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US-China tech war: why a digital trade deal with Japan and South Korea is key to gaining the upper hand

South China Morning Post - 03 June 2021

US-China tech war: why a digital trade deal with Japan and South Korea is key to gaining the upper hand
By Daniel Aum and Elliot Silverberg

  • Washington or Beijing could gain a strategic advantage as they compete to shape global digital architecture by locking in a three-way deal with Seoul and Tokyo
  • The US has more economic incentives to do so, but for China scooping such a compact would demonstrate its diplomatic prowess, say Daniel Aum and Elliot Silverberg

There is an aspect of the US-China technology race that is more consequential than simply mining more data or developing better technology. It is writing the rules of the digital road. In this competition over standards, whichever nation first strikes a trilateral deal with technology leaders Japan and South Korea will secure a strategic chokepoint in the digital architecture of Asia.

Far more so than China, the United States generally prefers an open, integrated global market that promotes unencumbered flows of data. In practice, Washington has established high standards for protecting data, reducing digital services taxes, and enforcing intellectual property rights. Examples include the US-Mexico-Canada Agreement and the US-Japan Digital Trade Agreement. Also significant is Washington’s push for such a framework in its engagement at multilateral forums, such as the World Trade Organization, Asia-Pacific Economic Cooperation and the G7, whose digital ministers recently endorsed digital standards that evoke shared liberal values of open and competitive markets.

For its part, Beijing has developed a national digital strategy to become a “network great power”. Composed of multiple elements – the “Great Firewall”, Digital Silk Road, and Belt and Road Initiative – and synchronised with Beijing’s regularly revised five-year plans, the blueprint is complex in design but straightforward in its objectives: to leverage the country’s immense pool of data, police the flow of foreign information, and boost digital trade. In so doing, Beijing aims to leapfrog the US as a global technology leader and to become a dominant force in shaping digital rules.

What might a Chinese digital system look like on a global scale? The Regional Comprehensive Economic Partnership (RCEP) offers clues. This 15-country pact, led by China, impels members to liberate cross-border data flows and to eliminate data localisation requirements, similar to accords such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). But a blanket “public policy” exception in the RCEP enables each country to decide for itself when to skirt such commitments. As observers have noted, the pact generally reflects China’s preferred digital framework, one that reduces tariffs on digital goods and services, but also restricts data flows, mandates data localisation, and favours domestic firms.

The conflicting models put forward by the US and China, along with various disparate efforts by other nations, have led to a fragmentation of digital standards. Without uniform rules, individual nations, as well as regional blocs like the European Union, are building a hodgepodge of different frameworks.

Amid this patchwork, Washington or Beijing could gain a strategic advantage by locking in a three-way deal with Seoul and Tokyo. South Korea and Japan are major producers of data and leading innovators in the region. A 2019 study by the Harvard Business Review ranked South Korea second and Japan third among the top “global data product” producers in Asia, behind only China. And in the Global Innovation Index for 2020, the World Intellectual Property Organization placed South Korea as the second and Japan as the fifth most innovative economies in the region.

Each nation is already undertaking a “digital new deal” at home. Abroad, South Korea is negotiating its first digital trade deal with Singapore. The objectives are to allow a greater flow of data between the two nations by improving consumer protections, relaxing barriers on cross-border data flows, and developing governance standards for artificial intelligence.

Japan similarly continues to promote an open digital architecture along the lines of its Data Free Flow with Trust framework – established at the G20 in 2019 – through Tokyo’s recent engagement with the Quad, the G7, and a much-anticipated G7-plus grouping of 10 advanced democracies.

Moreover, a trilateral deal would better position Washington or Beijing to influence digital standards in the Indo-Pacific. In 2019, nearly 60 per cent of global e-commerce transactions were in Asia, and there is room for further growth. While only 56 per cent of the region has internet access, more consumers are coming online all the time, especially in the Association of Southeast Asian Nations’ region, where 125,000 users are joining every day.

Aware of these benefits, the US has already taken steps to increase digital cooperation with both Japan and South Korea. In 2019, Washington signed a robust e-commerce deal with Tokyo, albeit without the usual enforcement mechanism. Following the April summit between US President Joe Biden and Japanese Prime Minister Yoshihide Suga, both nations are reportedly engaging in new bilateral efforts to address supply chain issues.

With regards to US-South Korea relations, in 2018, the allies revised the US-Korea Free Trade Agreement with provisions for information technology services. And at Biden’s recent summit with South Korean President Moon Jae-in, the two governments reiterated the importance of expanding digital cooperation. Washington could build on these efforts to harmonise high standards among the three allies and mediate their differences. As is, Seoul and Tokyo may hesitate to pursue cooperation independently given their current frigid diplomatic relations.

Other approaches for the US to raise digital standards appear improbable or, at the very least, will take longer to develop. In the near term, the Quad is unlikely to coopt an open framework, as India appears to be moving towards a more restricted data environment. Any US attempt to rejoin the CPTPP will certainly face domestic and international hurdles. At the WTO, there remain deep divisions over privacy and national security concerns, even as members have made some progress on a global digital compact.

For China, the economic incentives of a trilateral digital agreement are less compelling. South Korea and Japan are already members of RCEP, the first trade pact to bind Seoul and Tokyo. Still, China would demonstrate its diplomatic prowess if it were to scoop a trilateral trade deal with two of the US’ closest allies. Moreover, Beijing would show commitment to solidifying its digital foothold in the region. Beijing might seek to pull this off within the existing framework of trilateral trade deal negotiations, which have been officially under way since 2013, making it almost as old as the RCEP talks. As recently pointed out by Japanese officials, the RCEP model may well be the framework for this new deal.

To be sure, not all aspects of US-China relations need to be competitive. Indeed, there are significant areas of necessary collaboration, such as in addressing the proliferation of nuclear weapons, climate change, and pandemics. But if data really is the new oil, the first superpower to secure a deal with Tokyo and Seoul will be a step ahead in the digital rules rush.

 source: South China Morning Post