How To Set Rules For The Web

It is conventional wisdom that electronic commerce is an economic solvent--it dissolves old business models and rearranges relationships among buyers, sellers, and anyone in-between. What is only now becoming clear is that e-commerce can be a political solvent as well, melting traditional boundaries between Washington and the states while threatening the turf of vested political interests around the country, if not the world. Developing new public policy to accommodate and nurture e-commerce is perhaps one of the greatest challenges ahead.

Take electronic signatures, just the latest of a growing number of e-commerce issues to hit Congress. Stockbrokers, insurance agents, suppliers, credit-card issuers, and a horde of online retailers want a federal law passed recognizing electronic signatures as equal to the pen-and-paper kind. Sounds like a no-brainer, doesn't it? The booming Net is everywhere all the time, so it needs uniform regulations. It's just common sense.

But politics isn't about common sense. It's about power. There is a myriad of state and local laws on the books designed to regulate commerce and protect consumers that require paper records and written notification of credit-card defaults, changes in interest rates, home foreclosures, or cancellation of insurance policies. The electronic-signature bill before Congress would allow consumers to be contacted only electronically. Not good enough, say the states. But interstate commerce, which is surely what the Internet is all about, is Washington's jurisdiction. So politically, who should make the rules for the Net?

Over the long run, the economic imperatives of the Internet and globalization appear likely to force states and localities everywhere to cede power to national, or, in the case of Europe, international authorities. The need for harmony and simplicity in the rules for e-commerce points in that direction. The states' only hope is to organize and set common codes for taxation, digital signatures, privacy, and other important e-commerce issues--a mighty undertaking.

Political debate will slow progress toward the inevitable. Right now, Congress is engrossed in a battle over taxing the Net. Washington has declared a three-year moratorium on such taxes, and most legislators in Congress appear inclined to declare the Net a tax-free zone. But the states say they need sales taxes to finance local expenditures. Yet there are hundreds of state and local sales taxes that could be applied to the Net--an impossible situation.

Europe is struggling with the same problem. The European Union is trying to pass legislation to govern e-commerce on the Internet across Europe. But individual countries don't want to delegate power to Brussels when it comes to consumer protection. They want to extend national laws so Net shoppers can sue in their own local courts. That means online retailers would have to deal with 15 legal systems.

In the end, barriers to e-commerce will fall as authority to regulate the borderless Net shifts to the broadest possible political unit. In the meantime, our advice to politicians is to tinker. Technology is changing e-commerce so fast, it is difficult for policy to keep up. Taking a lot of incremental steps is better than waiting for the Big Solution to be hammered out at different levels of government. On electronic signatures, for example, Congress should pass a bill devoted to business-to-business Net commerce, where consumer protection isn't a problem. And 90% of all commerce on the Net is business-to-business, anyway.

We know the Net is changing the economy. We are only beginning to see how it might change politics, too.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE