The effects of digital trade policies on digital trade

Abstract As digital trade expands worldwide, the importance of policy factors in digital trade is garnering attention. However, the effectiveness of digital trade‐related policies on digital trade flow is empirically underinvestigated because of challenging data requirements. To overcome this, we combine recently developed, but separately used digital trade‐related datasets to empirically test how digital trade policies affect digital trade flows. In particular, we examine the effects of digital trade policies from two dimensions: unilateral domestic regulations and bilateral trade agreements. Our results reveal that a pair of countries experiences an increase in digital trade flow when they have a trade agreement containing digital trade‐related provisions. This tendency is even stronger when digital trade agreements contain more specific rules. On the contrary, domestic regulations recognised as digital trade barriers actually inhibit digital trade flows, and their negative effect is greater when the regulations are implemented by the importing country than the exporting one. Decomposing the barriers into several areas of regulations, we examine which area is more crucial than the others. These results may seem rather obvious, but conversely, they confirm the validity of our approach to measure digital trade flows across countries and the relevance of the digital trade policy variables.