Two Senators released a bill last week that could have major implications for the U.S. approach to economic diplomacy in the 21st century. Between budget fights, NSA hearings and the ongoing health care website saga, it is not surprising you might have missed it.
Senator Wyden (D-OR) and Senator Thune (R-SD) came together to sponsor a bipartisan bill — the Digital Trade Act of 2013 — that directs U.S. trade negotiators (and other diplomats with economic portfolios) to prioritize attention to the needs of the digital economy. Although the simple bill might seem small compared to the front page political fights that have captured attention over the past few months, the long term effect of such legislation — if passed — could very well be profound as international commerce is increasingly important to global trade, but it lacks most of the protections that legacy goods and services trade enjoy.
Digital trade issues, despite the Internet’s centrality to modern international commerce, currently occupy a position of peripheral importance to the United States Trade Representative (and even less to most other trade negotiators from other countries) compared with more traditional trade disciplines, such as agriculture, financial services and manufacturing. Of note, there is not even an Industry Trade Advisory Committee (ITAC) devoted to Internet-enabled commerce and the needs of online platforms (ITAC 8, which includes e-commerce, is a hodge podge of mostly telecom and hardware interests that have much different, but still important, concerns and expertise), despite the United States International Trade Commission study acknowledging that digital trade is one of our largest export industries. Given that ITACs are one of the main avenues through which the USTR solicits input from the private sector during confidential trade negotiations, this is a problem.
Ironically, the same rapid technological innovation on the Internet that is drastically lowering the transaction costs associated with international trade is now obsoleting the agreements and norms that facilitated 20th century commerce. If policymakers don’t keep pace with the technology, we risk backsliding into an international commerce wild west that lacks the predictability and certainty that businesses need to thrive.
Reconstructing the global trade apparatus following WWII has proven to be perhaps the biggest economic policy success of the 20th century. The currency and trade wars that epitomized the interwar years, including the disastrous Smoot-Hawley Tariff Act in the U.S., inflamed the global depression and stoked international strife that ultimately manifested itself in another catastrophic global conflict. Given the experience during the interwar period, migrating out from under the protection and certainty the global trade regime has afforded international commerce could have extremely negative implications.
Since the General Agreement on Tariffs and Trade (GATT) was signed in 1947 (the predecessor to the WTO), average global tariffs have dropped from 20 – 30 percent to just 4 percent. As a result, the volume of global trade has increased 27 fold (measured from 1950 – 2006), three times more than the growth in global gross domestic product. On top of tariff reductions, trade agreements have evolved to address non-tariff trade barriers and streamline international services trade — which is great for the United States as service industries account for 68 percent of U.S. GDP and 80 percent of U.S. jobs. However, the dramatic increase in global trade has benefited everyone by helping fuel the dramatic rise in per capita incomes since 1950. It’s not surprising that over 80 percent of economists agree that “unfettered international trade” is a good thing.
When the Marrakesh Agreement was signed in 1995, marking the birth of the WTO (and General Agreement on Trade in Services as well), trade negotiators had no idea that the Internet would soon revolutionize International commerce. In fact, nobody did. 1995 marked a major Internet milestone as it was the year that NSFNET was finally decommissioned, thus removing the final restrictions on the Internet’s ability to carry commercial traffic. Since then Internet traffic has grown 100 fold and now nearly 2.5 billion people are classified as Internet users.
The Internet has changed the face of global commerce as well. In a recent report, the OECD calls the Internet (and broadband connectivity) a “general purpose technology” that has fundamentally reshaped global commerce. In fact, the OECD said it expects the economic impact of the Internet to be more profound than that of previous general purpose technologies, such as the steam engine, railways, and electricity. The numbers are increasingly bearing this prediction out. One study, by the Finland’s Ministry of Employment and the Economy, stated that by 2025 half of all value in the global economy will be created digitally. Another study by the McKinsey Global Institute found that the Internet accounted for 21 percent of the GDP growth in the 13 mature economies studied over the past 5 years, and 75 percent of the economic benefit of the Internet accrued to traditional industries in the form of expanded market access and efficiency savings. In the U.S. economy alone, according to the U.S. International Trade Commission, exports of “digitally enabled services” grew from $282.1 billion in 2007 to $356.1 billion in 2011. Needless to say, no matter what measure you use, the Internet is having a profound positive effect on the growth of International commerce.
So, given the growth in online digital trade, one might ask: What’s the problem?
Unfortunately, as I mentioned above, international trade agreements struck before the explosive growth of the Internet offer little in the way of assurance to digital exporters and importers — particularly if those agreements are negotiated using “positive lists.” Furthermore, the WTO — even though it was relative quick to identify the existence of digital trade issues — has been able to do little to update its agreements to reflect the emergence of digital trade.
The U.S. has been a leader in this area, but digital trade issues — such as forced local hosting requirements, internet censorship, impediments to the flow of data, out-dated customs procedures, and draconian intellectual property protections that don’t reflect the realities of basic Internet technologies — have received relatively little attention compared to more traditional trade disciplines. What little language that addresses these issues that has made it into agreements to date has been aspirational and non-binding (see “intend to cooperate” language in U.S.-EU ICT principles, “seek to achieve” language in USTR press release on copyright limitations and exceptions in the TPP, and “shall endeavor” language in Cross-Border Data Flows in U.S.-Korea FTA), which is much different from most of the commitments made in the manufacturing or financial services chapters of U.S. trade agreements.
Given the increasing importance of the Internet to international commerce, and the lack of international agreements or norms that protect global informational flows (or interoperable international standards governing regulatory aspects of Internet commerce such as intermediary liability or privacy), global commerce is vulnerable to a new wave of short sighted protectionism, which has been spurred on by international politics. For example, countries like Brazil and Vietnam are instituting (or evaluating) local hosting requirements that purport to prevent their citizens’ data from leaving the country — regulations that would be inherently at odds with how the Internet actually works.
In this vein, after the Snowden revelations, some European legislators have called into question the Safe Harbour agreement that allows information about European users to transit back and forth across the Atlantic. If the Safe Harbour was nullified, huge amounts of commerce would be affected and no clear technological solutions exist to prevent any information about Europe’s citizens to flow back and forth across the Atlantic. Given the extent to which the two economic blocs are already interconnected, this would lead to chaos.
On top of that, there is an international diplomatic fight afoot — led by some of the world’s more authoritarian countries — that seeks to wrest control of the Internet away from ICANN, the private, multi-stakeholder Internet governance body that has shepherded the Internet through its explosive growth up to now. It’s not surprising that myopic government officials in countries such as Russia and China want more control over the Internet, but this does not bode well for the future prospects of continued Internet growth as an open platform for commerce and trade.
Paving the way for open commerce and communications online is going to be more difficult than lowering tariffs, which partially explains why traditional trade negotiators have been hesitant to wade deeper into these waters. And this is where the Digital Trade Act comes in. If passed, the USTR — which must pay attention to Congress or risk its trade negotiation efforts being voided — would be required to increase the importance of these issues in its international advocacy and negotiations. Although it’s going to take more than U.S. trade negotiators’ attention to update the global international trade apparatus (and the U.S. has a lot of work to do to repair its reputation after the NSA leaks), history has shown that the USTR — which negotiates economic access to the world’s largest economy — has a huge role in shaping international trade norms (e.g. the WTO’s Trade Related Aspects of Intellectual Property Agreement, which reset global IP norms in a relatively short period of time).
With this in mind, we fully agree with Senators Wyden and Thune, who in a joint op-ed in the Wall Street Journal stated that Congress should “require that such [future trade] agreements contain strong, binding commitments to keep the Internet open for business and for the free exchange of ideas.”