Trade, Policy, and Economic Development in the Digital Economy

We assess the impact of internet connectivity and digital trade policies on trade and welfare. Using a bilateral measure of internet connectivity, we find a significant positive relationship between the internet and both domestic and international trade for goods and services—at the both the intensive and extensive margin. We also find that digital trade facilitation provisions in trade agreements have significantly increased trade in services but not goods. These findings highlight that digital trade determinants play different roles for goods and services: the internet is beneficial for goods trade but critical for services. Finally, using a general equilibrium model of trade, we assess the trade and welfare impacts of increased internet connectivity in developing countries and find that increases in internet use can have large positive impacts on poorly connected countries. However, it also highlights the danger of developing countries falling behind as the digital economy continues to grow. Keywords: Digital trade, gravity, internet, development, data policies, international trade, domestic trade, services, extensive margin. JEL: D600, F140, F680, C540, O300