The US escalates its war of words with India and China over digital trade barriers

Profile picture for user slauchlan By Stuart Lauchlan April 9, 2019
Summary:
President Donald Trump is fond of tariffs and trade wars and there are more to come on the digital economy front.

trumpclimate

Yesterday, when looking at Frances decision to go ahead a digital tax on services providers, mainly targetting US tech firms, I pondered on the increasing war of words between the US and the European Union, noting:

With a President in the Oval Office who loves the smell of tariffs in the morning, another front in another trade war is all too possible.

Hours later, Donald Trump announced his intention to slap $11 billion of tariffs on EU goods in retaliation for European subsidies to Airbus, which he said the World Trade Organization had decided has “adversely impacted the United States”. (The WTO has previously said precisely the opposite.)

While it wasn’t connected to the digital tax issue, it was another reminder that the current White House administration is trigger-happy when it comes to complaining about how badly it feels other countries have treated America.

The recently published US Trade Representative's 2019 National Trade Estimate Report on Foreign Trade Barriers contains a litany of complaints of unfair treatment, with the EU’s digital tax stance right at the top:

In 2018, the European Commission proposed a directive to levy an interim tax on revenues from digital services, including advertising, online marketplaces, and data services, on large companies, including those without a physical presence in the European Union.  EU Member States including France, the United Kingdom, Italy, Spain and Austria are currently considering similar proposals.  The US opposes proposals that single out digital services for tax purposes.  In addition, to the extent these proposals apply almost exclusively to US companies, they raise further concerns of a discriminatory effect on US suppliers participating in EU markets.

China

Away from the EU, India and China are squarely in the cross-sights. China, already the subject of a trade war with the US on another front, comes under fire on a number of fronts, specifically:

  • China’s Restrictions on Cross-Border Data Flows and Data Localization Requirements:  China’s Cybersecurity Law and a range of related implementing regulations would prohibit or severely restrict routine cross-border transfers of information, including a broad range of information falling into the undefined category of being “important”.  The law also imposes data localization requirements on companies, including those that operate “critical information infrastructure.”
  • China’s Cloud Computing Restrictions: China prohibits foreign companies from directly providing cloud computing services to customers in China, requiring foreign service suppliers to partner with a Chinese company and to turn over to that partner their technology, intellectual property, know-how, and brands in order to enter the market.
  • China’s Web Filtering and Blocking of Legitimate Websites: China continues to engage in extensive blocking of legitimate websites.  China currently blocks 10 of the top 30 global sites and over 10,000 domains in total, affecting billions of dollars in potential US business.

The cloud computing regulations are picked out as particularly problematic from the US point of view:

Especially troubling is China’s treatment of foreign companies seeking to supply cloud computing services, including computer data and storage services and software application services over the Internet. China prohibits foreign companies from directly supplying any of these services.

Given the difficulty in supplying these services on a cross-border basis (largely due to restrictive Chinese policies), the only option a foreign service supplier has to access the Chinese market is to establish a contractual partnership with a Chinese company, which is the holder of the necessary Internet data center license, and turn over its valuable technology, intellectual property, know-how and branding as part of this arrangement.

Based on this model, a foreign supplier has no direct relationship with customers in China and no ability to independently develop its business and has essentially handed over its business to a Chinese company that may well become a global competitor.

India

As for India, the nation’s emerging - and frankly still unformed and confusing - policies on e-commerce are picked out for comment:

India is currently developing a new electronic commerce policy, early drafts of which have contemplated broad-based data localisation requirements and restrictions on cross-border data flows, expanded grounds for forced transfer of intellectual property and proprietary source code, preferential treatment for domestic digital products, and other discriminatory policies. The US strongly encourages India to reconsider the most discriminatory and trade-distortive aspects of this draft policy and the other measures described above.

India also comes under fire for its data localization requirements, which the US complains place burdens on non-Indian providers:

India has recently promulgated a number of data localization requirements that would serve as significant barriers to digital trade between the United States and India. These requirements raise costs for suppliers of data-intensive services by forcing the construction of unnecessary, redundant data centers and prevent local firms from taking advantage of the best global services available.

It notes:

In 2018, India published a number of measures that would restrict the cross-border flow of data and create onerous data localization requirements. In October, one such measure was implemented, requiring payment service suppliers to store all information related to electronic payments by Indian citizens within India.  Much broader restrictions included in India’s draft Personal Data Protection law and draft e-Commerce Policy threaten to undermine the digital economy as a major source of growth for India.

My take

To be fair to the Americans, on this last point there’s a good deal of agreement within India with the Internet and Mobile Association of India (IAMAI) calling the nascent e-commerce legislation “inimical” to the stated goal of building a trillion-dollar digital economy by 2022. Earlier this week, it stated:

By artificially curbing cross-border data flow, by mandating data localisation, by extending the definition of e-commerce to include all digital services like digital advertising and online streaming and possibly imposing FDI (Foreign Direct Investment) restrictions on all digital services, the draft policy is likely to severely bring down FDI flows in the sector which is the backbone to building a trillion-dollar digital economy.

Nonetheless, the US commentary in the trade report is indicative of a ‘unfair to America’ meme that’s only going to get repeated at increasing volume as the Presidential Election campaigns hot up. The report formally states:

Barriers to digital trade threaten the ability of all firms – including small businesses – to benefit from the advantages of the digital economy. When governments impose unnecessary barriers to cross-border data flows or discriminate against foreign digital services, local firms are often hurt the most, as they cannot take advantage of cross-border digital services that facilitate global competitiveness.

Or as we’re more likely to hear it on the campaign trail - Make America Great Again (Again).