Getting International Digital Trade Rules Right

Getting International Digital Trade Rules Right

Free trade is good, but writing the international rules that constrain protectionism can be challenging.

The Biden administration is locked in an internal struggle over U.S. participation in international agreements on digital trade rules. The U.S. Trade Representative‘s Office has withdrawn support for prior U.S. government proposals and positions in this area. At the same time, the White House has now convened “listening sessions” with stakeholders in the hopes of finding a way forward. The disagreements on this issue reflect both divergent policy views and competing stakeholder preferences, so bridging the gap between the sides will not be easy. However, creative approaches to crafting rules in this area are possible, and the current disagreements over international digital trade rules actually provide an opportunity to establish a balanced and durable system that constrains protectionism while still allowing domestic regulation to achieve policy goals such as protecting privacy.

Domestic regulation often generates political controversy, having broad implications for the role of government in the economy and society. Even where the goals of domestic regulation are positive, such as protecting personal privacy, there are reasons to scrutinize this regulation closely. Regulations are sometimes designed badly and are therefore ineffective at accomplishing their goals, and special interests often try to influence regulations in ways that favor their interests.

One way people have tried to improve domestic regulation is through international oversight, with international agreements that impose constraints on regulation. This can be a narrow effort, such as a requirement that domestic regulation not be protectionist, or a broader one, dictating the regulatory process or saying that domestic regulation must be “fair” or “reasonable.” Along the same lines, regarding the degree of their impact, international agreements can just provide a forum for discussion, or they may have a binding adjudication mechanism.

For decades, international agreements such as the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), have developed and refined rules for domestic regulations that affect trade in goods and services. GATT/WTO litigation on regulatory issues has been controversial over the years, involving international judgments on issues such as U.S. clean air regulations and regulation of fishing practices that might affect sea turtles. The rulings on these cases got the outcomes right. Still, their reasoning under the specific terms of the trade agreements at issue offers some lessons on reducing the controversy and ensuring the right balance between international oversight and domestic regulation in digital trade.

With regard to the objective of achieving balance, there is broad agreement that the core of what international oversight should achieve is preventing domestic regulation from being used as a disguised means of protectionism. Proponents of regulation may say they are trying to promote public policy goals such as protecting personal privacy. Still, sometimes, during the regulatory process, an interest group can slip in provisions designed to favor domestic firms. This has happened in the past with environmental regulation.

To achieve the right balance in digital trade—an area in which the international rules have varied, and governments are still debating and experimenting—what is needed is a carefully crafted set of obligations and exceptions. For example, with the issue of the free flow of data, which has been a critical issue in the Biden administration‘s internal debate, the obligation can be written broadly, establishing that data flows should be free and data localization requirements prohibited. Still, there must be an exception allowing for legitimate public policies such as protecting privacy, as long as the regulation does not constitute “arbitrary or unjustifiable discrimination between countries where like conditions prevail.” As long as you avoid nationality-based discrimination in your regulations and do not use regulation as a disguised means of protectionism, the regulation will be permitted under the agreement.

An additional consideration is that the level of enforceability of international agreements can vary. Some agreements just offer guidance to governments; others can be adjudicated in international tribunals, with trade penalties that can be imposed for non-compliance. Digital trade is a relatively new area for regulation, and many governments are still trying to hash out their domestic policies. As a result, it may be a good idea to go slow on enforcement. International rules on digital trade could start with a committee that meets regularly to discuss the domestic regulations being developed, through which governments can get a sense of how the international principles they establish might apply to real-world rules. Then, the adjudication mechanism could take effect in a couple of years.

Free trade is good, but writing the international rules that constrain protectionism can be challenging. Whereas tariffs are transparent and easy to restrict through trade agreements, crafting international rules and determining when domestic regulations are protectionist are complicated. It’s essential to get the verbiage of the obligations and exceptions just right, or else they could be over—or under—inclusive. In the case of digital trade rules, we should learn from decades of experience with trade in goods and services and adopt rules that get the right balance between international oversight and domestic regulation.

Simon Lester is a Nonresident Fellow at the Baker Institute. He runs the websites and China Trade Monitor. He has taught trade law at the University of Melbourne School of Law. Follow him on Twitter @snlester.