The Office of the U.S. Trade Representative’s decision last November to withdraw support for foundational digital trade rules was an abrupt and unfortunate way to end the year. This decision will not only have ramifications for U.S. export strength, but casts an unfortunate shadow across U.S. engagement on digital priorities with trading partners. This post gives a brief overview of what is on the horizon for U.S. digital service exports for the upcoming year.
MC13 To Start the Year, Moratorium Once Again Up for Renewal
The 13th World Trade Organization Ministerial is quickly approaching, taking place February 26-29 in Abu Dhabi. The outcomes and issues discussed are likely to set the stage for the rest of the year.
With respect to digital issues, announcements are expected on the Joint Statement Initiative on E-Commerce. At the end of last year, co-conveners announced consensus text on the following areas: online consumer protection; electronic signatures and authentication; unsolicited commercial electronic messages (spam); open government data; electronic contracts; transparency; paperless trading; cybersecurity; open internet access; electronic transaction frameworks; electronic invoicing; and “single windows.” The intent is to conclude these negotiations by early 2024. With the U.S. withdrawal of support for key rules, however, the final framework will be significantly less impactful than hoped for. Absent any valid alternatives to text on data flows, localization, and source code protection, it is unclear whether parties to the exercise will succeed in delivery of a comprehensive and strong final agreement in the next year. To the extent that alternatives emerge that represent a significant weakening of proposed rules, the JSI could verge on being affirmatively unhelpful–legitimizing trade partners’ discretion to impose unjustified or discriminatory restrictions of digital service suppliers.
Another key issue will be the renewal of the moratorium on imposing customs duties for electronic commerce, which has been renewed at every Ministerial since 2000. The prohibition on customs duties has been critical to the development of global digital trade, benefiting a wide range of MSMEs around the world. However, countries like India, South Africa, and Indonesia continued to oppose its renewal. Failure to renew this year will have significant implications for the millions of firms dependent on trading in software, games, video and other digitized products, while doing little to solve concerns on revenue. International institutions have looked at the risk of ending the moratorium, and identifying preferable alternatives to customs duties on electronic transmissions:
- OECD: “Failure to renew the Moratorium would result in greater policy uncertainty and less trade, and tariffs on electronic transmissions would reduce domestic competitiveness. Adverse effects would be most pronounced for low-income countries and smaller firms. Overall, evidence demonstrates that there is a strong case for the Moratorium to be renewed.”
- WTO: “Tariffs on electronic transmissions might also impact competitiveness and participation of firms in trade, especially MSMEs and women owned traders.”
World Bank: “Considering the incidence of tariffs, consumer welfare, implications for export competitiveness, and the option to capture revenues through economically neutral value added taxes, the benefits of the moratorium may well outweigh the costs incurred. Moreover, the application of reciprocal tariffs could make the application of tariffs on electronic transmissions fiscally counterproductive.” - IMF: “The World Trade Organization (WTO) moratorium on customs duties on electronic transmission can help to effectively channel developing countries’ tax reform efforts in a more efficient direction.”
A sign of success at MC13 will be the renewal of the moratorium, and commitments to continue work on achieving a high-standing agreement within the framework of the JSI.
U.S. Retreat on Digital Trade Casts Unwelcome Shadow
Three years into the Biden Administration’s new strategy of “Worker-Centered Trade,” stakeholders are still left puzzled on what that means for U.S. trade engagement. While the U.S. hosted many conventions and summits with trade partners in 2023, issuing relatively vague progress updates, concrete deliverables were unfortunately lacking.
The Indo-Pacific Economic Framework (IPEF) has yet to deliver on its initial promise at its launch (with the exception perhaps of the Commerce Department-led IPEF Supply Chain Agreement). Little was announced at the San Francisco Summit last November, where final outcomes were long expected. The IPEF Trade Pillar seems to have hit a standstill. Last minute demands from Congressional leaders not to announce anything on trade appear to have been successful, leaving future engagement highly uncertain.
While the USTR tabled text on the digital chapter in early 2023, the U.S. position is now unknown (which necessitated the move at the WTO) in comparison to the digital trade chapter in the U.S. Mexico Canada Agreement. More worrisome is that the change in position was reportedly at the behest of political leadership of the DOJ/FTC absent Congressional consultation based on unclear justifications linking domestic antitrust enforcement with international trade rules U.S. trading partners would be subject to.
And the U.S. new (or nonexistent) digital trade policy introduces uncertainty on upcoming workstreams. With USMCA’s inclusion of a “sunset” provision, negotiations are forthcoming. Will the U.S. seek a reversal in its prior support for the strong rules in the digital trade chapter? Such a move would prove quite controversial, with USTR only having negotiated the text mere years ago, based on strong bipartisan support from Congress.
Likely Trade Irritants in 2024
Outside the trade negotiation context, market access barriers continue to foster conflict for digitally-enabled services.
Digital services taxes (DSTs) are likely to once again take the spotlight. Despite the OECD agreement reached in 2021, and positive announcements of significant progress on the international framework to improve fairness in global taxation, some countries are once again pursuing unilateral DSTs. Canada announced it still intends to move forward with a DST this year, despite the warning of the U.S. government and Canada’s signature to the OECD agreement.
Other trade irritants include discriminatory on cloud computing restrictions that disadvantage foreign cloud providers in certain markets. Korea continues its practice of effectively shutting out U.S. firms from the domestic procurement market. The European Union is finalizing its consideration of the EU-wide certification scheme drawing from France’s SecNum Cloud approach. As drafted, the EUCS would disadvantage U.S. cloud services from participating in the EU market. Engagement in the U.S.-EU Trade & Technology Council is an important venue to address any discriminatory measures that undermine transatlantic cooperation in the ICT sector. The TTC is expected to meet following delays at the end of this month.
Countries’ approaches to regulating digital platforms will also pose trade conflicts to the extent the application of these rules are narrowly targeted to U.S. firms, excluding domestic competitors absent clear justifications. Engagement with foreign regulators will be critical to ensure that any ex-ante regulations provide fair and adequate guidance to covered entities that limit unintended consequences. A focus on the EU, where a panoply of requirements will begin to take effect this year, will be important–both for how access to the EU market is affected, and for defining a model other countries may seek to emulate.
Work to Continue on Trusted Methods for Data Flows
However, it is not all doom and gloom. International support for actualizing “Data Free Flow with Trust” (DFFT) is encouraging. DFFT was an initiative of Japan under its G20 Presidency, and subsequent G20 workstreams continue to support its development. The concept of (DFFT) aims to promote the free flow of data while ensuring trust in privacy, security, and intellectual property rights.Over the past year, there has been increasted discussions and support to operationalize DFFT, complementing and working with institutional partners like the OECD. Relatedly, Japan and the EU amended their bilateral FTA to include meaningful provisions aimed at promoting data flows and preventing data localization.
With positive initiatives like these gaining support, one can hope that the end of 2024 closes out on a more hopeful note for digital trade, and the economic benefits it brings to consumers across the globe, than the last.
To read the full article as it appears on the Disruptive Competition Project, click here.