Designing next generation trade agreements for the digital economy

However, firms that want to deliver graphic design or consulting services from anywhere to anywhere, share office spaces or manage autonomous vehicles, or ship their products globally from their websites or Instagram pages are finding the digital economy increasingly difficult to navigate.

From a business perspective, getting an agreement on digital rules among the widest number of countries is best.  Such a decision will create conditions for improved stability, lowered risk and reduced compliance costs in engaging in trade and business everywhere, with similar or identical rules and regulations in place. 

But there is a trade-off between getting an agreement with many parties and getting an agreement in a timeframe that businesses would view as helpful.  While governments can operate in cycles of years, companies are concerned about results every quarter. 

This mismatch between expectations and timing is particularly acute in the digital world, where business developments are often made at light speed.  Governments are sometimes struggling to even understand the ideas and principles of digital trade and are faced with particular challenges in crafting sensible regulations.

Digital trade was largely unregulated, or lightly addressed, in most places up until a few short years ago.  With few exceptions, firms were free to do whatever they wanted in the digital space, as long as they did not violate existing non-digital rules.  Governments have often tried to adapt physical rules to the digital realm. 

This situation has grown increasingly untenable.  The exponential growth rates of the digital economy means that governments cannot go on trying to shoehorn analogue rules to digital products and services.  

So how should governments manage the increasingly important digital world?  There are at least four broad responses so far.

First, governments are taking unilateral actions.  Countries are crafting rules covering cross-border shipments of e-commerce goods, imposing taxes on digital services, considering the application of customs duties to digital downloads, changing rules for consumer privacy, and so forth.  Not all regulation undertaken unilaterally is problematic, of course, but individual country rules can be a challenge for a “borderless” internet.

Second, at least 82 countries in the World Trade Organization (WTO) are trying to craft a set of rules to cover many aspects of digital trade, including managing e-commerce delivery of goods, grappling with online services, and ensuring security in cyberspace.  The so-called “Joint Sector Initiative” (JSI) is meant to wrap up by the June 2020 WTO ministerial conference with at least some set of common rules in place for the digital realm.

Third, many WTO members have been including digital trade rules into broader free trade agreement arrangements.  The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) provides a chapter on e-commerce and includes various digital elements across the nearly 600 pages of legal commitments.  The upcoming deal to replace the North American Free Trade Agreement (NAFTA) also has a set of digital provisions that build on CPTPP rules. 

Finally, some governments have started work on digital-only trade agreements.  The first of its kind, the Digital Economy Partnership Agreement (DEPA), concluded last week between Chile, New Zealand and Singapore.  A similar Digital Economy Agreement (DEA) is coming in March between Australia and Singapore.

Unilateral rules are especially problematic for firms.  It means that companies could find themselves trying to navigate literally hundreds of different settings if all 164 WTO members opted for country-specific rules.  Since many aspects of digital trade can be borderless, the proliferation of rules completely destroys the benefits and opportunities that might otherwise be ahead.  The burden is particularly high for smaller firms with limited resources and capacity to manage inconsistent or overlapping digital rules.

Hence, at least some coordination is needed.  The best outcome, for firms in the digital economy, is likely to be found in the broadest possible framework that applies seamlessly everywhere.  But getting this solution will take time. 

It is also likely to be relatively shallow, as the deal will have to balance the perceived interests of the widest possible group of member governments.  Getting to “yes” is difficult—including in the JSI talks in Geneva with about half the total membership of the WTO participating.  The JSI negotiations are between members that have opted to join the talks, suggesting greater enthusiasm for the task than among the entire membership of the WTO.  Even within this smaller grouping, however, negotiations have been challenging.  Officials are striving for an outcome in June, but are probably going to miss this target.

Governments that want to create high-quality, high-standard rules for digital are therefore faced with a dilemma.  Unilateral actions are still problematic, even if the objective is to create improved outcomes.  The multilateral process is too time consuming and not ambitious enough.

What to do?  This situation has prompted governments in the CPTPP process to create new “digital only” trade deals.  The DEPA and the DEA represent an attempt to bridge the gaps.  Both agreements are designed to be “modular” to allow future participants to select only the elements of the agreements that best suit the particular circumstances of members.

The basic idea is that governments will then regulate digital trade with consistent elements, as the modular provisions in DEPA and DEA are taken up by other governments.  These provisions could be incorporated through digital-only agreements, slotted into ongoing trade agreement negotiations or upgrades, or help provide specific texts for reference in the JSI process.  Even governments that intend to carry on with unilateral decisions could choose to align domestic rules with aspects of the DEPA and DEA.

The modules in DEPA, as an example, include provisions ranging from personal information protection to data hosting requirements to cybersecurity cooperation.  (More details on the specifics of DEPA can be found in our parallel Talking Trade piece here.) 

The DEPA may become the framework for governments interested in regulating digital trade in the future.  Countries could impose similar requirements, more or less stringently implemented, to help build consensus around similar rules. 

For firms, the DEPA approach may represent the most useful step so far in figuring out what to do about the growing importance of digital trade.  Consistency is critical in allowing the digital economy to flourish.  Companies do not want to watch the promise of a digital world wrecked through poor application of unilateral rules.