Cross-border data flows underpin digital trade. In fact, very little cross-trade in services, from accounting to travel to entertainment would be possible without data flows. A key restriction, localization mandates for data and infrastructure are intensifying globally and hinder U.S. exporters from expanding into new markets. The U.S. should work with trading partners to both remove and prevent future barriers to cross-border data flows and discourage data localization mandates, encouraging partners to model strong commitments on the digital trade chapter in USMCA. Other digital trade agreements include explicit protections against cross-border data flow restrictions as well, including the U.S.-Japan Digital Trade Agreement and Singapore’s digital trade agreements with the UK, South Korea, Australia, New Zealand, and Chile. Increasingly, countries are pursuing data protection laws, which often fail to provide for clear rules to transfer data or impose onerous obligations for data processing and storage.
U.S. firms face hostile environments in several markets which impedes company operations reflecting a growing trend of authoritarian-leaning governments to seize control of the internet or online services to restrict foreign presence and/or repress freedom of expression. In some jurisdictions, leaders leverage control over online services and speech through internet shutdowns. Other explicit barriers to digital trade come in the form of the outright filtering and blocking of U.S. internet platforms and online content. Some countries are also pursuing content regulations that grant the governments extensive powers to compel companies to comply with takedown orders, often accompanied with new levels of intimidation for local employees dubbed “hostage-taking laws”. Many existing trade rules and multilateral agreements address censorship in various ways, including General Agreement on Trade in Services Article XIV, UN Article 47, Article 19 of the United Nations Declaration of Human Rights, Article 19 of the International Covenant on Civil and Political Rights, the Declaration for the Future of the Internet, and products of the Freedom Online Coalition. Key threats include India’s expanded oversight of online content and services, Russia’s censorship laws that have intensified during its invasion of Ukraine, and Turkey’s increased obligations on the use and operation of social media.
Governments are pursuing rules to force U.S. online services providers to arbitrarily pay local incumbents through mandatory negotiations that are often based not in targeted market analyses or adjustments, but efforts to extract large sums of revenue from foreign players and redistribute them to large and politically powerful industries. In lieu of free market negotiations between online services suppliers and local industry players, these frameworks implement an obligation for platforms—often targeting a select few U.S. firms—to choose between paying powerful entities in local markets or exiting the market. Examples of these rules include Australia’s News Media Bargaining Code, Indonesia’s proposed online news law that would force payments from online platforms to news organizations with oversight conducted by a panel made up of media industry representatives, Canada’s Bill C-18, and Czechia’s proposed rules forcing online platforms to negotiate payments for news content shared through their services.
This policy is popular in the telecommunications landscape as well, as South Korea and the European Union have advanced proposals to force select content and application providers to pay domestic telecommunication service providers for delivering traffic to their internet subscribers, in a move that would hinder U.S. digital services exports and undermine the structure of the open internet that has prevailed for decades. These proposals in the telecommunications space, often dubbed “network usage fees”, are now being considered in other jurisdictions, such as Brazil. Given the targeted nature of these provisions towards U.S. companies and the conditioning of market presence on payments to local industry leaders, these proposals often contravene provisions of trade agreements and WTO rules that are aimed at streamlining foreign investment and liberalizing the free flow of services.
A general but ill-defined desire for “platform regulation”, often unsupported by evidence of consumer harm, is spurring digitally-focused ex-ante regulation around the world, including the EU, Japan, South Korea, and Australia. In some cases, platform regulation serves as a backdoor for industrial policy dressed up as competition policy and typically employs thresholds designed specifically to target leading U.S. internet services while sparing comparable domestic or third-party services. Such regulatory approaches depart from best practices of seeking general rules of industry-wide application, as opposed to targeting individual companies, absent credible evidence of market failure or consumer harm. Additionally, rather than being developed through highly prescriptive legislation, best practices also suggest that they be developed pursuant to a transparent rulemaking process that follows global norms.
Tools like strong encryption, critical to a trustworthy digital ecosystem, are common on devices such as smartphones and are increasingly deployed through end-to-end on communications services and browsers, for both consumers and businesses. Many countries, at the behest of their national security and law enforcement authorities, are considering or have implemented laws that mandate access to encrypted communications—thereby undermining business and consumer security. For industrial policy reasons noted above, some platform regulation proposals also seek to mandate data sharing and access to core technical and operational functionality of devices, undermining the security of the services offered by U.S. firms (and undoing a key competitive advantage). Additionally, rules various countries have implemented or are considering seek to undermine virtual private networks, compel interception of messages on over-the-top communications services, and require unique local cybersecurity standards (which are often divorced from international norms in security), all of which further harm digital security. Such rules ultimately restrict U.S. firms from operating in foreign markets since they necessitate weakening their goods and services globally, and preclude the use of standardized, scalable technologies. Often, these measures also undermine the goal of protecting consumer privacy, which are often sought in the same jurisdictions as those pursuing anti-encryption measures. Several international trade agreements protect companies’ rights to protect their consumers through strong encryption, such as the USMCA, the U.S.-Japan Digital Trade Agreement, and the UK-Japan Comprehensive Economic Partnership Agreement.
The provision of cloud services globally drives billions of dollars in economic value, as cloud computing supports a wide range of subsequent industries, applications, and services reliant on cloud infrastructure and suppliers. U.S. cloud service providers are global leaders and represent a remarkable U.S export success, supporting a trade surplus while sustaining tens of thousands of high-paying jobs for U.S. individuals. Increasingly, jurisdictions are seeking to impose onerous and targeted requirements on foreign cloud providers—many of the most prominent representatives of which are from the United States—that limit their ability to operate in these markets. The regulations and policies pursued globally range from traditional protectionist goals to preference local upstarts at the expense of foreign rivals, to measures seeking greater ability to conduct surveillance over individuals.
Examples include rules that mandate security standards preferential to local firms in France that are being considered for the entire EU bloc, certification standards aimed at keeping out foreign competitors in Korea and Vietnam, data localization requirements in Indonesia and Mexico, restrictions on virtual private networks in India, obligations regarding content and possible interception of messages in Malaysia, and a collection of intrusive measures related to intellectual property and business operations imposed in China.
Often based on inaccurate estimates, some countries assert that digital services fail to pay adequate taxes and should be subject to additional taxation, and subsequently introduce unilateral measures to tax U.S. online services firms through digital services taxes (DSTs). These proposals that have surfaced in the EU and elsewhere discourage foreign investment and are inconsistent with international treaty obligations. Many governments leading these proposals have said they will pause the collection of DSTs until the 2021 OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting Project is implemented. But in some jurisdictions, the status of the taxes are left unclear and firms continue to pay. Further, some countries—namely Canada—have pursued DSTs even after the OECD framework was announced.
Another method through which some governments seek to arbitrarily extract money from foreign online services providers is through customs duties on electronic transmissions. Since the 2nd Ministerial Conference of the World Trade Organization in 1998, the moratorium on customs duties on electronic transmission has been in effect and has been renewed at every Ministerial since. The moratorium has been key to the development of global digital trade and shows the international consensus with respect to the digital economy, reflected in the number of commitments made in free trade agreements among multiple leading digital economies. Permanent bans on the imposition of customs duties on electronic transmissions are also a frequent item in trade agreements around the world. Imposing customs requirements on purely digital transactions will also impose significant and unnecessary compliance burdens on nearly every enterprise, including small and medium-sized enterprises (SMEs).