19 April 2018

The Global Battle for Digital Trade

Global powers are competing to shape the new economy and the future of digital trade. In recent years, three groups have emerged: liberalizers (as represented by the U.S.), regulators (the European Union), and mercantilists (China). Each group champions different degrees and types of government intervention, especially for cross-border data flows. The differences among these approaches, and various attempts to bridge them, could define digital trade rules in the coming years.

Liberalizers’ primary goal is ensuring the freedom and openness of the internet, and they aim to prevent and remove digital trade barriers. They highlight the importance of digital flows to economic growth and worry that foreign governments are increasingly jeopardizing those benefits. For a snapshot of the world through liberalizer eyes, see the U.S. Trade Representative’s list of barriers to digital trade. Liberalizers emphasis the value of freely flowing data across borders, the costs of data localization, and the need to avoid unnecessary security measures, among other priorities.

As the leading liberalizer, the United States has been effective in introducing digital trade concerns into regional trade agreements (RTAs). A November 2017 study by Mark Wu, a Harvard Law professor, identified 69 RTAs with an e-commerce chapter or article dedicated to e-commerce. More than 30 members of the World Trade Organization first agreed to one of these RTAs with the United States, Singapore, or Australia. Not every one of those 30 members can be considered a liberalizer, of course, but their adoption of e-commerce in trade agreements reflects liberalizers’ reach.

The liberalizers’ preferences are also clearly reflected in two major RTA negotiations, one completed and the other underway. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which was signed in March 2018, does not include the United States but reflects many U.S. preferences in its e-commerce chapter. Reports suggest that negotiations to revise the North American Trade Agreement (NAFTA) will likely incorporate many of the digital trade provisions that the original Trans-Pacific Partnership included.

Regulators share many of the liberalizers’ goals in principal, but call for greater government intervention to protect individual privacy. They recall 2013, when Edward Snowden leaked information about U.S. intelligence collection, and point to recent revelations that Cambridge Analytica harvested Facebook user data. Like liberalizers, regulators generally oppose introducing customs duties on digital products. While claiming to oppose data localization, some of their proposed safeguards provide an opening for countries to do just that.

The European Union leads the regulator camp. To be sure, there is a range of opinion among the 28 countries within the European Union. For example, Denmark and Finland generally support fewer restrictions on digital trade, whereas Germany and France have been more vocal proponents of additional safeguards. These positions have coalesced around the General Data Protection Regulation, a new data privacy regime that will take effect in May and could greatly constrain the EU’s ability to agree to more ambitious rules with its trading partners. The EU’s development of an ePrivacy regulation may further constrain data flows.

But the regulators’ views are not confined to the EU, and there is some evidence they are gaining traction globally. Sean Heather of the U.S. Chamber of Commerce notes that Brazil and other countries in Latin America have adopted the EU’s practice of certifying that its partners have “adequate protection” of data. The EU’s preferences are also reflected in its RTAs with Japan and Canada, which place fewer restrictions on government intervention in digital trade than does the CPTPP. Bridging that gap would have major repercussions for shaping digital trade norms globally, but no one expects a breakthrough soon. Both Canada and Japan would have preferred stronger rules, but the EU’s position on data flows left little room for negotiation.

The mercantilist camp prioritizes industrial policy and security objectives. Mercantilists place restrictions on data flows, mandate data localization, and require technology transfers and source code disclosures, among other protectionist measures. These regulations are often justified on industrial or national security grounds, and they have the effect of undermining foreign competition. Many in this camp do less to protect intellectual property, which is often stolen through digital means.

China is the most active of the mercantilists, which include Indonesia, Russia, and several other emerging economies. China’s influence stems from the sheer size of its digital market, which is the largest in the world. China has been effective in convincing foreign firms to adopts its requirements as a condition for accessing its market.

It is unlikely these camps will bridge their digital divides anytime soon. Most negotiations underway are expected to yield lowest-common-denominator outcomes for digital trade. For example, reports suggest that ambitious e-commerce outcomes are unlikely for the Regional Comprehensive Economic Partnership Agreement (RCEP), which includes 16 countries at present.

Uniting the World Trade Organization’s 164 members will only be more difficult. Roughly half of the WTO’s members have not entered an RTA with explicit e-commerce components. On the one hand, that leaves room for the liberalizers to attract additional supporters. But the absence of those commitments also represents a temporary victory for the regulators and mercantilists.

As these groups compete, technology will continue to change, creating new issues to address and potentially even calling into question areas of greater consensus. Competition is likely to intensify before digital trade norms are cemented globally.

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