This paper was written toward the end of 2019. Today, in 2020, the world seems a different place, as we collectively experience the coronavirus crisis and new awareness about issues of racism and policy brutality. These crises have brought about new, and highlighted existing, urgent problems ― often exacerbated by Big Tech’s iron grip on our economic and social lives.

Emerging Challenges in 2020

The WTO itself is in serious crisis. The 12th WTO Ministerial Conference was due to be held in June 2020 but has been postponed ― possibly for another year. WTO Director-General Roberto Azevêdo has said he will step down on August 31, 2020, a year before completing his term. The United States is still blocking the appointment of new Appellate Body Members to the WTO, which means the WTO’s judicial function is not operational.

At the same time, many countries have had to take measures to deal with the novel coronavirus pandemic that are inconsistent with their WTO obligations. This is leading to a rethinking of whether the WTO model ― which left many countries short on domestic productive capacity and locked in rules that put foreign corporate rights before the domestic public health emergency ― are really fit for this purpose. There is a need for countries to have greater flexibility to depart from existing trade rules. This could well lead to a fundamental rethink of the WTO and its model of extreme liberalization ― which would be an urgent and welcome outcome.

Online commerce is booming, but many technology start-ups and thousands of small businesses have been hit hard by the pandemic-related economic shutdowns. On the contrary, Facebook, Google, and Amazon have seen their market shares and profits explode during the crisis.

At the same time, there is growing concern about the control that Big Tech exerts over so many aspects of public life, especially through anticompetitive behavior. Members of the US Congress and several federal agencies have joined European Union leaders in growing calls to break up vertically integrated roll-up corporations like Amazon, Google and Facebook.

A key provision of US tech policy that shields platforms from liability is coming under political scrutiny in the United States. As science deniers circulated inaccurate information about COVID-19 on social media, some tech corporations began to take steps to remove or flag erroneous content from their platforms. The Trump administration claimed a political bias, and Republicans are looking into rescinding the platforms’ immunity. At the same time, Democrats are concerned about some of the platforms’ policies of not taking down false or misleading political advertising that could jeopardize our elections.

There is growing recognition in many countries that digital corporations should pay their fair share of taxes. The EU is proposing this as a fiscal support measure in the wake of the crisis, but the Trump administration has just abandoned efforts toward a multilateral solution at the Organization for Economic Cooperation and Development (OECD).

Dependence on essential workers during the coronavirus crisis has also led to a greater understanding of the need for hazard pay and social protection, especially in sectors with sectoral bargaining agreements. But so-called “gig” workers, such as Uber drivers, GrubHub deliverers, and Instacart shoppers, still do not enjoy basic labor rights as workers, rather than as “contractors.”

In the United States, pressure campaigns have successfully targeted the use of facial recognition software powered by artificial intelligence (AI), since studies have demonstrated the racist impacts of such software: AI gives false positives for Black people more often than for whites.

At the same time, WTO members have undertaken multiple rounds of negotiations with a view to drafting a new “plurilateral” agreement on digital trade. They have negotiated draft texts in secret on 13 different provisions on data collection, liability, market access rights, nondiscrimination, source code disclosure, taxes, cybersecurity, and more, as described in this paper.

During these times of crisis, uncertainty, and rapid transformation, we need our governments to be able to respond more proactively to emerging problems. We need public interest concerns about economic rights, racial justice and fairness, and human, civil, and political rights to be the focus of conversations about rewriting the rules governing data and technology.

To accomplish this, however, we need to ensure that corporations are unable to acquire new WTO “trade” disciplines designed by Big Tech to consolidate their power over our economy and limit democratic oversight in the public interest.

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Subsidies can have trade effects and are therefore disciplined by the Agreement on Subsidies and Countervailing Measures (ASCM) at the World Trade Organization (WTO). The Agreement disciplines the use of trade distorting subsidies and stipulates actions which Members can take in response, including through the WTO dispute settlement mechanism to seek withdrawal of the subsidy or removal of its adverse effects, or remedial unilateral action in the form of countervailing duties to offset the effects of subsidised imports.

Some subsidies, such as those that support domestic renewable energy development and environmental goods and services, can have stated environmental objectives. On the other hand, certain subsidies may potentially contribute to over-exploitation of natural resources, or result in other environmental impacts, and can be flagged for reduction among Parties consistent with their national priorities.

This paper provides an overview of how trade disciplines on subsidies for energy and environmental goods in certain RTAs could address environmental concerns of Parties. While other subsidies including those for agriculture and fisheries could also have environmental implications, they are excluded from the scope of this report due to the complexity of the issue as well as resources required to develop the work.

In the absence of new multilateral disciplines, RTAs offer an opportunity for like-minded Parties to agree on disciplines. With respect to WTO rules, RTAs can provide an additional layer of disciplines by reaffirming WTO rules, agreeing to deepen or expand multilateral commitments; or agreeing to refrain from taking remedial actions between the Parties to the agreement. 

Two specific questions are examined in this paper: (i) to what extent can the objectives of particular subsidies for energy and environmental goods be considered in RTAs without prejudice to WTO obligations and (ii) how could RTAs serve to secure greater transparency of energy and environmentally related subsidies?

Subsidies for the energy and environmental goods can have environmental consequences as well as trade effects, and thus they are an important topic when considering how to green RTAs. The application of local-content requirements in renewable energy development has emerged in the past two decades and is a subject that requires consideration to ensure non- discriminatory measures, including for the environment.

As already observed in agreements such as the EU-Singapore Free Trade Agreement (FTA) that has been signed but not yet entered into force, Parties may agree to explicitly prohibit the use of such requirements in the framework of RTAs either in relation to renewable energy development or in a general sense as a way to signal the strength of their commitments to non-discriminatory forms of environmental regulation.

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Today, that growth and innovation is threatened as countries are considering terminating this agreement and imposing – for the first time ever – customs duties on software, music, film, and other digital products and services transmitted electronically over computer networks. Such duties jeopardize US jobs and exports. US policymakers should encourage countries to vote in favor of an extension of the Moratorium and should resist efforts to negotiate these issues at the World Customs Organization (WCO), which lacks the mandate to set such duties.

Why Does the WTO Moratorium Matter?

Customs duties on electronic transmissions would impact a wide range of US digital exports – potentially including subscription or streaming services for music, film, and publications; cloud and other remote software services; app updates and software security patches; data used in manufacturing plants; and a broad catch-all category of “other digital products.”

Some countries have even begun, or are considering, imposing customs duties and requirements on cross-border electronic transmissions. For example, in 2018, Indonesia issued Regulation No.17/PMK.010/2018 (Regulation 17), which amends the Indonesian Harmonized Tariff Schedule to add Chapter 99: “[s]oftware and other digital products transmitted electronically.” The measure has never been fully implemented, but if the Moratorium is terminated this could very well change.

If implemented around the world, measures imposing customs duties on electronic transmissions would have an immediate impact on the global economy – harming not only American digital exporters and workers, but also local industries, workers, and consumers in the implementing countries.

The United States Stands to Lose Jobs and Exports Across Digital Industries if Countries Impose these Duties

Software contributes $1 trillion to US Gross Domestic Product (GDP) and employs over 10 million Americans in jobs that pay more than two times the national average wage. Ending the Moratorium and imposing customs duties on electronic transmissions of software would jeopardize this economic prosperity. Additional impacts exist for American film, music, and other digital exports too.

Regulation 17 purports to cover a wide array of categories, classified in Indonesia’s tariff schedule between subheadings 9901.10.00 to subheading 9901.90.00, including “multimedia (audio, video or audiovisual)”; operating system software; application software; “support or driver data, including design for machinery system”; and a broad catch-all category covering “other software and digital products.”

Countries Imposing Customs Duties Face the Greatest Economic Risks

Countries imposing these duties have the most to lose: Such duties put at risk those countries’ global competitiveness, exports, exports, jobs, and consumer welfare. For example, a country that levies such duties would increase its own industries’ costs of accessing critical technologies and data, including productivity-enhancing software solutions; scientific, research, and other publications; and manufacturing data, blueprints, and other operational information.

Local industries need cross-border access to best-in-class software and data. Faced with higher software costs, local industries will become less competitive vis-à-vis their foreign competitors – threatening both domestic and export market sales. Furthermore, as customs duties would impose an unnecessary burden on local industries, they would also undermine those countries’ attractiveness as a destination for investment and R&D.

Estimated trade impacts are striking. According to a study recently published by the European Centre for International Political Economy (ECIPE), gross domestic product (GDP) losses would exceed the value of customs duties collected by 160 times for Indonesia, 49 times for India, and over 25 times for South Africa, when the risk of retaliatory or corresponding duties imposed by other countries is taken in to account.

Countries Imposing Customs Duties Also Face Legal Risks

Countries imposing such duties on electronic transmissions would also create unnecessary legal risk for themselves. Some countries have discussed the imposition of duties on digital services provided via the cloud or remote access or the imposition of such duties exclusively on foreign enterprises. These scenarios raise serious questions regarding both differential treatment and the scope of WTO Member authority to impose tariffs on such services.

The nature of electronic transmissions, which often consist of data packets transiting multiple servers in multiple jurisdictions, makes country of origin determinations difficult – if not impossible. Additionally, for those seeking to use the WCO to negotiate these tariffs or to address related legal questions, it is important to recall that the WCO’s mandate is limited to enhancing the effectiveness and efficiency of customs administrations – not tariff negotiations or determinations of the WTO consistency of such tariffs.

Is There Another Way?

Discussions are underway among countries at the Organization for Economic Cooperation and Development (OECD) to reach a multilateral agreement to address the challenges to the international tax system posed by an increasingly digitized global economy. Any such internal taxes would need to be applied on a neutral and nondiscriminatory basis, consistent with WTO and other international obligations.

Conclusion

We respectfully ask the US government to encourage countries to vote in favor of an extension of the Moratorium and to resist efforts to improperly negotiate these issues at the WCO.

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Trade and cybersecurity are increasingly intertwined. The expansion of the internet globally and use of data flows globally by businesses and consumers for communication, e-commerce, and as a source of access to information and innovation, is transforming international trade.^[1] The spread of artificial intelligence, the “internet of things,” and cloud computing will work to increase global connectivity of businesses, governments, and supply chains. ^[2]

As global interconnectivity grows, however, so does exposure to the risks and costs of cyberattacks. For example, formjacking—using JavaScript to steal credit card details from e-commerce sites—or supply chains hacks which exploit third party services and software to compromise a final target, undermine business and consumer trust in using the internet for commerce.^[3] The WannaCry ransomware attributed to North Korea infected more than 200,000 computers across 153 countries, costing hundreds of millions of dollars damage. What is clear is a lack of cybersecurity is costly and can undermine the trust of consumers and business in engaging in digital trade. Protecting trust in a digitally connected world necessarily involves collaboration across borders between the public and private sectors because global networks, organizations, and supply chains rely on the same systems and software, most of it supplied by enterprises, and they face the same threats.

The importance of cybersecurity is leading countries to adopt cybersecurity policies.^[4] According to one estimate at least 50 countries have adopted cybersecurity policies and regulation. Some of these cybersecurity policies recognize a need for international cooperation: the EU identified “a need for closer cooperation at a global level to improve security standards, improve information, and promote a common global approach to network and information security issues ….” ^[5]and the most recent U.S. Cybersecurity Strategy reaffirms the need to “strengthen the capacity and interoperability of those allies and partners to improve our ability to optimize our combined skills, resources, capabilities, and perspectives against shared threats. ^[6]

A common approach can enhance cybersecurity and protect digital trade. Conversely, divergent or obstructive approaches risk creating barriers to digital trade. These can include unique standards, requirements for localization of data or technology supply, and overreaching national security protections may violate obligations under the WTO and free trade agreements. A recent Brookings roundtable among cybersecurity and trade experts from government, civil society, and the private sector identified a need to unpack broad or restrictive measures from reasonable practices and policies designed to enhance the security of network infrastructure.

This brief will discuss how trade policy can be an instrument to support good cybersecurity practices and to build cooperation on cybersecurity among governments. We explore ways that trade agreements and trade policy can be used to unpack meaningful cybersecurity from artificial trade barriers. In particular, we look at the extent to which these can differentiate between cybersecurity and more restrictive measures in the name of national security. The challenge of adapting trade rules developed in an analog era to today’s digital world economy is an ongoing project, and managing cybersecurity effectively needs to be part of that project.

CYBERSECURITY, THE WTO NATIONAL SECURITY, AND OTHER WTO EXCEPTIONS

The WTO security exception. Article XXI of GATT allows for a number “security exceptions” from WTO obligations. Until recently, this exception has been used infrequently, not only because parties have been reluctant to put national security interests to the test of dispute settlement but in part out of concern that the exception could blow a very large hole in the trading system. ^[7]

Now, however, the growth in connectivity and parallel rise in cybersecurity concerns presents a real risk that cybersecurity becomes a catch-all to justify political control or to protect domestic industry from online competitors. For instance, Vietnam’s cybersecurity law prohibits, among other things “distorting history, denying revolutionary achievements, or destroying the fine tradition and customs of the people, social ethics or health of the community.” ^[8] A statement by the Shanghai Cooperation Organization on Cooperation in the Field of International Information Security considers as a threat the “dissemination of information harmful to social and political, social and economic systems, as well as spiritual, moral and cultural sphere of other states.” ^[9] The vague definition in China’s cybersecurity law of what constitutes critical infrastructure could be used to limit access of foreign firms to key sectors or require access to source code under the justification of security as a condition of entering a market, yet exposing foreign companies to IP theft. ^[10 ]

The Trump administration’s decision to use a national security rationale to justify tariffs not only on imports of steel and aluminum but also possibly tariffs on automobiles heightened concerns over abuse of the national security exception. Russia relied on the national security exception to justify blockages on goods from Ukraine transiting its territory, and the UAE is relying on the exception to justify barriers on imports from Qatar.

A 2019 WTO panel in the Russia/Ukraine case made clear that the GATT national security exception is not self-judging and that panels will make an objective assessment as to whether there were qualifying events such as “an emergency in international relations.”^[11]This assessment is complicated in the cybersecurity context because the exceptions for national security and the general exceptions provisions in the WTO and in free trade agreements (FTAs) blur with a proliferation of cyber risks from state and non-state actors and where measures to address cyber risks are increasingly economy-wide. Setting boundaries will require a common global definition of the cybersecurity domain.

The U.S. National Institute of Standards and Technology (NIST) provides a reference point for such a definition. It defines cybersecurity as “the prevention of damage to, unauthorized use of, exploitation of, and—if needed—the restoration of electronic information and communications systems, and the information they contain, in order to strengthen the confidentiality, integrity and availability of these systems.” ^[12]In turn, the White House National Cyber Strategy focuses on increasing the security and resilience of the nation’s information and information systems. ^[13]

This definition reflects two key elements of cyberattacks: On information and on information systems. It does not differentiate between action by states as well as criminals and its impact on public and private information, networks, and infrastructure. Thus, for example, it includes Russian use of false accounts and addresses to seed false information as well as malware to intrude on systems.

Critically, this focus on the integrity of information and information systems does not encompass broader purposes such as development of national industries, preserving law enforcement access to information on citizens, regulation of information content, or social controls that are not directly related to these core elements. Such laws should stand or fall on aspects of trade agreements other than the security exception.

Other WTO exceptions. The global networks of trade are vulnerable to attacks along supply chains. In some cases, government may determine that the best policy response to this vulnerability is to prevent certain companies or governments from participating in the supply of key technologies. For instance, a recent White House Executive Order prohibits the importation of information and communication technology and services from entities controlled by a foreign adversary and where the import poses various risks—including of cyberattack. ^[14] Recent draft regulations out of China regarding its cybersecurity review process also identify services and products controlled by foreign governments as potentially being subject to cybersecurity review. ^[15]

Actions like these raise fundamental questions about consistency with WTO MFN commitments and would have to be justified as either necessary for national security or under the more general exceptions provision. While national security would seem the most logical exception, this provision was crafted in 1948 during the Cold War and its references to national security, such as trafficking in arms or relating to fissionable material, are not well suited to the cyber context, where the attacks might concern malware that affects how electrical grids operate. ^[16]

The WTO GATT Article XX and GATS Article XIV general exception provisions are also available to justify such trade restrictions for cybersecurity purposes, and measures to protect critical infrastructure and supply chains could be considered necessary for public order or to protect human life or health. ^[17] Yet, in these cases, the government would be subject to the more rigorous (compared to the national security exception) disciplines of these other provisions, which include requiring that the cybersecurity measures are least trade-restrictive and that there is a no less trade-restrictive alternative available to achieve the members desired level of protection. In addition, the chapeau to these exception provisions requires that the cyber measures are not arbitrary or unjustifiable or a disguised restriction on international trade. Applying such disciplines to cybersecurity measures that restrict trade would help distinguish between measures to protect information and information systems versus disguised restrictions on trade. However, whether governments are prepared to subject what they see as a national security measure to the disciplines of the general exception disciplines remains to be tested.

Yet, where governments seek to rely on the national security exception instead, the risk is this could lead to a large increase in trade restrictions. Given the step-up in aggressiveness in the cyber domain, it appears that cybersecurity will challenge how the trading system has traditionally balanced rights of access to markets with rights of governments to restrict trade for legitimate policy reasons. Fresh thinking and cooperation among like-minded trading partners on how to provide scope for legitimate cybersecurity policy that does not unnecessarily restrict trade is needed.

USING TRADE POLICY TO IMPROVE CYBERSECURITY

Although digital trade increases cybersecurity risks, trade and cybersecurity policy can also work in tandem to support growth in digital trade as well as strengthen cybersecurity outcomes.

Access to data. As cybersecurity defense becomes more sophisticated, use of analytics and machine learning to monitor network activity plays a growing role in the analysis of risks and anomalies.^[18] In fact, requiring data to be localized reduces opportunities for companies to use big data analytics to assess risk across global operations and supply chains. Forcing data into specific locations also increases the risk and cost of a data breach.The CPTPP and USMCA commitments to information flows across borders (subject to appropriate exceptions) and to avoiding data localization requirements, advances digital trade opportunities and cybersecurity outcomes.^[19]

Information sharing. As reflected in the U.S. Cybersecurity Information Sharing Act, real-time sharing of information on threats and vulnerabilities to promote awareness, plan responses, and help targets adapt and respond has become an important feature of cybersecurity policies. The trust issues in sharing proprietary or classified information in the domestic context are compounded when dealing with governments or organizations across national borders. Nevertheless, the U.S. is seeking to improve information sharing with international partners and allies and along supply chains. Trade agreements can include commitments to building public and private sector information sharing mechanisms. For example, the U.S.-Mexico-Canada trade agreement includes a commitment to sharing information and best practices as a means of addressing and responding to cyberattacks. ^[20 ]

Cybersecurity standards. Cybersecurity standards can build a common approach to addressing cybersecurity risks based on best practice. For instance, the International Standards Organization (ISO) and the International Electrotechnical Commission (IEC) have developed a number of cybersecurity-related standards, including the jointly developed ISO/IEC 27000 series as well as sector specific-standards for electric utilities, healthcare, and shipping. ^[21] Standards are most effective when they don’t proscribe a particular approach but instead are frameworks for managing risk, relying on business and government to design cybersecurity measures most suitable to their business practices and risk profiles. In turn, the NIST Cyber Framework relies on international standards such as ISO 27001 as references for its cyber risk management framework, with the result that the framework is not U.S. specific and can be adopted globally.^[22]Trade agreements can be used to reinforce the role of consensus-based standards with commitments to develop international standards and to use international standards where they exist as a basis for domestic regulation, which also supports the development of globally consistent and least trade-restrictive approaches to cybersecurity. Using international standards as a basis for cybersecurity policy can also help address concerns that cybersecurity regulation is a disguised restriction on trade aimed instead at supporting domestic industry.

Certification of compliance with cybersecurity standards. Compliance certification can give consumers and business confidence in the cybersecurity of organizations and government. Under the EU Cybersecurity Act which came in to force in June 2019, the European Union Agency for Cybersecurity (ENISA) will establish an EU-wide cybersecurity certification scheme. ^[23] NIST has developed a different approach in the Baldridge Performance Excellence Program, which encourages self-assessment of compliance. Trade agreements can support conformity assessment regimes and seek to minimize such regimes becoming unnecessarily burdensome on trade by requiring governments to allow other parties to demonstrate and undertake in the country of export conformity assessment of products with the country of imports cybersecurity regulations. In addition, commitments that conformity assessment requirements are non-discriminatory and not disguised restrictions on international trade provide additional disciplines that lead to the consideration of trade impacts on the development of cybersecurity regulation.

Risk-based approach to cybersecurity. According to the OECD, cybersecurity should “aim to reduce the risk to an acceptable level relative to the economic and social benefits expected from those activities, while taking into account the legitimate interests of others.”^[24] Similarly, the NIST framework relies on risk assessments tailored to each organization’s needs, and the EU’s Network and Information System Directive requires security measures “appropriate and proportionate … to manage the risks posed to the security of network and information systems.” A risk assessment should then inform decisions as to what measures to adopt, what risk reduction can be expected, and at what cost. The rapidly changing nature of cybersecurity threats means that addressing risk is a dynamic process that requires regular reassessment of risk and consideration of what else might be needed to reduce risk to acceptable levels. By contrast, an overly prescriptive regulation can become quickly outdated or lead to box-checking instead of thoughtful assessment whether the steps taken are in fact reducing risk.

Building an effective approach to cybersecurity also requires engaging government and business leaders and building cyber risk management into the core of corporate and government practice.^[25]The USMCA includes a recognition of the importance of taking a risk-based approach to cybersecurity instead of proscriptive approaches, including risk-based approaches that rely on consensus-based international standards and best practices.^[26]

CONCLUSION

The scope for trade policy to support cybersecurity outcomes presents a complex set of issues that are only beginning to be explored. Today, cybersecurity risk is growing more acute as business, government, and people become more interconnected and reliant on technology. On the one hand, the risk that governments increasingly will restrict access to data and networks merits attention, since it could potentially result in adverse consequences for digital trade and impair the potential for the free flow of data to drive growth and welfare. On the other hand, getting cybersecurity policy wrong will undermine trust in the digital economy. Therefore, new trade rules that can both support risk based effective cybersecurity regulation, build bridges between the cybersecurity policy in different countries to maximize synergies, and minimize barriers to trade are needed.

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FOOTNOTES

1. 1Joshua P. Meltzer, “The Importance of the Internet and Transatlantic Data Flows for U.S. and EU Trade and Investment, Brookings 2014.
2. 2Michael Ferentina and Emine Elcin Koten 2019, “Understanding supply chain 4.0 and its potential impact on global value chains”, in Global Value Chain Development Report 2019 (WTO, IDE-JETRO, OECD, UIBE, World Bank).
3. 3Symantec Internet Security Threat Report, April 2019.
4. 4OECD 2012, “Cybersecurity Policy Making At A Turning Point” (OECD Paris 2012).
5. 5Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016 concerning measures for a high common level of security of network and information systems across the Union.
6. 6White National Cybersecurity Strategy 2018.
7. 7Tania Voon, Can International Trade Law Recover? The Security Exception In WTO Law: Entering A New Era”, AJIL Unbound (2019) vol. 113, pp 45-50.
8. 8Vietnam Law 24 on Cybersecurity, 12 June 2018.
9. 9NATO Cooperative Cyber Defence Center of Excellence. “Agreement between the Government of the member Stats of the Shanghai Cooperation Organization on Cooperation in the Field of International Information Security.”
10. 10Samm Sacks, Rogier Creemers, Lorand Laskai, Paul Triolo and Graham Webster, “China’s Cybersecurity Reviews for ‘Critical’ Systems Add Focus on Supply Chain, Foreign Control (Translation) https://www.newamerica.org/cybersecurity-initiative/digichina/blog/chinas-cybersecurity-reviews-critical-systems-add-focus-supply-chain-foreign-control-translation/.
11. 11WTO Panel Report, Russia-Traffic in Transit, WT/DS512/R (adopted April 26, 2019), para 7.64, 7.77.
12. 12NISTIR 7298, Revision 3, “Glossary of Key Information Security Terms”, July 2019.
13. 13White House National Cybersecurity Strategy, September 2018.
14. 14White House Executive Order on Securing the Information and Communications Technology and Services Supply Chain, May 15, 2019 https://www.whitehouse.gov/presidential-actions/executive-order-securing-information-communications-technology-services-supply-chain/.
15. 15 Samm Sacks, Rogier Creemers, Lorand Laskai, Paul Triolo and Graham Webster, “China’s Cybersecurity Reviews for ‘Critical’ Systems Add Focus on Supply Chain, Foreign Control (Translation) https://www.newamerica.org/cybersecurity-initiative/digichina/blog/chinas-cybersecurity-reviews-critical-systems-add-focus-supply-chain-foreign-control-translation/.
16. 16See generally Mona Pinchis-Paulsen, “Trade Multilateralism and U.S. National Security: The Making of the GATT Security Exception”, Michigan J. Int’l L. 41 (forthcoming).
17. 17GATS Article XIV(a), GATT Article XX(b).
18. 18OECD (2015) Digital Security Risk Management for Economic and Social Prosperity: OECD Recommendation and Companion Document, OECD 2015 Publishing, Paris, Principle 7.
19. 19CPTPP Articles 14.11, 14.13; USMCA Articles 19.11, 19.12
20. 20USMCA article 19.15(b). IEC 61850, ISO/IEC 80001, IEC 61162.
21. 21IEC 61850, ISO/IEC 80001, IEC 61162.
22. 22NIST Roadmap for Improving Critical Infrastructure Cybersecurity Version 1.1, April 25, 2019.
23. 23Regulation (EU) 2010/881 of the European Parliament and of the Council of 17 April 2019 on ENISA.
24. 24OECD (2015) Digital Security Risk Management for Economic and Social Prosperity: OECD Recommendation and Companion Document, OECD 2015.
25. 25Thomas Poppensieker et al, 2018. “Digital and Risk A new posture for cyberrisk in a networked world”, McKinsey & Company.
26. 26USMCA Article 19.15.

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Why Does the WTO Moratorium Matter?

The Moratorium is an agreement not to impose customs duties on cross-border electronic transmissions. Some countries have begun, or are considering, imposing customs duties and requirements on those transmissions, including enterprise software solutions. While imposing such duties may sound appealing, it is ultimately a self-defeating step that will reduce those countries’ competitiveness, undermine their exports, and hurt their consumers and workers. A country that levies such duties is increasing its own industries’ costs of accessing a wide array of technologies and data sources that are critical to growth and innovation, business operations, and the transfer of technology. This includes:

• productivity-enhancing software solutions;
• scientific, research, and other publications; and
• manufacturing data, blueprints, and other operational information.

Self-imposed restrictions on enterprise software solutions will hinder economic development. These and other transmissions are necessary for industries to compete in the marketplace, invest in the future, and hire workers locally.

The Economic Damage to Countries Imposing Customs Duties on Software & Other Electronic Transmissions Could be Severe

Countries should be wary of the claim that they would benefit by imposing customs duties on software and other electronic transmissions. According to a study recently published by the European Centre for International Political Economy (ECIPE), gross domestic product (GDP) losses would dwarf the value of customs duties collected by 160 times for Indonesia, 49 times for India, and over 25 times for South Africa, when the risk of retaliatory or corresponding duties imposed by other countries is taken in to account.1 The impacts on these countries’ digital exports of film, music, publications, software, and other types of electronic transmissions could be severe. Across even just a handful of developing countries, ECIPE estimates the annual GDP losses at US$10.6 billion. 

Imposing Customs Duties on Software & Other Electronic Transmissions Will Hurt Local Industries and Economies

In today’s global marketplace, companies seek to gain an edge by integrating software and other emerging technologies at every stage of the production and value chain. Data-enabled software innovations, which are most often electronically accessed via cloud computing, are connecting suppliers, manufacturers, and service providers around the world, while accelerating efficiencies relating to product design, engineering, production, logistics, marketing, and servicing. Software is the tool that drives these efficiencies. Local industries need cross-border access to best-in-class software and data. By imposing customs requirements on local industries, countries will hurt their own future economic growth and competitiveness. Faced with higher software costs, local industries will become less competitive vis-à-vis their foreign competitors – threatening both domestic and export market sales. Furthermore, as customs duties would impose an unnecessary burden on industries operating in those countries imposing them, they would also undermine those countries’ attractiveness as a destination for investment and R&D.

Countries that Impose Customs Duties on Software & Other Electronic Transmissions Face Significant Legal Exposure

At a time of ongoing WTO digital trade negotiations and uncertainty in the global trading system, countries should be careful not to create unnecessary legal exposure for themselves by imposing customs duties or other requirements on electronic transmissions. Some have discussed the imposition of duties on digital services provided via the cloud or remote access or the imposition of such duties exclusively on foreign enterprises. These scenarios raise serious questions regarding both differential treatment and the scope of Member authority to impose tariffs on services. The nature of electronic transmissions, which often consist of data packets transiting multiple servers in multiple jurisdictions, makes country of origin determinations difficult – if not impossible. Finally, for those seeking to use the World Customs Organization (WCO) to negotiate these tariffs or to address related legal questions, it is important to recall that the WCO’s mandate is limited to enhancing the effectiveness and efficiency of Customs administrations – not tariff negotiations or determinations of the WTO consistency of such tariffs.

Conclusion

For the foregoing reasons, WTO Members should vote in favor of an extension of the Moratorium.

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Background

• Since 1998, the WTO Members have applied a moratorium against tariffs on international electronic transmissions (commonly referred to as the WTO ‘E-Commerce’ Moratorium). However, some WTO Members have recently debated whether the moratorium remains in their economic interest, given the potential revenues that might be generated by imposing tariffs on electronic transmissions. The study examines the impact on India, Indonesia, South Africa and China (and the general case for developing countries) and concludes that imposing such tariffs would be fiscally counter-productive.
• Putting aside any legal questions, a country that opted out of the moratorium may apply tariffs affecting a wide range of cross-border business activities. Our research shows that if countries ceased to uphold the moratorium and levied import duties on digital goods and services, they would suffer negative economic consequences in the form of higher prices and reduced consumption, which would in turn slow GDP growth and shrink tax revenues. Yet our research indicates that the payoff in tariff revenues would ultimately be minimal relative to the scale of economic damage that would result from import duties on electronic transmissions.

GDP and tax losses based on global imposition of tariffs on electronic transmissions (Scenario 2) on four economies. (in millions of US$)Impact on GDP and the economy  

• Each of the four countries examined in our study would lose considerably more in gross domestic product (GDP) than they would gain in tariffs. Assuming a likely scenario in which tariffs imposed by one country gave way to widespread reciprocal tariffs (Scenario 2), India would lose 49 times more in GDP than it would generate in duty revenues. The figures are even more skewed for Indonesia, which would give up 160 times as much GDP as it would collect in tariffs, while South Africa would lose over 25 times more and China, seven times more.

Impact on tax revenues

• Likewise, if the goal is to fill tax coffers, imposing tariffs is a wrong-headed strategy. Duties would take a toll on domestic output that would depress tax collection. The net result for tax authorities is strongly negative. Again assuming a situation of reciprocal tariffs (Scenario 2), the loss of tax revenues is estimated to be 51 times larger than the tariff revenues for India, 23 times for Indonesia, 12 times for South Africa and three times for China. In short, a tariff on electronic transmissions would prove to be a highly inefficient form of tax collection.

Conclusion from the results

• In assessing existing literature on this issue, our study examined the potential tariff revenue losses projected in 2017 and 2019 UNCTAD reports that made a case for ending the moratorium. However, UNCTAD research did not discuss the economic and domestic tax losses that are likely to ensue if duties are implemented – and which we detail further in our own study. UNCTAD reports also did not take into account the significant enforcement and compliance costs involved in implementing electronic tariffs.
• In addition, UNCTADs’ research was based on certain assumptions that we believe merit serious scepticism – including that in the future, virtually all physical media or paper-based products would be digitised and therefore exempt from duties under the moratorium. Finally, those reports substantially overstated the potential of ‘lost’ tariffs due to digitalisation by over-estimating the value of digital trade – despite contrary evidence that the price of digitally-delivered items has tended to decline over time.
• Both UNCTAD reports have sought to argue that the adoption of 3D printing or additive manufacturing would make it harder for developing countries to capture taxes on manufactured goods. We believe the premise of this argument is questionable. It remains the case that, even if the files for 3D manufacturing (e.g. schematics and blueprints) can only be taxed once, the source materials used to manufacture products (the additives, or the thermoplastic ‘ink’ of a 3D printer) will remain subject to tariffs and sales tax. The more items are manufactured, the more states would stand to collect in tariffs and sales tax on 3D ‘ink.’ In short, we see no reason that the advent of 3D printing would undermine the economic logic of maintaining the moratorium.
• Finally, we would draw attention to one of the less-heralded benefits of digital trade, and one that is a boon to tax collection e-commerce forces more transactions into a transparent, trackable and therefore taxable realm. For many developing countries, where tax evasion is a constant challenge, a shift towards digital transactions is likely to help boost domestic tax collection. Far from undermining government sources of revenue, the growth of e-commerce stands to enhance a nation’s tax base, pushing grey market transactions into a taxable space.

Introduction

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These innovations create challenges for the beleaguered multilateral trading system whose rules were crafted long before the World Wide Web existed.  As noted in this Bretton Woods Committee blogpost, evolution in how economic actors transact business requires policymakers similarly to adjust the form and content of their international trade agreements in order to remain relevant.  Policymakers are aware of the challenge. The outlines of the debate are only just now starting to emerge.

WTO Secretary General Azevedo recently noted in this speech that a significant proportion of regional trade agreements (approximately 0%) already include e-commerce components designed to extend the multilateral trading paradigm into the sector.  He expects the proportion to increase, no doubt due to the various workstreams underway inside the WTO under the “Work Programme on Electronic Commerce” launched this year among 76 nations globally. But the familiar triad of trade disciplines (market access, customs facilitation, rules/enforcement) illustrates the magnitude of the challenge at hand.

• Market Access: Much digital commerce already occurs in a duty-free zone in the sense that intellectual property (e.g., software downloads) is not subject to a tariff structure which requires negotiation.  Moreover, the free flow of data and software globally often includes a parallel cross-border sharing of personal and professional data which itself is also not subject to formal trade rules. 
• Customs Facilitation: For those transactions that still generate parallel flows of concrete goods, trade standards seeking to facilitate cross-border commerce increasingly must recognize as valid e-signatures, electronic bills of lading and, of course, blockchain-based trade documents with built-in (but not always auditable) authentication.
• Rules/Enforcement: Transparency regarding the rules applicable to electronic transactions and trade quickly generate complicated questions about what kind of rules should be included.  Should data protection laws at the national or sub-national level be considered a non-tariff barrier (NTBs) subject to trade remedies?  The decades-long shift towards services trade raises real questions and tensions regarding where the appropriate boundary should exist between protectionist national standards that create impressible trade barriers and legitimate national efforts to articulate standards as noted in this Atlantic Council blogpost.  Experience in this area suggests strongly that being overly aggressive regarding NTBs can backfire, increasing trade tensions and raising real questions regarding which entities are appropriately authorized to articulate and enforce such rules.

Beyond these technical areas, real questions also arise globally once the digital divide is taking into consideration.  As this think tank study indicates, developing nations increasingly question whether data should flow freely without charges or fees across borders in general even before data privacy and data protection issues are discussed.  A broad range of developed and developing countries additionally are experimenting with a range of data localization requirements such as local content, local presence and local corporate governance.  Some nations (most famously, China) also require some technology transfer as a condition of market entry.

Formally, the Trade in Services Agreement provides the main mechanism for negotiating new trade standards regarding e-commerce that go far beyond customs facilitation and authentication. The WTO talks include discussions regarding network access, online consumer protection, net neutrality, and source code in addition to localization, data privacy and customs facilitation.

The United States Example

The United States has negotiated ten bilateral free trade agreements since the turn of the 21^st century with e-commerce chapters.  The United States Trade Representative has held two consistent positions across multiple administrations regarding cross-border digital trade.  First, such trade must occur without additional trade policy frictions in the form of customs duties.   Second, the non-discrimination principle must extend across the full scope of digital products.  These two positions appear consistently in all ten free trade agreements. 

Four of these agreements (Australia, Korea, Chile, Columbia) additionally include commitments concerning digital authentication of trade documents.  Five of these agreements (Australia, Columbia, Korea, Peru) also include general language – but no enforceable obligations – regarding the importance of transparent and fair consumer protection standards. These provisions operate in addition to now-standard language in free trade agreements regarding protection of intellectual property rights.

Only one agreement (Korea) expressly addresses data localization issues.  Perhaps unsurprisingly, the agreement establishes a principle in favor of the free flow of data across borders.  It specifically pledges that both nations will “endeavor to refrain from imposing of maintaining unnecessary barriers to electronic information flows across borders.”  Should it come to litigation, surely the modifier (“unnecessary”) will be the focus of the dispute.

This is not an academic hypothetical, especially at a moment in history when the U.S. government actively seeks to exercise the full scope of trade remedies available.  The scope of active trade remedy and enforcement activity goes far beyond the headline-grabbing tariff actions in old economy sectors like steel.  In March 2019, the USTR initiated trade consultation proceedings under the US-Korea Free Trade Agreement regarding a non-tariff issue that until recently would have been considered solely the province of national government immune from trade remedies:  competition/antitrust law. 

What Comes Next

U.S. policymakers are not alone in taking proactive action to extend traditional multilateral trading standards into non-traditional areas.  Consider this 2016 European Commission document, in which the EU made clear that it also seeks to promote the free flow of data across borders, but only subject to standards (currently under negotiation within the TISA framework) that would incorporate European rules regarding data protection and data privacy.  More importantly, the EU does not reject all localization requirements; it merely seeks to ensure that “market entrants do not face unfair licensing conditions when they enter a market.” 

The WTO also seeks to increase the cross-border flow of data, but from a different perspective.  Deputy Secretary General Alan Wolff indicated in a speech on April 11 that the WTO seeks to increase substantially the amount of data it collects and then shares to its membership regarding national-level regulatory standards and non-tariff barriers for the purpose of increasing transparency….and enforcement activity by members.  

Conclusion

The data revolution is only just beginning.  Smart devices sharing data with remote servers and smart contracts that automatically execute using blockchain technology have not yet reached critical mass within the economy.  But they will.  Policymakers are only just starting the process now of sorting through what kinds of trade standards can and should apply to this sector.

Extending the traditional trade paradigm to the electronic commerce context will raise real and difficult questions about the boundary between legitimate national rule-making activities in the regulatory arena and the applicability of treaty commitments.  Put simply: can a treaty commit overrule or preempt a national rulemaking process that does not have as its stated purpose a restriction on international trade?

These issues have been under discussion for over a decade.  They were raised originally in the context of non-tariff barriers and trade in services.  So if we want a sense of how these standards could develop, the services and NTB discussions can serve as a guide.  We can expect to see individual nations test the boundaries through consultations such as the US/Korea consultations on competition law adjudication in addition to formal TISA talk.  We can also expect to see policymakers jockey for position and standard-setting authority regarding data localization and data privacy. 

The relatively easy issues in the customs facilitation arena (electronic trade documents, electronic authentication standards) may generate early traction.  But the road to a new multilateral system runs through the data and e-commerce issues and their close cousins, non-tariff barriers.  The outlines for a global dialogue on these issues is only just emerging.  They may not generate headlines in the mainstream media, but these are the next generation of trade policy issues that will determine whether or not the multilateral trading system is sufficiently resilient to evolve and support a global economy centered on intangibles.

Barbara C. Matthews is Founder and CEO at BCMstrategy, Inc., a start-up with patented technology to measure cross-border public policy risk and anticipate outcomes.  She has served as a senior U.S. government official at the U.S. Treasury Department and as Senior Counsel to the House Financial Services Committee.  She is also non-resident senior fellow at the Atlantic Council and a member of WITA, the Council on Foreign Relations, and the Bretton Woods Committee. The views expressed here are her own.

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