Delivering on the prosperity deal for digital
In the U.S.-UK Prosperity Deal, both governments pledged to negotiate “an ambitious set of digital trade provisions”. The UK has also underscored digital trade in its Trade Strategy, identifying such agreements as one of the “trade levers” to “maximise timely trading opportunities”. As the world’s chief exporters of digitally-delivered services, and two leading economies in the burgeoning growth of AI, the U.S. and UK have a unique opportunity to chart a new course in the form of a robust agreement that meaningfully addresses foundational rules for cutting-edge services.
The core of a new agreement should be rules preventing non-tariff barriers to trade from sprouting like weeds and hindering digital industries’ critical need to scale globally.
The UK’s Trade Strategy highlights the agreement with Ukraine as a model that includes many priorities both governments and their respective industries share, such as rules on cross-border data flows, location of computing facilities, encryption, and source code protection. Importantly, these provisions parallel those of the “gold standard” set by the first Trump Administration in its FTA with Canada and Mexico. However, if this agreement is to serve as a model, the scope should be expanded to include audio-visual services (notably excluded in the UK-Ukraine agreement), which represent an important export market for both countries.
With the basics in place, reflecting agreements both countries have made with other parties, negotiators can look at where they can raise the bar. There is a huge win for both countries in establishing a precedent for other market-expanding deals. To that end, a robust U.S.-UK Agreement on Digital Trade could unlock substantial benefits both in direct trade and positive spinoff effects on the smart economy—particularly if it resulted in the removal of outstanding barriers, including the UK’s Digital Services Tax, and supported moderating approaches to regulating AI, online markets and online safety, and put appropriate constraints on compelled governmental access to consumer data.
Although the UK has so far succeeded in avoiding the issue, the first precondition for a serious deal is likely to be action on the UK Digital Services Tax, which stands out as other countries such as Canada, India, Pakistan, and New Zealand abandon similar taxes or proposals. From the U.S. perspective, there is a credibility problem with the UK promoting more open digital trade and imposing an extra-territorial turnover tax on multinationals in the sector.
While the UK Government is facing significant fiscal pressure, it might be easier to get rid of what is an aberration in the tax code alongside a new digital agreement. It would be hard to model the full revenue impacts of removing the tax, but the sheer size of the digital economy means that a sufficiently ambitious digital trade agreement that increases its growth is a big prize. Based on earlier estimates of the size of the digital economy and the typical tax share in economic activity, it would take around a 1% increase in the size of the digital economy to offset the around £800m revenue from the digital services tax. Although hard to measure, it is reasonable to assume that eliminating the DST could result in a significant increase in foreign investment in this dynamic and fast-growing part of the UK economy—investment that could otherwise avoid the UK in favor of more digitally-friendly locations.
Second, this agreement would offer an opportunity to supercharge both countries’ ambitious AI Action Plans, aiming to deliver on the transformative economic potential of AI, if based on best trade principles for a competitive global AI market.
The U.S. and the UK could both do well in such a global market, given their established research strengths in the sector and comparative advantage across the AI tech stack. In some cases, the needs of AI reflect the needs of the wider economy (e.g., cross-border data flows, or protection for commercial secrets such as source code and algorithms). In other cases, the needs are more novel, for example, ensuring that developers can rely on compute facilities outside a specific jurisdiction and ensuring that there are appropriate copyright exceptions critical for machine learning. The UK Government consulted on AI and copyright rules earlier this year, and next steps in this space are promising.
While it is important for the UK’s own economic interests to adopt a suitable copyright exception that matches the flexibility and protection provided by the U.S. fair use doctrine, it is also vital to secure free trade in AI-enabled services between the two countries. The lack of a statutory exception creates legal risk that impedes commercial collaboration between the two markets, and proposals for extra-territorial application of existing UK copyright rules (e.g., those floated by Baroness Kidron in response to the Data Bill earlier this year) would be an outright barrier to U.S. exports.
Japan and the EU also have protections for AI training and other text and data mining applications. The UK meeting that major economy norm would avoid fragmentation among the democratic developed economies, which would impede competition with authoritarian states also pursuing AI leadership. Memorializing such a principle in a bilateral agreement would be an important step in providing legal certainty and predictability that is a precondition for AI investment.
Third, such an agreement would allow both parties to examine potential obstacles to digital trade and advance potential solutions, including by ensuring the non-discriminatory implementation of the UK’s DMCCA, calibrating regulatory fines and fees based on domestic, not global, turnover, and adopting a do-no-harm approach towards digital regulation that takes into account potential costs to innovation in critical and emerging technology sectors prior to moving forward with regulatory proposals.
If that barrier can be overcome and both sides are serious about a digital trade deal with teeth, there is an opportunity to support mutual growth in the digital economy. More than that, there is an opportunity to set an example that would help expand the global trade in innovative services such as AI, showing real leadership and supporting prosperity and security globally.
