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U.S. Trade Report Emphasizes Importance of Digital Trade

The U.S. Government recently took a significant step toward a 21st century trade policy.  The U.S. Trade Representative’s “National Trade Estimate Report on Foreign Trade Barriers” (NTE)  singled out numerous barriers to international, Internet-enabled commerce in its annual “threat assessment” for U.S. trade. (very large PDF here).  While media coverage focused on the fact that the NTE report called out direct Internet censorship in nations like China (e.g., Reuters, N.Y. Times, AP), the report goes much further than that.  

In fact, USTR specifically highlighted the NTE report’s new focus on digital trade.  In addition to citing censorship, the report flags other examples of filtering and site blocking, and identifies issues like mandatory localization rules and liability standards, among other problems.  As DisCo has covered before, U.S. trade policy has slowly evolved toward recognizing Internet trade as a mode of commerce that is on equal footing with physical trade.  

Although more than 20 years have passed since the commercialization of the Internet, online commerce continues to be treated differently from global physical commerce.   While international rules unambiguously prohibit restricting trade in goods (except in narrow circumstances), a filing by my organization, CCIA, documented widespread discrimination against Internet trade in services.  Although trade scholars have argued for years that WTO rules should be understood to prohibit these digital trade barriers, [1] [2] they are frequently flouted.  Aside from a handful of cases, few countries have attempted to enforce free trade rules with respect to the Internet.  As I explained to a Congressional commission last year, this includes the United States, much to the detriment of U.S. exports.   

The latest NTE report suggests that this may be changing.  In addition to the obvious concerns regarding blocking and filtering of content, the NTE report identifies other digital trade barriers, including:

1. Data and infrastructure localization:  USTR observes “a growing trend among our trading partners to impose localization barriers to trade,” referring to foreign states’ obligations that information about citizens and/or hardware upon which that data is stored be localized in the country.  These policies have the effect of keeping data within the reach of local law enforcement and security officials, while also favoring domestic service providers.  The report identifies countries including China, Russia, Vietnam, and Indonesia as imposing such barriers.

2. “Link taxes”: The NTE report discusses so-called “link taxes” in Europe — sometimes referred to as snippet subsidies or “ancillary copyright.”  These mandatory payments by online services to domestic European publishers have been discussed on DisCo before. [1] [2]  USTR observes that after these cross-subsidies were implemented, publishers’ revenue decreased overall, with smaller publishers being disproportionately harmed.  It concludes that the EU-wide push for expanded link taxes “bears careful monitoring.

3. Unpredictable intermediary liability rules: USTR observes that rules for holding online intermediaries responsible for what Internet end-users do pose problems.  The NTE report calls out several countries that have or are considering what might be considered ‘shoot-the-messenger’ rules regarding Internet user misconduct, including India, as well as a proposal in Europe branded as “duty of care.”  Initiatives of this variety, according to the NTE, “appear motivated, at least in part, by legacy businesses struggling to compete against the efficiencies provided by Internet-based commerce. This underscores the risk that even well-intentioned goals can, if implemented through heavy-handed regulation, or even just threat thereof, seriously undermine innovative business development and hurt the EU’s own efforts to inject more dynamism into its markets.”

The NTE report marks another step in the gradual recognition of the Internet’s importance to international commerce.  The 2014 launch of the Trade in Services agreement (TiSA) talks was accompanied by public recognition of the importance of digital trade.  The following year, the U.S. Trade Representative’s office released a “digital dozen” list of Obama Administration trade policies, which included items such as ensuring digital non-discrimination and promoting the cross-border delivery of information services.  Announcing these new priorities in a speech in May 2015, Ambr. Holleyman stated, “the trading rules that have helped us get to where we are today are no longer sufficient.  They are no longer sufficient in light of the seismic changes in the way that technology is evolving.  They are no longer sufficient in the face of new barriers that are being erected.”  The roots of these developments, however, extend at least back to October 2011, when then-U.S. Trade Representative Ron Kirk submitted a formal request for information to China regarding its Internet blocking policies.  Invoking protocols created by the WTO General Agreement on Trade in Services (GATS), Kirk’s inquiry presumed that Internet barriers could violate trade rules.

The emphasis on digital barriers in the National Trade Estimate represents a new step in this direction.  Despite its ponderous name, the NTE report represents the Administration’s formal position on global trade barriers and what is being done to address them.  While media accounts understandably focused on the NTE report’s criticism of arbitrary censoring of Internet, social media, and news sites in countries like China, Turkey, and Vietnam, the significance of the NTE’s digital focus extends beyond the (very important) issue of Internet censorship.

U.S. trade policy is entering into a new era, one that has resulted from Internet-enabled commerce taking, as USTR says, “local and national markets to a global scale.”  While this has had a sweeping, positive effect on international trade — particularly with respect to small and medium-sized businesses — it has also challenged nations’ favored, incumbent interests.  As USTR has noted, governments haven’t overlooked this:  “Many governments have responded to these changes by seeking to control digital trade in blunt and disruptive ways. Some rules are responsive to legitimate public policy goals; others are explicitly protectionist.”  Separating out those specific public policy concerns from the wave of protectionism dressed up as good policy will occupy trade officials for years to come, but the global economy will be better for the effort.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.