The digital ecosystem is evolving at a breakneck pace, fueled by innovations in artificial intelligence (AI), big data analytics, and global data connectivity. These advancements aren’t just changing the way we communicate or do business.
They’re reshaping international trade laws and triggering shifts in the policy frameworks governing cross-border data flows. The stakes are high as governments grapple with the complex challenges of balancing economic progress with national security, privacy, and fair competition.
Early Strides in Digital Trade Policy
In recent years, international trade agreements like the United States-Mexico-Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) have laid the groundwork for the digital economy. These agreements reflect the beginnings of a shared global vision that aims to eliminate barriers to digital trade, thereby facilitating the smooth flow of data across borders.
Western economies generally operate on the principle of “Data Free Flow with Trust” (DFFT). The notion supports open data flows but also pushes for responsible data practices. This balance is becoming increasingly difficult to maintain. As stakeholders ranging from technology giants to individual consumers have varied interests in how data is handled, the new rules for digital trade will not necessarily be a straightforward extension of the old ones.
The Evolving Trade Climate
A lot has changed since the earliest days of digital trade laws. Factors like the growing influence of AI, changes in US domestic politics, US-China relations, and supply chain disruptions are shaping new narratives. Concerns about AI safety and data ethics add another layer of complexity.
All these evolving dynamics influence the regulatory environment, impacting how governments balance economic interests against broader policy objectives. The result could be a slowing of policy development, or even fragmentation in the global digital trade landscape.
Role of AI in Digital Trade
AI technologies are intrinsically linked with the broader issues of digital trade and data flows. AI systems require a colossal amount of data to learn and generate insights. This dependency accentuates the significance of digital trade rules that manage how data flows across borders. For instance, AI thrives on cloud computing and data collected from the Internet of Things (IoT), both of which are closely tied to trade policies.
Restricting cross-border data flows could bottleneck AI development, limiting not only the training data but also access to essential commercial services. Cloud computing is an example, as it democratizes AI, enabling even smaller firms without the means to develop their own infrastructure to enter the field.
But it’s not just about the data. The broader regulatory landscape for AI—addressing risks such as bias, intellectual property theft, and weaponization—is still in flux. The EU’s AI Act and the United States’ Voluntary AI Commitments are merely the tip of the iceberg. The challenge lies in coordinating international efforts to manage these diverse and often conflicting interests.
The Rising Obstacles to Data Movement
Government interventions targeting data flows are on the rise, bringing new challenges to digital trade. Data localization measures have come to the forefront as a key regulatory tool. These include:
Data mirroring rules, demanding local storage of certain data before overseas transfer.
Explicit data storage laws, obliging firms to house data in its country of origin.
“De facto” local storage mandates, indirectly making it tough to move data abroad.
Partial or complete bans on overseas data transfer.
In many cases, these laws are framed as necessary for various policy goals, such as data protection or national security. But often, they come across as protectionist measures designed to boost domestic enterprises at the expense of global competition.
WTO’s Take on Digital Trade Barriers
When the World Trade Organization (WTO) agreements were inked in 1995, the landscape of international commerce was a far cry from the digitally charged ecosystem we know today. The trade of services and goods over digital platforms was almost a figment of the imagination. Although the WTO’s framework lacks specific rules for modern digital trade issues such as data localization and cross-border data flows, some existing commitments can still be applied to these areas.
GATS Commitments and Digital Trade
For instance, the General Agreement on Trade in Services (GATS) governs restrictions on cross-border data flow in the context of trade in services. Each member country defines its market access and national treatment commitments, tailoring them to specific service sectors. These commitments are specified across four distinct “modes” of service supply.
For example, if a member country makes a commitment to market access for cross-border services provided through electronic delivery (known as “mode 1”), any restrictions they place on data transfer associated with those services could violate that commitment. GATS rulings uphold the concept of “technological neutrality,” emphasizing that the method of service delivery, whether it’s through the Internet, telephone, or mail, should not be a barrier.
Moreover, where commitments relate to “mode 3” or a commercial presence in the export market, certain restrictions like data localization can potentially contravene these commitments, specifically when these restrictions hinder necessary data transfers.
But there’s a caveat. GATS houses several exceptions that allow members to enforce measures essential to protect public morals, maintain public order, or for the preservation of human, animal, or plant life. These exceptions could serve as a potential escape hatch for governments to impose digital trade barriers for causes like cybersecurity and privacy, albeit in a non-discriminatory manner.
The Temporary Nature of Customs Moratorium
Switching gears a bit, let’s talk about customs duties on electronic transmissions. Since 1998, WTO members have been renewing a temporary agreement to shelve any customs duties on digital transmissions. This is no permanent resolution but an interim measure that needs consensus-driven renewals every two years. And not all countries are on the same page. Developing countries often dissent, arguing the moratorium leaves them at a revenue loss and unable to protect local industries from overseas competition.
Progress Through the E-Commerce Joint Statement Initiative
In an encouraging move, the United States and 75 other WTO members began talks in 2019 to explore the possibilities of a plurilateral agreement centered around e-commerce. This E-Commerce Joint Statement Initiative (JSI) covers six core areas such as trust in digital trade, enabling e-commerce, and market access. Currently, 89 members accounting for 90% of global trade participate in this initiative.
Progress has been incremental. While there’s been some headway on less controversial matters like electronic signatures and open government data, stickier issues like data localization and cross-border data flows still need extensive dialogue and possibly, compromises.
The Pioneers: The TPP and the USMCA
The digital world never stays the same, and trade agreements reflect this constant evolution. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), formerly known as the Trans-Pacific Partnership (TPP), set the bar high. As the first agreement to introduce a robust digital trade chapter, the CPTPP mapped the terrain for data localization, cross-border data flows, and forced technology transfer. After the United States stepped away from it in 2017, other countries, like the United Kingdom, have eagerly joined the pact.
Meanwhile, the United States-Mexico-Canada Agreement (USMCA) has advanced digital trade rules in its unique ways, taking inspiration from the CPTPP. We also have the US-Japan Digital Trade Agreement (US-Japan DTA) in the mix, extending and updating CPTPP rules.
Key Provisions You Should Know
No Customs Duties on Electronic Transmissions
The CPTPP made a groundbreaking move by permanently prohibiting customs duties on “electronic transmissions.” So, whether you’re sending software, media, or other digital content across borders, no duty fees will apply. USMCA and US-Japan DTA follow a similar path but focus more on “digital products.”
Free Flow of Data Across Borders
Free flow of data is the backbone of digital trade. The CPTPP, USMCA, and US-Japan DTA ensure that information can be transferred freely for business purposes. However, they also provide leeway for governments to impose restrictions to achieve “legitimate public policy objectives,” which remain vaguely defined.
Data Localization Policies
While CPTPP allows exceptions for legitimate policy objectives, the USMCA and US-Japan DTA are more rigid about data localization. In these agreements, no exceptions are allowed, making them stricter about keeping data within a country’s borders.
Source Code and Algorithm Protection
For software developers, the security of source codes and algorithms is paramount. The CPTPP sets limitations on forced disclosure of such information. The USMCA and US-Japan DTA broaden the scope, offering more extensive protection while providing exceptions for regulatory bodies.
All these agreements come with general and security exceptions, making them flexible for various scenarios. However, the lack of clear definitions may leave room for ambiguity in implementation and compliance.
The Road Ahead: Untested Waters
The one thing to note is that these rules are still relatively new. We’ve yet to see how effective they’ll be in mitigating digital trade barriers. Governments still possess substantial flexibility through vaguely defined “public policy objectives” and broad security exceptions. The effectiveness of these digital trade provisions remains an open question.
Emerging Trends in Digital Trade Policies Globally
The digital economy has become an integral part of global trade. As countries grapple with regulatory frameworks to address digital trade, various new initiatives are appearing on the international scene. Let’s dive into some of the most significant ones.
Indo-Pacific Economic Framework (IPEF)
In 2022, the U.S. joined hands with other Indo-Pacific nations to explore a future trade structure known as the Indo-Pacific Economic Framework (IPEF). This isn’t your standard trade agreement—it doesn’t include market access for goods or services. Instead, it revolves around four pillars: Trade, Supply Chains, Clean Economy, and Fair Economy. Within the trade pillar, the focus is on shaping an inclusive and trustworthy digital economy. Although the framework is in the discussion phase, with a summary released in April 2023, the nations intend to conclude talks by November 2023.
US-Taiwan 21st Century Trade Initiative
The U.S. and Taiwan are partnering in a different way through their “21st Century Trade Initiative.” The first phase was signed in June 2023, covering areas like customs administration and anti-corruption, but digital trade will be a part of future discussions. The aim? To create a digital environment that boosts consumer trust, supports businesses, and is just plain fair.
EU’s Digital Trade Chapter Evolution
The European Union is also hopping onto the digital trade bandwagon. It’s not only incorporating digital trade chapters in its trade agreements but is also pushing for stronger commitments regarding data flows and data localization. For instance, the EU has begun integrating these evolved digital trade chapters in agreements with New Zealand, Chile, and the UK.
Data Privacy in the EU and the New EU-US Framework
Data privacy is a tricky issue, especially with the EU’s robust General Data Protection Regulation (GDPR). But in July 2023, a new framework between the EU and the U.S. was established to ensure data can move freely while adhering to privacy laws. It’s a step toward aligning two fundamentally different approaches to data governance.
Asia-Pacific’s Growing Digital Ambitions
Asia-Pacific nations, particularly Singapore, are no strangers to the digital trade scene. The region has hosted numerous initiatives, including the Digital Economy Partnership Agreement (DEPA) involving Singapore, Chile, and New Zealand. Not only does this pact cover an array of digital topics, from fintech to data innovation, but it also offers a blueprint that other countries can join.
The Global Perspective
The G7 nations are keen to address digital trade in a coordinated fashion. In 2021, they released a set of Digital Trade Principles to tackle protectionism and other barriers to data flows. In April 2023, they even included AI governance in their digital trade policy discussions.
Additionally, discussions are taking place in international forums like the Asia-Pacific Economic Cooperation (APEC) and the Organisation for Economic Co-operation and Development (OECD). From data standards to AI, these talks aim to harmonize digital trade rules globally.
The Murky Waters of US Digital Trade Objectives
The current U.S. landscape surrounding digital trade and cross-border data flows remains ambiguous. Although the Biden Administration has signaled its concerns about restrictive foreign policies that limit U.S. digital exports, it hasn’t clearly defined its stance on these issues. In addition, critics like labor unions are pressing against existing digital trade regulations, citing them as loopholes that erode consumer and worker protections.
The result? A complex debate that questions whether earlier agreements achieve the right balance between promoting digital trade and safeguarding public interests.
Role of the Unions in Shaping Digital Trade Policies
Labor unions in the U.S. are increasingly becoming vocal critics of digital trade agreements, especially those modeled after the CPTPP and USMCA. These unions argue that the current regulations undermine various social safeguards, including worker and consumer privacy. Their criticism is worth noting, especially as the Biden
Administration aims to incorporate the voices of workers in shaping U.S. trade policies. On the flip side, broadening policy exceptions could dilute the impact of future data flow commitments for businesses.
The Limbo of US Trade Promotion Authority (TPA)
The U.S. Trade Promotion Authority, which enables expedited procedures for trade agreements, expired in July 2021. Renewing the TPA doesn’t seem to be on the Biden Administration’s priority list, which means future agreements might have to sidestep Congressional approval. This sets a precedent for executive agreements but opens up a Pandora’s box of constitutional questions.
Congress Pushes Back
Congress has recently begun to challenge the Administration’s bypass of legislative approval. Recent legislative initiatives, such as the United States-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act, aim to impose stringent oversight on future negotiations. We could see more of such legislative interventions if no conventional TPA compromise is found.
Rising Global Tensions and Their Influence on Digital Trade
Increasing geopolitical tensions, particularly with China, are swaying U.S. policy decisions. A slew of new bills aims to safeguard the transfer of personal data and restrict data flow to ‘high-risk’ countries. Moreover, legislative proposals are starting to touch upon the realm of AI, calling for tighter export controls on semiconductors used in AI development.
The Security Aspect
As Congress turns its attention toward the security implications of digital trade, it’s worth considering how this could affect AI policies. Bills that expand semiconductor export controls may limit the abilities of AI developers in countries like China, who would be restricted from using cloud-based services for training AI models.
Questions Surrounding IPEF
The internal U.S. politics are further complicating international initiatives like the International Partnership on E-commerce and Free trade (IPEF). This initiative isn’t a comprehensive FTA and doesn’t address market access, which could make enforcing digital trade rules more challenging. Given that the U.S. sees IPEF as a key platform for promoting secure data flows, the lack of clarity on the initiative’s ambition levels raises more questions than it answers.
In summary, the U.S. stands at a crossroads when it comes to shaping its digital trade policy and regulating cross-border data flows. Multiple stakeholders, including labor unions, Congress, and international entities, are all exerting their influence, while the absence of a renewed TPA adds another layer of complexity. Amidst these uncertainties, it remains to be seen which direction the U.S. will take in the ever-evolving landscape of digital trade.