Electronic Commerce: An Introduction

Electronic Commerce: An Introduction

Order Code RS20426
Updated April 1, 2002
CRS Report for Congress
Received through the CRS Web
Electronic Commerce: An Introduction
Glenn J. McLoughlin
Specialist in Technology and Telecommunications
Resources, Science, and Industry Division
Summary
Electronic commercial transactions over the Internet, or “e-commerce,” have grown
so fast over the last five years that many experts continue to underestimate its growth
and development. Whether retail business-to-customer or business-to-business
transactions, e-commerce is now a significant part of commercial transactions. In turn,
policymakers both in the United States and abroad are likely to face increasingly complex
issues of security, privacy, taxation, infrastructure development and other issues in 2001
and beyond. This report will be updated periodically.
The Internet and E-Commerce
The convergence of computer and telecommunications technologies has
revolutionized how we get, store, retrieve, and share information. Many experts contend
that this convergence has created the Information Economy, driven by the Internet, and
fueled a surge in U.S. productivity and economic growth. Commercial transactions on the
Internet, whether retail business-to-customer or business-to-business, are commonly called
electronic commerce, or “e-commerce.”
Since the mid-1990s, commercial transactions on the Internet have grown
substantially.1 By 1996, Internet traffic, including e-commerce, was doubling every 100
days. By mid-1997, the U.S. Department of Commerce reported that just over 4 million
people were using e-commerce; by the end of 1997, that figure had grown to over 10
million users. The rate of e-commerce growth continues so rapidly that projections often
are outdated as fast as they are published. One 1998 industry estimate projected that U.S.
retail transactions would reach $7 billion by 2000 — a figure now widely accepted as
having been reached in the year the report came out.
1 For statistics and other data on e-commerce, see: CRS Report RL30435, Internet and E-
Commerce Statistics: What They Mean and Where to Find Them On the Web. Other sources
include: [http://www.idc.com], [http://www.abcnews.go.com], [http://www.forrester.com],
[http://earmarketer.com], and [http://www.cs.cmu.edu]. It is important to note that some
measurements of e-commerce, particularly that data reported in the media, have not been verified.

Congressional Research Service ˜ The Library of Congress

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Still, government and industry sources report huge annual jumps in e-commerce
transactions. In May 2001 the Bureau of the Census, in the Department of Commerce,
reported that for the first quarter of 2001, U.S. e-commerce sales hit $6.99 billion–up
33.5% from the first quarter of 2000, but down 19% from the fourth quarter of 2000.
(This would be the first decline in six quarters, or since the fourth quarter of 1999, when
the Bureau of the Census started recording such data). Business conducted over the
Internet continues to grow, even with an economic slowdown and with many new “dot-
com” businesses no longer in existence. The Forrester Research Group released a report
in March 2001 that estimated 2000 world e-commerce at $657 billion, with a project
growth to $6.8 trillion. The consulting firm IDC reported an estimated $354 billion in e-
commerce sales in 2000, with a projected growth to $5 trillion in 2005. What these
reports, and others like them, indicate is how difficult it is to precisely measure e-
commerce on a macroeconomic scale, other than to say that it is likely that strong growth,
particularly of e-commerce sales in the global economy, will continue over the long term.

Internationally, there are issues regarding Internet use and e-commerce growth.
While the western industrialized nations dominate Internet development and use, by the
year 2003 more than half of the material posted on the Internet will be in a language other
than English. This has large ramifications for e-commerce and ease of transactions,
security, and privacy issues. Policymakers, industry leaders, academicians, and others are
concerned that this development will not correlate with equal access to the Internet for
many in developing nations—therefore creating a global “digital divide.” The United
States and Canada represent the largest percentage of Internet users, at 56.6%. Europe
follows with 23.4%. At the end of 2000, of approximately 200 million Internet users
worldwide, only 3.1% are in Latin America, 0.5% are in the Middle East, and 0.6% are
in Africa. The Asian Pacific region has 15.8% of all Internet users; but its rate of growth
of Internet use is nearly twice as fast as the United States and Canada. In this respect, the
U.S.-Canada share of Internet use may decline to 36% by 2005.
The E-Commerce Industry
Even with some concern about accuracy and timeliness of e-commerce statistics,
reliable industry sources report huge jumps in e-commerce transactions, particularly during
fourth quarter holiday shopping. But long-term, industry growth has not been limited to
just holiday shopping. According to a study undertaken by the University of Texas, the
Internet portion of the U.S. economy grew at a compounded rate of 174% from 1995-
1998 (the U.S. gross domestic product grew at 2.8% during the same period), and e-
commerce accounted for one-third of that growth. Increasingly, many firms use
“vortals”—vertically integrated portals or gateways that advertise or provide information
on a specific industry or special interest. As a portion of e-commerce business, vortals
provide targeted advertising for e-commerce transactions, and may grow from 35% of all
e-commerce advertising to 57% by 2004. However, not all firms providing these services
are profitable; in fact, most have yet to turn a profit.
One of the fastest growing sectors of e-commerce is business-to-business
transactions–what is often called “B2B.” The Forrester Group, a private sector consulting
firm, estimates that by 2003, that sector of the U.S. economy will reach $1.5 trillion, up
from nearly $200 billion in 2000. Business-to-business transactions between small and
medium sized businesses and their suppliers is rapidly growing, as many of these firms

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begin to use Internet connections for supply chain management, after-sales support, and
payments.
Clinton Administration Policies: 1998-2000
The Clinton Administration advocated a wide range of policy prescriptions to
encourage e-commerce growth. These included calling on the World Trade Organization
(WTO) to declare the Internet to be a tax-free environment for delivering both goods and
services; recommending that no new tax policies be imposed on Internet commerce; stating
that nations develop a “uniform commercial code” for electronic commerce; requesting
that intellectual property protection— patents, trademarks, and copyrights—be consistent
and enforceable; that nations adhere to international agreements to protect the security and
privacy of Internet commercial transactions; that governments and businesses cooperate
to more fully develop and expand the Internet infrastructure; and that businesses self-
regulate e-commerce content.
The Clinton Administration’s “The Emerging Digital Economy” (April 1998), “The
Emerging Digital Economy II” (June 1999), “Digital Economy 2000” (June 2000), and
“Leadership for the New Millennium, Delivering on Digital Progress and Prosperity”
(January 2001) provided overarching views on domestic and global e-commerce. These
reports provide data on the explosive growth of e-commerce, its role in global trade and
national Gross Domestic Product (GDP), and contributions that computer and
telecommunications technology convergence is making to productivity gains in the United
States and worldwide. The Administration also argued that the effects that information
technologies have had on raising national productivity, lowering inflation, creating high
wage jobs, and contributing up to one-third of all domestic growth in the 1990s.
Issues for the Bush Administration and the 107th Congress
Since the mid-1990s, Congress also has taken an active interest in e-commerce issues.
Among the many issues, Congress may revisit policies that establish federal encryption
procedures and provide electronic security in the wake of September 11, 2001. The 107th
Congress has passed a bill that would extend the moratorium on domestic e-commerce
taxation to November 2003. In addition, congressional policymakers are looking at the
European Union (EU) and WTO policies and regulations in e-commerce.
Protection and Security Issues. There are a variety of protection and security
issues that affect e-commerce growth and development. Encryption is the encoding of
electronic messages to transfer important information and data, in which “keys” are needed
to unlock or decode the message. Encryption is an important element of e-commerce
security, with the issue of who holds the keys at the core of the debate. In September
1999, United States announced plans to further relax its encryption export policy by
allowing export of unlimited key length encryption products, with some exceptions. It
also advocated reduced reporting requirements for those firms that export encrypted
products. The rules for implementing this policy were issued in September 2000 by the
Bureau of Export Administration in the Department of Commerce. However, the events
of September 11, 2001 have caused many in industry and government to review this
policy–and the USA PATRIOT ACT of 2001 (P.L. 107-56) has given lawmakers greater
authority to gain access to electronic financial transactions (for example, to ferret out

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illegal money laundering). Consumers and civil liberties activists are very concerned about
this development and have said they will monitor this law closely.
In a related area, the 106th Congress considered and passed legislation establishing
standards for transmission and verification of electronic transmissions. Electronic
signatures are a means of verifying the identity of a user of a computer system to control
access to, or to authorize, a transaction. The main congressional interests in electronic
signatures focus on enabling electronic signatures to carry legal weight in place of written
signatures, removing the inconsistencies among state policies that some fear may retard
the growth of e-commerce, and establishing federal government requirements for use of
electronic signatures when filing information electronically. Neither federal law
enforcement nor national security agencies oppose these objectives, and most U.S.
businesses would like a national electronic signatures standard to further enhance e-
commerce. When President Clinton signed into law the Electronic Signatures in Global and
National Commerce Act (P.L. 106-229), the process of developing a national electronic
signature standards was begun. Among its many provisions, this law also establishes
principles for U.S. negotiators for setting global electronic signatures policies.
E-Commerce Taxation. Congress passed the Internet Tax Freedom Act on
October 21, 1998, as Titles XI and XII of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999 (P.L. 105-277, 112 Stat 2681). Among its
provisions, the Act imposes a 3-year moratorium on the ability of state and local
governments to levy certain taxes on the Internet; it prohibits taxes on Internet access,
unless such a tax was generally imposed and actually enforced prior to October 1, 1998;
it creates an Advisory Commission on Electronic Commerce (ACEC), which may make
recommendations to Congress on e-commerce taxation in the United States and abroad;
and it opposes regulatory, tariff, and tax barriers to international e-commerce and asks the
President to pursue international agreements to ban them.) The ACEC made its policy
recommendations, after much debate and some divisiveness, to Congress on April 3, 2000.
The ACEC called for, among its recommendations, extending the domestic Internet tax
moratorium for five more years, through 2006; prohibiting the taxation of digitized goods
over the Internet, regardless of national source; and a continued moratorium on any
international tariffs on electronic transmissions over the Internet.
Congressional interest in Internet taxation has weighed concerns about impeding the
growth of e-commerce by taxing revenues; enforcement and compliance of an Internet tax;
and policies outside of the United States which do not impose an Internet tax. H.R. 1552,
The Internet Tax Nondiscrimination Act (Rep. Cox) would extend the Internet tax
moratorium through November 1, 2003. It was passed by both houses of Congress and
signed into law on November 28, 2001 (P.L. 107-75; see also: Report RS20980, Internet
Tax Bills in the 107th Congress: A Brief Comparison, for more information.)
Connecting Small Businesses. One of the concerns of many policymakers is
that small and medium-sized businesses are not included in e-commerce growth. Many
small and medium-sized firms contend that because of cost, lack of technical expertise, and
ability to maintain web sites, they cannot compete with larger companies that have an
Internet presence. In the 107th Congress, the Electronic Commerce Enhancement Act of
2001 (H.R. 524, Barcia), introduced February 8, 2001, is intended to help redress this
imbalance, according to its supporters. This legislation directs the National Institute of
Standards (NIST) to establish an advisory panel to examine the challenges facing small and

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medium-sized businesses in integrating e-commerce technologies. The legislation also
requires NIST’s Manufacturing Extension Partnership to establish a competitive grant
program to help businesses use electronic commerce technology. It passed the House of
Representatives, 409-6, on February 14, 2001, and now awaits Senate action.
The EU. While much of the debate on the government’s role in e-commerce has
focused on domestic issues in the United States, the EU will likely have an important
impact on global e-commerce policy development. The EU is very active in e-commerce
issues. In some areas there is agreement with U.S. policies, and in some areas there are
still tensions. While the EU as an entity represents a sizable portion of global Internet
commerce, across national boundaries, Internet use and e-commerce potential varies
widely. Supporters state that e-commerce policy should not be set by EU bureaucrats in
Brussels. Therefore, the EU has approached e-commerce with what one observer has
called a “light regulatory touch.” Among contentious issues, the EU has supported the
temporary moratorium on global e-commerce taxes, and supports making the moratorium
permanent. But the EU has taken a different approach than U.S. policy by treating
electronic transmissions (including those that deliver electronic goods such as software)
as services. This position would allow EU countries more flexibility in imposing trade
restrictions, and would allow treating electronic transmissions—including e-commerce—as
services, making them subject to EU value-added duties. The EU also has taken a different
approach to data protection and privacy, key components for strengthening e-commerce
security and maintaining consumer confidence. The EU actions prohibit the transfer of
data in and out of the EU, unless the outside country provides sufficient privacy
safeguards. The U.S. position is to permit industry self-regulation of data protection and
privacy safeguards. (For more information on the European data directive, see CRS
Report RL30784, Internet Privacy: An Analysis of Technology and Policy Issues.)
The WTO. The WTO has presented another set of challenges to U.S. policymakers.
The first two WTO ministerial meetings addressed issues that have an impact on e-
commerce. The first WTO Ministerial conference was held in Singapore on December 9-
13, 1996. Among the issues considered by the WTO participants was an agreement to
reduce trade barriers for information technology goods and services. This issue was
considered vital to the development of telecommunications infrastructure–including the
Internet–among developing nations. A majority of participants signed an agreement to
reduce these barriers. At the second WTO Ministerial conference, held in Geneva on May
18 and 20, 1998, an agreement was reached by the participating trade ministers to direct
the WTO General Council to develop a work program on electronic commerce and to
report on the progress of the work program, with recommendations, at the next
conference. The ministers also agreed that countries continue the practice of not imposing
tariffs on electronic transmission. While e-commerce was on the agenda at the third WTO
conference in Seattle in 1999, disruptions at that conference curtailed discussions.
The WTO also has addressed e-commerce. In the October 27 draft Ministerial
Declaration for the fourth conference in Doha, Qatar, the Chairman of the General Council
stated that “electronic commerce creates new challenges and opportunities for trade for
Members of all stages of development...[W]e instruct the General Council to consider the
most appropriate institutional changes for handling the Work Programme, and to report
on further progress to the Fifth Ministerial Conference” and that “Members will maintain
their current practice of not imposing custom duties on electronic transmissions until the
Fifth Session.” This language was adopted as article 34 under the Ministerial Declaration

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of November 14, 2001. Upcoming WTO conferences may address any additional e-
commerce issues raised by WTO working groups on goods, services, intellectual property
and economic development; or address related e-commerce issues raised at previous
ministerial conferences in areas such as privacy, security, taxation, and infrastructure. (See
CRS Report RS20319, Telecommunications Services Trade and the WTO Agreement and
CRS Report RS20387, The World Trade Organization (WTO) Seattle Ministerial
Conference).
Issues
The 107th Congress may address a series of complex questions on e-commerce. They
include: how viable is the continuation of the Internet tax moratorium, and can a consensus
be reached on an e-commerce tax policy? What are the appropriate roles of government
and industry in U.S. policies on encryption, digital signatures, and data storage and
protection for e-commerce? What is the best mechanism for achieving standard and
consistent e-commerce policies between the United States and other nations? Will the
United States, by virtue of its large proportion of Internet use and e-commerce
development, try to dominate global e-commerce policy? Internet use erases national
boundaries, and the growth of e-commerce on the Internet and the complexity of these
issues may mean that domestic and global e-commerce policies become increasingly
intertwined.