he digital transformation is driving profound changes in business models and the structure of economies, creating new sources of wealth and disrupting established ones. It is also reshaping the context in which business takes place, including how people interact socially, how domestic politics play out and how national interests align in the geopolitical arena. All these developments have implications for international commerce, including the conditions for competition between economies and the distribution of the benefits from trade.
This raises questions about the rules for international commerce as codified under the Agreement Establishing the World Trade Organization1 (WTO Agreement) and other international treaties. Do these rules hold up in the new evolving digital context (with suitable updating), or is there a need for more fundamental revision and, indeed, a renegotiation of WTO members’ commitments?
From a day-to-day business perspective, the existing framework has, so far, accommodated change reasonably well. WTO rules are technologically neutral, so the introduction of new ways to conduct trade does not change members’ rights or obligations. Moreover, the digital economy is booming. Electronic commerce (e-commerce) has been growing by leaps and bounds, with numerous institutions providing the basic legal infrastructure by establishing conventions for things ranging from governance of internet protocols (domain names, net neutrality and so forth) to authentication of electronic contracts and recognition of electronic signatures.
Comprehensive enabling frameworks for e-commerce between nations have been articulated and embedded in regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Canada-United States-Mexico Agreement (CUSMA) that is set to replace the older North American Free Trade Agreement. And a negotiation is under way under the auspices of the WTO to create a broader multilateral agreement along these same lines.
However, a more general updating of the trade regime is needed to address the many points of friction that have emerged as the digital transformation has progressed. Reflecting this, negotiations have been launched by Chile, New Zealand and Singapore toward a Digital Economy Partnership Agreement (DEPA).
In addition to the technicalities of facilitating electronic commerce (including access to the internet, online consumer protection and digital identities), the draft DEPA addresses a range of contentious issues such as customs duties on digital products, data localization and cross-border data flows, cyber security and national security exceptions to normal course digital trade, protection of personally identifiable information, cooperation in competition policy and new issues such as the regulation of artificial intelligence (AI).
The limited development of many of the chapters in the initial draft of the DEPA signals the extensive work that remains to be done in fleshing out this regime. Moreover, the DEPA does not address all the hot button issues that are threatening to undermine the multilateral trading system. The following is a brief description of the key issues that need to be addressed at the broader multilateral level to make the WTO fit for purpose to regulate digital trade in the modern innovation-intensive, knowledge-based and data-driven economy.
Governance of Data Flows
In thinking about digital trade, there are many unresolved categorization challenges, but for present purposes, just consider the distinction between conventional intellectual property (IP) in digital form (for example, a song, book or movie) and the commercially valuable information about who bought it, when and where. Today, such data, captured and stored in massive quantities and analyzed with advanced tools, constitute the motherlode of the data-driven economy.
Clearly, data that are constituent parts of the electronic transmission of commercial services need to flow unimpeded across borders, consistent with WTO General Agreement on Trade in Services (GATS) commitments on technological neutrality of services delivery. However, it is unrealistic to expect countries to accept that GATS commitments on digital services also entail commitments on the asset value of data generated within their jurisdiction.
Importantly, these data flows represent a new mode of trade that is not covered by the WTO — an implicit barter exchange of data for “free” internet services. The fact that these data can be captured and commercially exploited by companies that have no physical establishment in the source country also means they escape taxation in the source jurisdiction under current international tax conventions. Who gets to capture the value of data is one of the major points of friction in the digital economy; this can only be sorted out through a negotiation that would subsume the current WTO negotiations on e-commerce, the review of the moratorium on tariffs on electronic transmissions and the initiative of the Organisation for Economic Co-operation and Development on the taxation of profits generated in the digital domain.
Legitimate Public Policy Exceptions to Free Flow of Data
The networked world is generating new demands for governance that will reshape how societies regulate themselves. Social concerns are being raised by ubiquitous surveillance (by both corporations and states) and the erosion of privacy, misinformation and fake news, political interference and manipulation of electorates, and commercial exploitation of people’s vulnerabilities (including of children). In addition, the digital transformation raises vulnerability to psychological operations (or “psyops”), which can be used to destabilize countries from within through targeted disinformation and manipulation of social media memes. This “informationalization” of warfare raises the need for informational defence, which, in turn, will mean data fences.
This “informationalization” of warfare raises the need for informational defence, which, in turn, will mean data fences.
Various types of responses are being contemplated. For example, some cities have banned the use of facial recognition technology for corporate or police surveillance.2 Some observers have called for the advertising-driven business model of social media platforms to be replaced by subscription services as a remedy to socially toxic outcomes of the present business models. And bans have been proposed on personally targeted political advertising during election campaigns.
WTO rules (article XX) provide for “legitimate” exceptions from trade commitments, but these issues require more treatment than assertions of a “right to regulate” in a trade agreement, which would ultimately leave the determination of what is legitimate and what is disguised protectionism to be decided ex post by dispute resolution panels.
National Security Exceptions
The “backbone” economic infrastructure comprised of telecommunications, transportation, energy and financial services has traditionally been closely regulated by national governments because of national security concerns. With digitalization and the buildout of the Internet of Things (IoT), this infrastructure is transformed from a passive framework into a veritable nervous system for the digital economy, raising the stakes of vulnerabilities to cyber attacks.
National governments are unlikely to accept the unbounded risks to national sovereignty from the level of intrusion into the national infrastructure system that free flow of data across borders in the new IoT environment would potentially allow. Indeed, the security of the intangible infrastructure of the digitalized economy has emerged as a major battleground issue in the technology war between the United States and China, in which the United States has banned China’s Huawei from any participation in the buildout of its 5G network and pressed its allies to do likewise.
Existing WTO disciplines (article XXI) were not designed to deal with these kinds of issues. Notably, the CUSMA text on national security exceptions to trade commitments repeats the existing WTO language, but drops the examples that were top of mind for the framers of this text back in 1947 when it was committed to paper: trade in fissionable materials, active kinetic war and transport of munitions. The security issues in the digital realm are completely different. New language will be needed in a multilaterally agreed text to provide guidance to future dispute settlement panels.
Most Favoured Nation in the Digital Sphere
A foundational principle of the WTO is that of “most favoured nation” (MFN). This states that preferences given to one country must be given to all WTO members. This is the core principle for non-discriminatory trade. At the same time, the WTO requires that “substantially all trade” be liberalized as a condition for such preferences (article XXIV). How is this to be transposed to the digital realm? For example, the European Union is developing its Digital Single Market, which, in principle, provides discriminatory access to digital markets within the European Union to member states.
The Group of Twenty has articulated the concept of “free flow of data with trust,”3 and analysts have outlined possible architectures for common data areas based on trust.4 Given the possibility of the fracturing of the digital economy into walled-off and possibly warring data realms,5 suitable ground rules will need to be articulated as to what MFN treatment means and what are grounds for derogation from MFN as the digital economy expands its coverage of global commerce.
Almost across the board, economic regulatory reforms are likely to be implemented at the national level to address the issues raised by the digital transformation, given the characteristics of the data-driven economy,6 which features numerous sources of potential market failure. The regulatory challenges are complex. There is no historical analogue for an economy built on a capital asset with the characteristics of data, which does not come with recognizable ownership rights7 and is not traded in structured markets with transparent prices, yet is the most valuable asset in the world and flows across borders with no royalty. Nor is there a precedent for a society in which individual transnational corporations have more clients than the populations of China, the European Union and the United States combined. The vast amount of information held by these corporations, without checks or balances and shielded from all transparency as “trade secrets,” poses serious policy issues for national governments and the international community. Potential divergence in policy responses is likely and may require new accommodation within the WTO framework.
Nor is there a precedent for a society in which individual transnational corporations have more clients than the populations of China, the European Union and the United States combined.
The rise of globally market-dominating “superstar firms” in the data-driven economy raises competition concerns that become inextricably entwined with market access. In view of a mounting number of transnational cases alleging anti-competitive behaviour, and national initiatives such as Germany’s to revamp competition law to address the issues raised by the digital economy,8 the lack of a broadly accepted WTO mechanism to mediate in this area is becoming increasingly problematic.
Governance of AI
The governance of AI is an area of extraordinary activity and ferment at the moment. Principles to govern the development of AI regulation have been articulated.9 As AI applications proliferate and are deployed in international commerce, the regulatory framework for these applications will become a major challenge for the rules-based system in terms of standards, interoperability, disguised barriers to trade, mutual recognition and so forth. In many ways, AI regulation promises to be as contentious in the digital realm as sanitary and phytosanitary standards have proven to be in agricultural trade.
The advent of machine learning changes the economics of innovation in various ways, for example, in terms of the pace of innovation, the proliferation of machine-generated “works,” an implied further rise in the value of intangible assets, and a much-increased reliance on trade secrets to capture benefits. IP rights have been a major battleground issue in trade negotiations and are at the heart of the trade and technology war between the United States and China. The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights will need to be updated, with wide open questions as to how.
Investment has been the area of economic interdependence that has probably been most disrupted by the trade and technology war and the ensuing decoupling. Investment, both inward and outward, is a major avenue for technology dissemination, which is vital to economic convergence and development. The WTO Agreement on Trade-Related Investment Measures limits itself to addressing trade impacts of measures such as local content requirements. Issues such as technology transfer requirements were hotly contested in the Uruguay Round but could not be resolved and were excluded. Arguably, this is an area where the data-driven economy requires a comprehensive rethinking,10 especially given that the “servicification” of trade requires multi-faceted market access.
The digital transformation calls into question numerous aspects of the framing of the rules-based system. Much of the technical regulation in areas ranging from privacy to competition policy to IP will be developed through parallel processes. But how these regulatory developments interface with trade will require elaboration, which, in turn, will require a thorough review of WTO rules.
The immediate future is not propitious for the launch of a new full-fledged digital round of multilateral negotiations. Judging by the current trade and technology war between the United States and China, the contest between the major digital economies for capture of the lucrative markets promised by the digital transformation is likely to be fierce.
However, as initiatives such as the DEPA negotiations signal, the rules-based system will require a comprehensive review, and there is much thinking to be done on how the rules should be reframed. For the WTO, the time may be out of joint, but it is not short of work.