Explainer: Understanding Digital Trade

Explainer: Understanding Digital Trade

What is Digital Trade

Digital trade is the cross-border transfer of data, products, or services by electronic means, usually the Internet. It is changing global commerce, and in many ways, reducing the relevance of traditional at-the-border barriers to trade, like tariffs. Businesses transfer data across borders to improve operations. In addition, businesses and consumers use the Internet to find and access digital goods (like music and software), physical goods (e.g. e-commerce delivered packages) and services (such as video telephony, cloud storage, and data analytics services.)

Conceptually, data and digital goods services should be able to flow (nearly) seamlessly across borders. Yet, many countries are enacting a growing range of barriers to digital trade. Countries should be able to update laws to account for digital technologies, but not as tools for protectionism. Unfortunately, international trade rules have not kept pace with technological innovation to effectively limit digital protectionism. For example, countries like China, Vietnam, and Indonesia are enacting rules involving data and digital platforms and services in such a way that they discriminate against foreign firms. To address these types of issues, countries started negotiations this week in Geneva on new rules to govern global digital trade at the World Trade Organization (WTO).

Digital Trade and Data

Data is critical to the modern global economy. Data can be an internal input for an organization (e.g., data on how effectively a company’s machines are operating). Indeed, the increased digitalization of organizations has increased the importance of data as an input to commerce, impacting not just information industries, but traditional industries as well. In addition, data constitutes digital products, such as software, books, videos, and sound recordings.

Businesses use data to create value, and many can only maximize that value when data can flow freely across borders. Yet a growing number of countries are enacting barriers that make it more expensive and time-consuming, if not illegal, to transfer data overseas. China, Russia, Indonesia, India, and others are forcing firms to store data locally — “forced data localization”—for a growing range of data categories, such as financial, accounting, tax, health, personal, and telecommunications data. Countries often use the concern over data privacy and government access to data as cover for protectionism in enacting these policies, while others don’t even hide it. Cutting off data flows may prevent a foreign firm from serving a market as they do not have the resources or expertise to deal with costly and burdensome data storage and handling restrictions in every country in which they may have customers. 

This is why the United States, Japan, and others have negotiated provisions in trade agreements that prohibit countries from enacting barriers to data flows, including personal data, such as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the United States–Mexico–Canada Agreement (USMCA). In contrast, the European Union negotiates “adequacy” agreements, separate to its trade agreements, to address personal data flows, as it tries to get trade partners to enforce European privacy laws, instead of holding firms accountable for how they manage data, wherever they store it. Essentially, the European Union wants every other country to replicate its restrictive and onerous approach to privacy. So far, outside European and British territories, only six countries have received a national adequacy finding—Argentina, Uruguay, Israel, Japan, New Zealand, and Canada. Efforts to establish global rules to protect data flows have been limited, in large part because of the EU’s approach to privacy. Whether Japan and others can get the European Union to change its approach is one of the biggest challenges in WTO talks.

Digital Trade and Intellectual Property

The rise of digital trade makes including intellectual property regimes in trade agreements even more of an imperative as the Internet can make intellectual property very easy to steal. This extends to copyright for content like movies, music and video games and protections for the source code and algorithms that enable and protect digital services and IT products. New rules are also needed to prohibit countries from enacting rules to force firms to disclose sensitive intellectual property as a condition of market entry, because if IP is handed to rivals, it essentially undermines their ability to compete. Again, current rules for intellectual property at the World Trade Organization (WTO) and World Intellectual Property Organization are woefully out of date, so it’s incumbent on the world’s leading economies to set new global rules.

Digital Trade and Platforms

Internet-based platforms like Skype, Spotify, and Netflix act as agents of digital trade in delivering digital products and services to users around the world. Many platforms rely on copyright and other intellectual property rules to protect the content they create or license in order to provide different content to different markets. However, several countries are using legacy regulatory frameworks for traditional telecommunication and broadcast firms to enact discriminatory and restrictive regulations to “level the playing field” (often code for protectionism). Some countries are forcing foreign tech firms to setup joint ventures, local offices, and local data storage accommodations, among other restrictions. Others are limiting the content they can show or conversely requiring them to include certain content (see the case of Netflix in Italy). There are legitimate regulatory issues raised by new platforms, but instead of burdening them with traditional frameworks, countries need to recognize that these newer IP-based services are more akin to email than television or telephony and therefore shouldn’t be subject to the same more heavy-handed regulatory settings.

Digital Trade and Customs Duties

The vast majority of barriers to digital trade involve behind-the-border “non-tariff” regulations. However, some countries (e.g., Indonesia, India, and South Africa) want to enact custom duties on digital imports in a misguided effort to collect tariff revenue and protect domestic digital industries. These countries are trying to overturn a long-standing agreement (in effect since 1998) among WTO members to not enact such duties (called the e-commerce moratorium), which members agreed to in a prescient effort to head off this exact scenario. Members recognized the need to protect the potential for an open, global digital trading system to emerge.

Policy Implications

To fully maximize the potential of free global digital trade, the world’s leading digital economies need to put in place rules to protect it.

In the United States, Congress should pass USMCA as it includes stronger rules that protect and support digital trade. Domestically, the Trump administration should expand the Commerce Department’s network of “digital economy attachés” in embassies around the world, to ensure it has officials on the ground to identify and respond to digital trade barriers. The U.S. Trade Representative should use this information, where relevant, to take action against countries enacting digital trade barriers, such as withdrawing India and Indonesia’s tariff-free market access to the U.S. market under the Generalized System of Preferences. At the WTO, the United States should seek to improve and use the dispute settlement body to initiate new digital trade cases to test how current rules apply to digital trade barriers in Indonesia, Russia, and China.

The United States should use the USMCA’s digital trade provisions as a general starting point in upcoming WTO e-commerce negotiations. The challenge will be for the United States and similarly ambitious trading partners, such as Japan and Australia, to get countries to signal that they’re committed to an ambitious agreement from the outset. While these talks won’t necessary cover all the issues outlined above, two key litmus test issues for involvement should be a willingness to negotiate rules to protect the free flow of data, including personal data, and agreeing to make the moratorium on data transmissions permanent.

Nigel Cory is associate director for trade policy at the Information Technology and Innovation Foundation (ITIF), the world’s leading technology policy think tank.

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