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Electronic commerce is creating a new mode of delivering new types of products in a global market in which geographical boundaries and location lose their meaning. This paper, which is an extension of earlier work on measuring electronic commerce, focuses on how the Internet will affect practices of measuring and thinking about trade transactions. It uses available sources and statistics for software to try to measure the extent to which international transactions are, or could become, "digital" and raises policy issues related to international trade in electronic markets. Most countries? value added taxation (VAT) systems require making a distinction between goods and services. Goods and services also fall under distinct trade agreements - the GATT and the GATS, respectively. Yet, newspapers, software packages, and CDs can now be converted into bits and delivered electronically, and the same will be true for other goods in the future. The growth of electronic commerce will probably require a re-evaluation of how certain transactions are classified. Even if the available data are poor, evidence on on-line software sales, together with data on the growing and globalising market for packaged software, can be used to show that: While the "digital" industry is not yet covered by international statistics, US data suggest that it is large and growing rapidly. Pre-packaged software is the most dynamic software industry segment. Worth $109.3 billion in 1996, it expected to double by 2002 ($221.9 billion). Traditionally dominated by the United States, the packaged software market is becoming global. Software markets in Canada, France, Germany and Japan have shown above OECD average growth rates. The German market is estimated at 8.6 per cent of the world packaged software market. Measuring and mismeasuring software trade Tracking software imports and exports in trade statistics is fraught with measurement problems. Border valuations are often based on the medium (diskettes, CD-ROMs) rather than on content (the software); moreover, methodology may not be consistent over time, shipments, or countries. Statistics not only underestimate the value of the software contained in the medium, but also fail to measure more generally the value of copyrighted works sold in foreign markets (the gold-master problem). Finally, bundling of software with the sale of a computer creates another sizeable source of mismeasurement. Nevertheless, the following tentative conclusions can be drawn: It is difficult to measure internationally traded physical software. Estimates of US software exports to Japan in 1994 varied between $209.8 million and $2 436.2 million. Based on available estimates from leading US independent pre-packaged software vendors, US software exports represent slightly less than half of total sales. Top Canadian packaged software firms have a high propensity to export, with an average 90 per cent of their revenues coming from abroad. Electronic software delivery and its implications for international transactions In addition to the traditional modes of supply (across-the-border trade, bundled in hardware, trade through commercial presence), software products can now be converted into bits and shipped directly over the Internet. This trend, the so-called electronic software distribution (ESD) revolution, will increasingly reorient domestic and international transactions from already hard to measure physical transactions to intangible electronic exchanges. Evidence on ESD indicates that: Among digital products, software is the best on-line seller and will increasingly be traded over the Internet. Private estimates suggest that ESD amounts to 1-2 per cent of overall industry revenues and up to 10 per cent of packaged software revenues. Among the reasons holding back the wider implementation of ESD are bandwidth limitations, consumers? love for the "look and feel" of the software box, and fears of on-line piracy. Various private estimates point to growing use of ESD. By the year 2000 up to 50 per cent of packaged software may be downloaded directly from the Internet and electronic sales may represent about 5 per cent of the total world-wide software market. Even if the use of ESD is limited, its potential in the rapidly growing area of international transactions may be significant. Among the major distributors of software over the Internet, those with international customers seem to export more than one-third of their products. A crude "back of the envelope" calculation shows that US revenues from international electronic delivery of software could amount to 6 per cent of overall US software export revenues. Concerns about piracy, bandwidth problems, restrictions on and costs of international transactions are holding back international ESD. New technologies, together with trade liberalisation and harmonisation of regulations will contribute to the development of electronic software delivery. Selected policy issues related to trade in digitised products Across-the-border electronic commerce involving goods will continue to face custom duties and value added tax. The main challenge to fiscal and custom authorities will come from supplies of on-line activities. Tariffs on computer software do not seem to constitute a significant trade barrier, and the proposed "standstill" (no new tariffs for electronically traded products would simply ensure maintenance of the positive status quo situation. The crucial issue for international trade in on-line activities is the elimination of international differences in regulatory barriers affecting access to electronic markets. The implications of electronic commerce for collecting conventional income and sales taxes are also significant, but the possibility of raising substantial revenues by taxing international Internet transactions is very low owing to the geographical mobility of the potential "Internet tax payer". Moreover, electronic transactions are difficult to monitor, and international electronic transactions might be technically impossible to trace, although it may be possible to develop technology for auditing international transactions of some digital products. Countries are also becoming increasingly aware of copyright concerns related to the Internet and are beginning to modify their copyright laws to reflect electronic transmission and storage of digital work such as software. The Internet, as a naturally global contestable market, is creating pressure and momentum for trade liberalisation and international harmonisation of regulations.