USTR's Disastrous 180 on Digital Trade
Chris Padilla November 8, 2023
On October 26, the Office of the U.S. Trade Representative (USTR) made an announcement that sent shockwaves through the American business community and halls of Congress. In one fell swoop, USTR unilaterally jettisoned over a decade of bipartisan consensus on digital trade and abandoned American leadership on a matter essential to our nation's economic prosperity.
The proximate issue is U.S. participation in World Trade Organization negotiations for an e-commerce agreement. USTR announced that it was ending support for proposals related to cross-border data flows, data localization, and source code protection, critical provisions of these negotiations. The agency justified the decision by saying the U.S. needs “policy space” for potential regulatory actions against technology companies. This is a euphemism long used by the most recalcitrant trade ministries to excuse blatant protectionism; now, USTR has joined them. Influenced by progressive groups, USTR contends that trade rules on data flows and source code go too far to constrain U.S. domestic regulatory oversight.
As President Biden might say, this is malarkey. The United States carefully developed these rules over more than ten years to ensure they protect the government’s ability to regulate the digital economy to address privacy, equity, competition, and other policy concerns. Nothing in these rules, which are already incorporated in US trade agreements with Canada, Mexico, and Japan, place any limits on legitimate actions by U.S. regulators or law enforcement bodies.
USTR’s decision is a stunning and unjustified reversal of longstanding U.S. policy. For decades, through Democratic and Republican administrations, America has been the standard-bearer for rules enabling cross-border data flows subject to appropriate safeguards, ensuring non-discrimination, and promoting America’s digital leadership.
America stood for digital trade, not because of the “influence of big tech” – the slogan used by anti-trade campaigners to conjure up fear. Rather, trade policymakers (until now) understood that data flows are the lifeblood of all business, from autos, industrial machinery, agriculture, pharmaceuticals, medical devices, and aerospace manufacturing to services like audiovisual, energy, finance, insurance, IT, logistics, and telecommunications. Airplane engines transmit data across borders during flight to ensure safety and proper maintenance. Banks transmit data across borders to facilitate credit card transactions. Logistics carriers need real-time international data flows to ensure the package you ordered arrives at the right place on time. And small- and medium-sized enterprises disproportionately rely on the Internet and digital commerce.
How will leading American businesses compete if forced to build or lease local data centers in foreign markets with data localization requirements? And how will Americans' data be protected when foreign countries arbitrarily demand that everything -- down to the last megabyte of a company's data -- be needlessly replicated on servers in every country that feels like it? USTR's short-sighted decision has failed to recognize a basic economic truth: In the 21st Century, digital trade is trade, because virtually all businesses are now digital businesses.
Stepping back from longstanding US positions on digital trade policy issues not only gives the green light to other governments to impose restrictions that discriminate against US businesses, it actually encourages them to do so. As Senate Finance Committee Chairman Ron Wyden warned, “USTR’s decision to walk away from the negotiating table in Geneva is a win for China, plain and simple.” He's right.
The Administration’s decision is especially confounding because it came just ahead of the release of its Executive Order on AI, an area where it is actively seeking an international leadership role. But how can AI work without cross-border data flows? If your company's AI chatbot cannot readily access information because some foreign bureaucrat has put an arbitrary wall around your business data, it won't work as intended or might even feed you misinformation. The United States has stepped squarely on its AI message, abandoning its advocacy for trusted data flows at the moment it is most needed.
The collateral damage extends further. Many U.S. companies were early supporters of the launch of the Indo-Pacific Economic Framework Agreement (IPEF). They believed an IPEF agreement that included binding and enforceable digital trade rules, modeled on the US-Mexico-Canada Agreement, would advance U.S. competitiveness in this strategic and fast-growing region. But USTR’s poorly judged decision to take digital trade off the table further reveals IPEF as the empty vessel many partner countries already believe it to be. America cannot build strategic economic partnerships in the Pacific with just smiles and handshakes; substance is needed, but USTR apparently isn't interested.
Few pay attention to the inner workings of the WTO’s e-commerce agenda. But the impact of USTR's decision to abandon digital trade will be wide-ranging: it will harm a wide swath of American industries far beyond the tech sector, will hamstring American leadership on AI at a crucial moment, and will enfeeble America’s economic diplomacy in the Indo-Pacific. It is a profoundly bad decision that should be reversed, and quickly.