[Salon] Washington’s hesitancy on digital-trade diplomacy

[Chas Freeman <cwfresidence@gmail.com>]

Washington’s hesitancy on digital-trade diplomacy (iiss.org)

Washington’s hesitancy on digital-trade diplomacy

A group of 81 countries reached a negotiating milestone in July 2024 on measures they might take to reduce barriers to trading digital goods and on cross-border data flows. The United States did not join them, however, due to concerns over security and maintaining regulatory autonomy.

On 26 July 2024, Australia, Japan and Singapore announced that 81 countries had consented to the release of a draft agreement that, once adopted, would facilitate global electronic commerce. This was the most notable achievement since formal negotiations began via the World Trade Organization (WTO) in January 2019. The negotiating group debating how best to harmonise digital-trade rules eventually grew to 91 countries and territories. The United States was among the ten that did not sign off on the draft, which was ‘due to domestic consultations and considerations’, as noted in a footnote.

At the time of the announcement, Washington released a statement from Ambassador María Pagán, the chief US envoy to the WTO, noting that ‘the current text falls short and more work is needed, including with respect to the essential security exception’. The type of security exception favoured by the US would allow signatories to bypass the terms of the agreement if following them would harm national security (by, for example, exposing sensitive software source code). In late 2023, US Trade Representative Katherine Tai announced that Washington would withdraw its support for key items on the agenda of the Joint Statement Initiative (JSI) on E-Commerce, as the initiative is called, so US abstention did not come as a surprise.

It will take further negotiations for the parties to reach a comprehensive agreement that can be implemented, a process that will likely take years, but US resistance casts some doubt on whether a broad global push to reform long-outdated digital-trade rules can succeed. Some had thought that the administration of US President Joe Biden would be able to resolve its major concerns regarding regulatory autonomy and security in 2024, but with less than five months remaining before the inauguration of a new president, this now appears unlikely.

The IPEF

US trade policy has been in varying stages of disarray since at least 2017 due to several factors. Firstly, Congress has not given Trade Promotion Authority to Biden (sometimes referred to as ‘fast-track authority’). This authority allows administrations to negotiate trade agreements and send the subsequent bills to Congress for up-or-down votes (without allowing legislators to attach amendments). The most recent Trade Promotion Authority lasted from 2015 to June 2021. The Biden administration has not sought renewal and has opted instead to pursue deals such as a 2023 agreement with Japan on critical minerals and the Indo-Pacific Economic Framework for Prosperity (IPEF), Washington’s primary mechanism for increasing international economic integration in the region. These are trade agreements only in the loosest senses of the term. They pointedly do not include market-access components – trade-speak for tariff reductions – and, in effect, give the administration the ability to forgo congressional approval. (One consequence is that representatives have protested that the administration has not consulted with the legislature on international economic policy. They have argued that the Commerce Clause of the US Constitution gives Congress the power to ‘regulate commerce with foreign nations’.)

It will take further negotiations for the parties to reach a comprehensive agreement that can be implemented, a process that will likely take years, but US resistance casts some doubt on whether a broad global push to reform long-outdated digital-trade rules can succeed.

In early November 2023, the US paused IPEF negotiations on digital-trade rules, following its actions regarding the JSI. Tai ultimately attributed the JSI withdrawal to the fact that Washington wanted to align the types of digital-trade harmonisation measures on the table as part of the JSI and IPEF processes, although this effort currently appears stalled. A point regarding bureaucratic politics is germane here: when the position of US trade representative was established within the executive branch in 1963, the office had nearly sole operational authority over trade issues, but this is no longer the case. The departments of Commerce, State, Treasury, Justice and others now have significant influence over trade issues. This has led presidential administrations to present occasionally mixed public messages on trade issues, such as digital trade in the JSI and the IPEF.

The US business community is eager for Washington to join an agreement that would harmonise regulations and reduce trade barriers for digital goods. On 7 November 2023 the US Chamber of Commerce and others sent a letter to the directors of the National Security Council and the National Economic Council, expressing concern about Tai’s announcement regarding the JSI. They were joined by 32 senators led by Senate Finance Committee Chairman Ron Wyden, a Democrat, and the top Republican on the committee, Mike Crapo. Their 30 November letter to Biden argued that the administration was ‘leaving a vacuum’ on digital issues that authoritarian regimes such as China and Russia could fill. The letter also noted the trade representative had failed to propose policy alternatives that would advance long-standing priorities on digital trade: promoting the free flow of data, preventing forced technology transfer out of the US, opening competitive markets for digital goods and services, and combating forced data localisation. The US opposes forced data localisation – when countries require that certain types of data be collected or physically stored within their borders – for several reasons. The country says it impinges on the free flow of data, functions as a trade barrier, imposes significant infrastructure costs and raises costs in general on US businesses.

The administration received support from other members of Congress, who listed in a 6 November 2023 letter a litany of threats that the agreements posed to privacy, civil rights and safeguards for artificial intelligence, though it did not include counter-proposals. Little has changed since then, except the US election is now only a few months away rather than a year.

The JSI and digital trade

While the title of the JSI suggests it focuses on e-commerce, its coverage is more expansive and extends to digital trade, including issues of openness, trust and transparency, and cooperation and development. Other issues – cross-border data flows, data-localisation requirements and privacy – were left out of the draft text so that an agreement might be reached.

Definitions of what constitutes ‘digital trade’ vary in wording and scope depending on the international organisation in question. The three-part Asia-Pacific Economic Cooperation (APEC) definition is probably the broadest and is a useful starting point. APEC says digital trade includes:

(i) trade in goods and services such as goods sold over the Internet and e-commerce platforms and digital content such as software, books, music, films and apps as well as trade in digitally enabled services including legal, financial, education and consultancy; (ii) electronic facilitation of trade, such as the acceptance of electronic trade documents and, possibly, the adoption of ‘regtech’ solutions as technology evolves; and (iii) the transmission of data across borders, both as a direct business activity and to support other business activities.

The US business community is eager for Washington to join an agreement that would harmonise regulations and reduce trade barriers for digital goods.

At the core, much of the debate around digital trade focuses on cross-border data flows and transmissions. South Africa, for example, in December 2023 lodged a declaration in protest of a WTO moratorium on customs duties applied to data transmissions agreed by members in 1998 and extended since then. Pretoria argued that this moratorium deprives it and other countries of significant customs revenue, although it has not been joined by many other countries.

The economic benefits of cross-border data flows are well documented, but they are often measured after the fact due to the difficulty of estimating their direct and indirect values. US exports of services that could be digitally delivered were worth US$626 billion in 2022, a 28% increase from 2017. The UN Conference on Trade and Development put the global figure for digital trade at US$3.94 trillion in 2022.

Without agreement on and adherence to a common set of rules for digital trade, these gains risk being undone. A 7 November 2023 report by Digital Policy Alert, a think tank, counted 1,900 new data-governance policy developments among G20 members alone since 1 January 2020. Regulatory fragmentation has long been a major concern in this area, and by this measure it is getting worse rather than better and increasing operating costs for businesses globally. The US resistance to the JSI is likely to exacerbate the problem.

As Senators Wyden and Crapo pointed out, Washington risks creating a vacuum in which authoritarian regimes can degrade international norms on access to information and thereby threaten core principles regarding democracy, the rule of law and human rights. Indeed, those are a few of the key elements listed in A Declaration for the Future of the Internet, signed by 70 countries – including the US – in April 2022. Notably, China and Russia did not sign this declaration. China has made concerted and well-known efforts to export its model of restrictive internet governance and surveillance to countries in Asia, Africa and Latin America. Russia shares many of the same goals but lacks the level of influence China can exert via its large technology firms.

US agreements to date

The US had taken a strong pro-digital-trade stance prior to its surprise move against the JSI in 2023. The re-negotiated North American Free Trade Agreement, now named the United States–Mexico–Canada Agreement (USMCA), is a prime example. It includes a chapter dedicated to digital trade, the most recent US trade agreement currently in force to do so. Among other measures, it prohibits data-localisation requirements, allows restrictions on cross-border data flows only in service of public-policy goals, enshrines duty-free access for digital products, and protects firms’ source code and algorithms. It also contains provisions on paperless trade and other digital means of better facilitating the cross-border movement of physical goods.

The Korea–US Free Trade Agreement, re-negotiated in 2019, also has a chapter on e-commerce, which covers much the same ground as the standalone US–Japan digital-trade agreement. The USMCA, Korea–US agreement and US–Japan commitments match and in some instances exceed the ambitions agreed by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Many trade-policy experts thus expected the USMCA chapter in particular to serve as the model for US agreements on the subject, not least because it passed both the House and Senate with overwhelming support. That no longer appears to be the case.

Outlook

The Biden administration could reverse course on the JSI and digital trade in the IPEF, but this appears unlikely. For Washington’s negotiating partners – including its closest allies – the tumult of late 2023 and 2024 does not bode well for collaboration on this issue. A further risk may be the possible re-election of Donald Trump in November, which would likely usher in a wave of protectionist policymaking from the executive branch in 2025. The prospects for trade policy under Kamala Harris are less clear, but they likely will not be greatly different than under Biden.

For Washington’s negotiating partners – including its closest allies – the tumult of late 2023 and 2024 does not bode well for collaboration on [digital-trade issues].

Small and middle powers are likely to press ahead on digital-trade issues in the absence of the US. For example, the Digital Economy Partnership Agreement, a harmonisation effort launched in 2020 with a much smaller number of initial participants – Chile, New Zealand and Singapore, three of the four founding members of the CPTPP – has demonstrated the potential of an accession growth model. South Korea joined by accession in May 2024 and, as of June, six other countries, including China, have applied and are thus planning to adopt many common policies for digital identities, paperless trade and cross-border data flows, among other areas.