. In some areas however, new instruments may be required. Creating an environment of trust is not only the responsibility of policy-makers, regulators and the courts. As in any business environment, the private sector has a major role to play in its own right or in cooperation with government in developing business norms, standards and codes of conduct, as well as in identifying and encouraging the adoption of best practices.

Groups representing the interests of consumers and the public also play a role in creating an environment of trust in the e-economy. Citizens, as consumers, need to be aware of their rights under the law, the precautions they should take before providing personal information online, the tools available to them to protect their privacy, the standards of conduct they should expect from businesses and governments and the remedies that are available to them to redress grievances.

Spam, or unsolicited commercial e-mail, has grown in volume to now place significant pressure on the Internet and its users. The Radicati Group and MessageLabs estimate that worldwide, spam cost businesses US$20.5 billion in 2003. The biggest potential cost of spam, however, is the loss of public confidence in Internet communications. Some businesses are considering abandoning the Internet in favour of reliable and secure private and closed user group networks, for both operational and internal communications. Politicians and corporate executives have publicly expressed concern that spam mail, if allowed to continue along its current growth path, could drive businesses and consumers away from using the Internet.

Rather than traditional regulatory approaches, issues like spam require concerted action by governments and the private sector aimed at establishing practical and pragmatic rules of the game. So serious is the threat of spam that cooperative, multi-jurisdictional enforcement of civil and criminal sanctions will most likely be required to stem the tide.

In sum, the task of building an environment of trust in the e-economy is complex. It involves actions to create an enabling legal and regulatory environment, to develop voluntary codes of practice, to educate businesses, consumers and public service providers and to create tools that are easy to use. This can only be done if all stakeholders work in partnership.

Where do we currently stand in building this environment of trust?

1. Government–industry partnership initiatives

The federal government is making significant progress in dealing with many of the issues set out in the 1998 Electronic Commerce Strategy, as well as second generation issues, through the following initiatives.

• Personal Information Protection and Electronic Documents Act (PIPEDA), enacted April 2000, came into full effect on January 1, 2004. This Act sets out the ground rules for how private sector organizations can collect, use or disclose information in the course of their commercial activities. It seeks to balance an individual's right to privacy with the legitimate business needs of organizations. The Act is the product of a partnership between government and the private sector. It is based on the Canadian Standards Association's Model Code for the Protection of Personal Information, which is incorporated into the legislation.
• Canadian Code of Practice for Consumer Protection in Electronic Commerce establishes good business practice benchmarks for merchants conducting commercial activities with consumers online. Like PIPEDA, the Code is the product of partnership between different stakeholder groups. It was developed by a working group composed of representatives of different industry sectors and tested through pilot projects before being finalized by the e-Commerce Leaders Code Review Committee and endorsed by federal, provincial and territorial ministers responsible for consumer affairs in January 2004.
• Principles for Electronic Authentication (2004) establish benchmarks to ensure that authentication products and services embody sound business and market practices, meet the needs of Canadians, and are accepted internationally. These marketplace principles were developed by a working group with membership drawn from a wide range of business interests, professional associations, end users, academia and governments. The Principles extend and complement the existing governance structure for authentication services in Canada.
• Ministerial Task Force on Spam came about as the result of a partnership and consensus with key industry stakeholders and consumer organizations to identify ways of reducing spam or unsolicited commercial e-mail. It will oversee the implementation of a six-point Action Plan, calling for specific initiatives by government and the private sector, including the use of existing laws and regulatory measures, the review of regulatory gaps in current laws, the improvement of current industry practices, the use of technology to validate legitimate commercial communications, the enhancement of consumer education and awareness and the promotion of an international framework to fight spam. ¹³

2. Business-led initiatives

The business community has undertaken a number of activities to assist SMEs in dealing with privacy concerns, including,

• The Canadian e-Business Initiative's (CeBI's) Online E-Security and Privacy Guide for SMEs, which includes reviews of how other countries manage their approach to e-business security and privacy issues.
• The Canadian Bankers' Association and the Canadian Chamber of Commerce's Minding your e Business seminars, which were conducted across the country; and
• The Canadian Institute of Chartered Accountants' (CICA's) e-business toolkit, Winning with e Business, for use by small businesses, organizations and chartered accountants.

C. Creating an enabling environment internationally

In the past five years, substantial progress has been made in building an environment that will support the development of the e-economy within Canada. This, however, is only the beginning.

In the e-economy, electronic goods and services can be produced and offered for sale anywhere in the world as easily as they can be produced and offered for sale in local markets, providing that a number of conditions are met:

• International agreements must be in place to facilitate trade in electronic goods and services between countries.
• Consumers and businesses must have confidence that their interests will be protected when buying and selling electronic goods and services in other countries.
• The network facilities and human capital required both to operate and to govern international markets for electronic goods and services must be present at both ends of trading relationships.
• Building an international environment that will enable the growth of the e-economy in all countries, whatever their current level of development, poses significant challenges on each of these dimensions.

1. Facilitating trade in the e-economy

Traditionally, international trade agreements were limited to trade in physical goods and sought to lower or remove tariffs and other barriers to the movement of these goods across borders. Today, agreements that reduce or eliminate obstacles to the movement of intangible goods and services that are traded electronically over ICT networks, as well as obstacles to the movement of people who produce, distribute or service these products are just as important.

In the past two decades, considerable progress has been made in removing barriers to trade in services at both the regional and international levels. The North American Free Trade Agreement and the process of constructing the European Union pioneered the extension of traditional trade principles and disciplines to trade in services and the movement of people. These achievements helped lay the foundations for the World Trade Organization (WTO) agreements on Trade in Services and Trade-Related Aspects of Intellectual Property Rights, which begin to address issues that facilitate the growth of the global e-economy.

In addition to these formal agreements, the WTO launched a comprehensive work program to examine all trade-related issues related to global e-commerce, including those that relate to trade in goods, services and intellectual property, with particular emphasis on the needs and interests of developing countries. Pending the results of this work, WTO members have agreed to encourage the growth of e-commerce by not imposing customs duties on electronic transmissions.

Other international fora, such as Asia-Pacific Economic Co-operation (APEC) and the United Nations, facilitate international trade within an electronic environment. The Electronic Commerce Working Group of the United Nations Commission on International Trade Law (UNCITRAL) is working on a draft convention on the use of data messages in contracts across jurisdictions. This work on electronic contracting follows UNCITRAL's 1996 Model Law on Electronic Commerce and the 2001 Model Law on Electronic Signatures.

It is clear from all the international work done to date that balancing the interests of both developed and developing countries is an extremely complex challenge. This challenge is complicated by the fact that in the global e-economy, the boundaries between economic and social activities blur, as do the boundaries between issues that are purely national and those across all nations. This complexity is demonstrated by ongoing debates about the relationship between international trade agreements, universal human rights and national policies in areas such as culture, education and health care services and environmental and labour standards.

2. Increasing confidence and trust internationally

The international arrangements that permit and encourage cross-border trade in electronic products and services and other forms of global e-commerce must also help to ensure high levels of marketplace trust.

For consumers to provide personal information, enter into agreements, or make payments for the purchase of products across borders, they must be confident that they know the identity and business reputation of the party with whom they are dealing, that their privacy will be protected, that any personal and financial information they provide will be secure, and that they have appropriate means of redress against fraud, theft and unfair business practices.

Businesses share many of the same concerns as consumers. They want to know that the confidentiality of corporate information will be protected in other jurisdictions, that intellectual property rights will be respected and enforced, that they have effective means of resolving disputes with suppliers and customers in other countries, and that networks are reliable and secure. Above all, they want simplicity and consistency between the laws and regulations of different countries. Establishing an international environment of trust for consumers and businesses is not an easy task. Legal frameworks often differ between countries – it is not always clear which jurisdiction has responsibility for an electronic transaction that involves parties in different countries and enforcement can be a problem given the intangible nature of e-economy assets and the ease with which they can be moved within cyberspace or from one country to another.

During the past few years, the OECD has begun to systematically address the issues on the trust agenda for the e-economy. The OECD updated its guidelines for protecting privacy and ensuring the security and confidentiality of information that flows across the borders of its member states. It has also developed new guidelines related to consumer protection and network security, and is examining issues of authentication and spam. Canada plays a leading role in these efforts, just as it did in the formulation of the OECD 1998 e-Commerce Strategy.

Like Canada, individual countries have enacted legislation and implemented measures to create trust in the e-economy. These international efforts to create a global environment of trust, however, are often patchwork, but confidence and trust issues are starting to be addressed in various global fora, such as the World Summit on the Information Society (WSIS), with all interested stakeholders, including governments, the private sector, non-governmental organizations and other international organizations at the table.

3. Building capacity in developing countries

As the amount of economic activity that takes place on networks rises and as the e-economy spreads to developing countries, it is becoming critical to develop international frameworks for governing the e-economy that harmonize different national approaches and provide a basis for cooperative enforcement across jurisdictions. Building the capacity of developing countries to participate in the construction of this global framework will be a major challenge. As experience in other areas shows (e.g. trade in services), innovation in global governance arrangements cannot be fully successful unless developing countries have the technical, legal and institutional capacity to implement international agreements within their national jurisdictions.

D. Challenge questions:

What strategies are needed to create an enabling environment?

What more needs to be done in Canada to build an environment of trust in the e-economy for businesses and consumers?

• What additional measures are needed to support privacy, information integrity and network security?
• What further steps are needed to protect the interests of consumers and businesses and provide means to resolve disputes?
• How can protection of intellectual property rights be balanced with access to information and knowledge?
• What additional measures are needed to build trust in the e-economy internationally?
• What measures are required to deal more effectively with spam, viruses and other threats to Internet use?
• How can the use of authentication in the marketplace be accelerated?

How can Canada help build an enabling environment internationally?

• What international arrangements are needed to facilitate trade in electronic goods and services using ICT networks?
• How can Canada help build e-economy capacities in developing countries?

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¹² E-Business in Canada: New Momentum, EKOS, 2004.

¹³ News Release and Backgrounder, May 11, 2004.