Digital protectionism on the rise - principles to champion a global economy

In a age when trade wars and tariffs have once again become popular blunt instruments on the world stage, there’s a real danger of a rise in digital protectionism threatening trade policies in the global economy.

That’s the focus of a new study from UK tech trade association techUK, which centers on what a post-Brexit Britain could/should do to use its independent status to influence international consensus. As a result while the report has a specific objective of carving out a role for a UK cut away from the European Union and trying to cut trade deals with other nations, the context against which this plays out and the recommendations techUK makes have global relevance.

The study notes that recent years have seen more and more countries taking protectionist policy decisions to protect their domestic markets from foreign competition, using tariffs, restrictions on data flows and forced transfer of intellectual property as weapons in this struggle.

There’s a lot at stake here. The latest figures from the World Trade Organization (WTO) - from 2016 - on the value of e-commerce transactions puts the total at $27.7 trillion, $23.9 trillion of which came from B2B. At the same time, trade in physical IT accounted from $1.6 trillion, three times the total it stood at ten years earlier.  Such numbers are impressive, but also vulnerable. techUK cites a number of warnings from various bodies around the world, such as the Swedish Board of Trade which argues that data flow restrictions threaten to “fragment the global digital economy”, while the European Centre for International Political Economy (ECIPE) warns that a “restrictive regulatory environment for digital trade will weigh down many non-digital sectors”.

But when the current occupant of the Oval Office is a self-confessed enthusiast for tariffs and trade wars and nation states like China are nakedly pursuing digital protectionism, it’s tempting to take a pessimistic view of what can be done to keep the balance. Add into the mix the likes of India teeing up protectionist e-commerce legislation and European countries rolling out Digital Services Taxes aimed squarely at US tech firms and things look bleak for consensus and conducive to digital economic Balkanization.

All of this will cost everyone dearly. Noting that the trade war between the US and China has to date cost both nations combined around $150 billion, techUK observes:

Despite the growth of digital trade, many countries are taking a protectionist stance that threatens this growth and will increase costs for consumers and businesses. Free trade is in dire need of champions.

Champions

That champion status is what the trade organization wants to see a Brexit Britain carve out for itself. Whether that ends up being (a) attainable and (b) a challenge that legislators make a priority in the already packed post 31 January period post-EU remains to be seen.

Fortunately there are others already tackling the problem with techUK citing a number of positive exemplars, including:

• The rise in dedicated e-commerce sections in Free Trade Agreements, noting that around half of WTO members have signed up to at least one such FTA.
• Last year’s EU-Japan Economic Partnership Agreement, which includes some wide-ranging commitments on digital trade.
• The updated NAFTA agreement between the US, Mexico and Canada has an upgraded digital economy focus.
• New talks between New Zealand, Chile and Singapore on a Digital Economy Partnership Agreement.

The most significant pan-national work at present stems from the WTO’s progress towards a Joint Statement Initiative on e-commerce. Although India is not participating, the US, China and the EU are, which leads techUK to suggest:

[This] could result in an ambitious and inclusive new global deal on digital trade…. Such an agreement would help stem the tide of protectionist measures and set new standards for the digital economy. The impacts of digital trade will be felt across the world, but its opportunities are not open to all at the moment… To achieve global rules, it is essential that digital trade is inclusive to all across the world.

But achieving that elusive global consensus is no easy task. The suspension of progress towards a Trade in Services Agreement (TiSA) in 2016 is a case in point. Although 23 WTO members took part in the negotiations and stated support for the goal of focusing on digital trade provisions, nothing’s happened since 2016 and there’s little sign of any enthusiasm to kick-start the process. The same could happen with the JSI, cautions techUK:

Deep policy divides threaten to hold up the talks, especially between China and the USA. EU ambitions to set the pace in digital regulation are also likely to cause some problems along the way. Nevertheless, the JSI marks the most promising opportunity to agree global rules in digital trade and after Brexit the UK should participate as an independent WTO member and work towards an ambitious and inclusive outcome.

Principles 

Assuming that a Brexit Britain does answer that call - other interpretations are available - then techUK recommends that a number of key digital trade principles should come into play, all of which have global applicability.

Data

The issue:

In terms of the impact on businesses, barriers to data flows can result in higher costs to store and process data - often between 30-60 per cent more than if they were able to go outside their country. Restricting digital trade between countries with equivalent data protection standards can also prevent the transfer of day-to-day data needed for activities such as human resources leading to duplicative processes and incurring higher compliance costs - a greater weight on smaller firms. Specific requirements that financial data should be localised adds greater costs and restricts digital banking options for one of the most data intensive sectors of all. It is essential then to reach a sensible balance between measures that address legitimate public concerns, for example the protection of personal data or the need for regulators to access financial data, while not unduly erecting barriers to trade.

Recommendations:

1. Enable the cross-border flow of data without compromising data protection standards
2. Prevent the forced localisation of data.
3. Facilitate regulatory access to data.
4. Prevent separate treatment for cross-border flows of financial data.

Tariffs

The issue:

[A] key achievement of the WTO in supporting the digital economy was the introduction of a moratorium on customs and increase costs for other rapidly digitizing sectors… Since 1998, the moratorium has been a key plank of the multilateral trading system, and a vital enabler of the growth of the internet as we know it today. By preventing the development and imposition of tariffs and customs duties on electronic transmissions, the moratorium has facilitated the development of the $27.7 trillion global e-commerce market.  India and South Africa have called for a “re-think” of the moratorium, citing the potential revenue lost due to the expansion of items electronically transmitted. Ending the moratorium, or defining it in such a way as to open up the contents of electronic transmissions to the imposition of tariffs, would mark the single biggest reversal of trade liberalisation in living memory. With the global sales of the top 10 software companies coming to over $250 billion last year, new digital tariffs could threaten entire digital business model and increase costs for other rapidly digitizing sectors.

Recommendations:

1. Secure the expansion of the Information Technology Agreement in both geographic and product coverage.
2. Make the moratorium on customs duties on electronic transmissions permanent.

IP

The issue:

Intellectual property rights are an enabler of innovation. Yet some states have sought to demand intellectual property as a condition of market access.

Recommendations:

1. Prevent the mandatory transfer of source codes, algorithms, or encryption keys as a condition of market access.
2. Support the development of AI through enabling open government data and text and data mining.
3.  

Regulatory Cooperation

The issue:

While tariffs are an important issue for digital trade, the reality is that the primary barriers are those behind the border. Non-tariff barriers, like differing approaches to regulation, will be the main block to digital trade.

Recommendations:

1. Establish cooperation on the regulation of AI, fintech and other emerging technologies
2. Establish cooperation on cybersecurity issues with an emphasis on a risk-based approach.

Trade Facilitation

The issue:

Digital trade policy can also play a role in facilitating the flow of other goods and services. E-commerce platforms have opened global markets in goods for SMEs..The lack of uniformity makes “cross-border digital activities more complex and raise[s] the cost of doing business in multiple markets.

Recommendations:

1. Standardise minimum di minimis thresholds to facilitate e-commerce
2. Secure recognition of e-signatures and expansion of paperless trading

My take

This is a robust and well-thought out report and set of recommendations that are clearly a call to action for a Brexit Britain that is supposedly reaching for a nirvana of striking trade deals left, right and centre. Your political stance will clearly influence how much credence you’re going to give to the prospects of that, but beyond the shadow of Brexit, there are some strong basic principles that would - in an ideal world - inform a welcome consensus on digital trade across the globe. Sadly the vested interests will kick in - especially in a US election year - but this report provides much food for thought. You can download the full copy here. Well worth a read.