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The US appears poised to pursue a digital trade agreement in Asia – What does that mean?

Steptoe | 15 October 2021

The US appears poised to pursue a digital trade agreement in Asia – What does that mean?

By Eric Emerson & Chris Forsgren

Momentum is building for the United States to pursue a plurilateral digital trade agreement (or possibly a series of bilateral agreements) with trading partners in the Indo-Pacific region, as part of the Biden administration’s strategy to reengage with the region and counter Chinese economic influence. This sentiment has been expressed in public statements from U.S. Trade Representative (“USTR”) Tai and National Security Council Indo-Pacific Coordinator Kurt Campbell. Furthermore, USTR Tai, Secretary of State Anthony Blinken and Vice President Kamala Harris have all discussed the issue of digital trade with foreign counterparts in the region over the past several months.

In addition to Biden Administration officials, other key stakeholders have announced their support for U.S. participation in a digital trade agreement in the Indo-Pacific. Key members of Congress as well as allies and partners in the region have expressed interest in a U.S.-led digital trade pact. U.S. industry also appears to be on board. For example, more than a dozen industry and business groups – including the U.S. Chamber of Commerce, the Semiconductor Industry Association and the Information Technology Industry Council – wrote a letter to USTR Tai stressing that developing digital trade rules with partners in the Indo-Pacific should be “a critical element” of the U.S. trade agenda, particularly in the face of rising digital protectionist measures globally. The apparent buy-in from all key actors and stakeholders strongly suggests that a digital trade agreement in the Indo-Pacific is a serious possibility.

This alert discusses what a potential digital trade agreement might look like, based on existing precedent, and also hypothesizes what the alternatives to such an agreement might be.

What Would an Indo-Pacific Digital Trade Agreement Look Like?

If the United States decided to start negotiations for a digital trade agreement in the Indo-Pacific region, there are five agreements that could serve as potential templates: the digital trade chapter of the U.S.-Mexico-Canada Agreement (“USMCA”), the U.S.-Japan digital trade agreement, the Australia-Singapore digital economy agreement, the e-commerce chapter of the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”), and the Digital Economic Partnership Agreement (“DEPA”) between Chile, New Zealand and Singapore signed in June 2020. Examining the contents of these agreements provides clues about what could be in a future digital trade pact, since they share some core substantive provisions, and since any digital trade agreement will probably include at least some of the same countries party to these existing agreements.

First, in contrast to trade in physical goods, these five agreements all prohibit customs duties (i.e., tariffs) on “content transmitted electronically” between the treaty parties. Continuation of the longstanding World Trade Organization moratorium on customs duties for e-commerce has recently been questioned by some Members, so such a provision would essentially codify and cement this practice – at least with respect to parties to the agreement.

Second, the existing agreements proscribe national-origin based discrimination against digital products. This means that the governments of treaty parties cannot adopt measures that treat the digital products of one treaty party (including their own) more favorably than similar digital products from another party. However, the existing agreements uniformly provide an exception to this rule for “subsidies or grants provided by [the government], including government-supported loans, guarantees and insurance.” The exclusion of such subsidy discipline from a digital trade agreement is potentially problematic. For manufactured goods, unfair or distortive government subsidies can be addressed through national countervailing duty laws. In the absence of any ability to place duties on digital goods, unfair subsidies would essentially be beyond correction.

Third, the existing agreements require that all parties establish (or maintain) a domestic “legal framework that provides for the protection of the personal information of persons who conduct or engage in electronic transactions.” Generally speaking, the existing agreements are rather permissive as to the form a party’s domestic legal framework can take. They all provide significant flexibility to parties by clarifying that “a Party may comply with the obligation…by adopting or maintaining measures such as comprehensive privacy, personal information, or personal data protection laws, sector-specific laws covering privacy, or laws that provide for the enforcement of voluntary undertakings by enterprises relating to privacy.” These agreements simply encourage the parties take into account some general principles and guidelines set out by certain relevant international bodies (e.g., APEC or the OECD). These principles include “limitation on collection; choice; data quality; purpose specification; use limitation; security safeguards; transparency; individual participation; and accountability.” However, these agreements do require each party to publish information on the protections it provides for personal information to users of digital trade, specifically including how (1) a natural person can pursue a remedy and (2) an enterprise can comply with the country’s legal requirements. Finally, these provisions urge the parties to explore how they can promote interoperability between their respective frameworks, in order to facilitate cross-border data transfers while still protecting personal information.

Fourth, the existing agreements contain provisions aimed at preventing forced technology transfers for certain digital products. Although the existing agreements vary somewhat in this regard, these protections generally extend to source code (including algorithms) for digital products and, in some cases, to digital information and communication products that utilize cryptographic technologies (i.e., encryption). These protections come in two forms. Firstly, they prohibit a party from requiring the transfer of these technologies as a condition for “the import, distribution, sale or use of” the product in its territory. Secondly, in some cases they prohibit the parties from requiring the supplier of these technologies to “partner with a person in its territory” as a condition of allowing the digital product to be produced, used or sold in that country.

Fifth, and perhaps most importantly, the existing agreements set out rules combatting so-called “data localization” requirements. Data localization rules are measures that a country implements that prevent or hamper the storage or transfer of data outside the territory of that country. Accordingly, these anti-data localization provisions have two components: they require treaty parties to allow cross-border data transfers and proscribe parties from requiring that data be stored on servers located within their territory. These protections against data localization are critical to the future development of digital trade, since the vast majority of digital products depend on the movement and/or processing of data used by or derived from consumption of those products. However, these provisions are tempered by a rather permissive public policy exception. This exception provides that these requirements shall not “prevent a Party from adopting or maintaining measures inconsistent with” them “to achieve a legitimate public policy objective, provided that the measure” (1) “is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade”; and (2) “does not impose restrictions on [data transfers or location of computing facilities] greater than are required to achieve the objective.” Depending on how restrictively the two qualifying conditions of this exception are interpreted, the ability of a party to curtail the anti-data localization provisions to achieve any “legitimate public policy objective” could significantly diminish the benefits of these provisions in practice.

Finally, perhaps as important as the core substantive provisions of the existing agreements themselves is the fact that these provisions are generally subject to binding dispute settlement (although certain of the agreements limit the scope of dispute settlement somewhat). This is crucial to ensuring the benefits of the rules set out in a digital trade agreement come to fruition, since there would otherwise be no way for a treaty party to enforce the commitments made in the agreement. Furthermore, without the enforceability provided by binding dispute settlement, businesses may lack the certainty they need to fully reap the commercial benefits and opportunities a digital trade pact could provide.

In addition to the core substantive provisions discussed above, the existing agreements set out a number of other less consequential or non-binding provisions that nonetheless help to promote the development of digital trade and the digital economy. Examples include a requirement for parties to set up a framework governing electronic transactions; rules facilitating use or adoption of electronic signatures/authentication and paperless trading (i.e., use of digital trade administration documents, bills of lading, etc.); measures to protect consumers from unsolicited commercial electronic messages; provisions encouraging parties to provide open government data for use by businesses and researchers; and provisions promoting cooperation on cybersecurity among the parties.

DEPA and the Australia-Singapore digital economy agreement also contain some non-binding provisions that the Biden Administration would likely be interested in including in any new digital trade agreement – in light of its framing of its trade policy as “worker-centric” and its other policy priorities. These include provisions that seek to promote participation of small- and medium-sized enterprises in digital commerce; provisions promoting party cooperation on competition policy in the digital economy; and provisions promoting “digital inclusion” – i.e., facilitating participation in the digital economy by disadvantaged peoples and groups such as Indigenous Peoples, women, rural populations and low socio-economic groups. Moreover, depending on the level of ambition the Biden administration seeks for the agreement, it could also push for the inclusion of provisions dealing with key emerging areas of technology such as Fintech and artificial intelligence, as DEPA and the Australia-Singapore agreement have done (albeit in a non-binding fashion).

What Is the Alternative to a Digital Trade Agreement?

One of the key considerations that has led various government officials, industry representatives and commentators to urge that the United States pursue an Indo-Pacific digital trade agreement sooner rather than later is that, in the absence of U.S. leadership, China will likely fill the void with its own rules governing this area that are more aligned with its interests and governance/economic model. Some have cited the recently concluded Regional Comprehensive Economic Partnership agreement (“RCEP”) – which many Asian nations, including some close U.S. allies like Japan and South Korea, have joined – as both evidence that China is aggressively pursuing greater economic engagement in the Indo-Pacific region generally, and as an indication of the kind of agreement China would seek to proliferate given the opportunity. RCEP includes a chapter on e-commerce, which provides some insight into the kind of system China would like to see govern the digital trade space.

Substantively speaking, RCEP’s e-commerce chapter sets out may of the same rules as the other digital trade agreements discussed above. These include a prohibition on customs duties for digital products, protections for personal information, and restrictions on data localization. The key distinction, however, is in the enforceability of these provisions. For example, the provisions on data localization are subject to a similarly-worded public policy exception as the other existing agreements. But the “necessity” of a public policy measure that is allowed to violate these provisions under the exception is self-judging – i.e., it is entirely up to the party implementing the restrictive measure to decide whether or not the measure is “necessary” to achieve the public policy objective. Additionally, RCEP’s e-commerce chapter writ large is not subject to binding dispute settlement. This means that there is no effective mechanism for parties and stakeholders to vindicate the rights that are ostensibly provided in that chapter (and their attendant commercial benefits). As the industry groups argued in their recent letter to USTR Tai: “While RCEP contains an e-commerce chapter, it is excluded from dispute settlement and rests on self-judging exceptions that will frustrate any efforts to hold China or other countries accountable for protectionist, authoritarian, or predatory digital policies.”

U.S. economic and geopolitical interests, in conjunction with the statements and actions of U.S. officials, allies and industry, suggest that the United States may soon pursue a digital trade agreement with likeminded partners in the Indo-Pacific region, and will likely do so based on the principles identified above. A failure to do so could lead U.S. allies to gravitate toward an agreement with fewer protections and less enforceability. This would then not provide the level of robust production U.S. stakeholders are seeking in order to expand their participation in the international digital economy

 source: Steptoe