[A2k] FT- Digital trade: Data protectionism

Thiru Balasubramaniam thiru at keionline.org
Mon Aug 4 23:31:49 PDT 2014


August 4, 2014 7:35 pm
Digital trade: Data protectionism

By Shawn Donnan
Negotiators are struggling to create rules to govern cross-border commerce
in data

Mary Huang has a tantalising vision for the fashion industry: her shoe
designs are turned out by 3D printers rather than developing-world workers
and boxed by robots.

For Ms Huang, fulfilling international orders should entail sending digital
production files to automated banks of 3D printers in shops in Tokyo or
London, thereby avoiding import duties and the rag trade’s moral quandaries
about outsourcing production to distant sweat shops.

“That is not that far away,” says Ms Huang, a young design graduate whose
Continuum Fashion company began selling 3D-printed shoes online from its
Brooklyn office this year. “That is achievable in a couple of years. So why
aren’t we doing it? It’s incredibly efficient for business.”

Global data flows are soaring and “digital trade” is becoming an important
part of the global economy. If the standardised shipping container and the
internet each contributed to what has been an era of “hyperglobalisation”,
it does not take much imagination to see the 3D printer reshaping not just
manufacturing but also globalisation.

But, even as it grows rapidly, digital trade is facing new barriers.
Negotiators are scrambling to draft rules to prevent what could amount to a
wave of protectionism. Without credible trade rules, some argue,
governments eager to protect their own industries or their citizens’
privacy could ban Ms Huang’s digital production files, and those of other
companies, from crossing their borders.

Ms Huang’s frustration is not exclusive to small operations. Eric Spiegel
<http://www.ft.com/cms/s/0/cbc12588-79df-11e2-9dad-00144feabdc0.html>, the
head of Siemens’ US arm, laid out a vision not that far removed from Ms
Huang’s when he spoke at a breakfast in Washington hosted by the McKinsey
Global Institute, the consultancy’s think-tank. The German engineering
company, he said, would soon begin delivering spare parts to customers via
email and 3D printers, also avoiding physical borders and the usual
logistical complexities of global trade.

But the advances in business are also coming up against fundamental debates
about privacy.

The Edward Snowden
<http://www.ft.com/intl/topics/people/Edward_Snowden> revelations
of US online snooping have sparked a worldwide debate about privacy and the
internet. Receiving less attention is the way international trade
negotiations are trying to deal with what limits, if any, ought to be set
on the flow of data around the globe and how to prepare for a digital
future that is already a reality in some sectors.

The negotiation of a 12-country Transpacific trade partnership
has sparked debate in Australia and New Zealand over whether companies
ought to be allowed to store personal banking and medical data in foreign
countries, or if such sensitive information should even be allowed to cross
borders freely.

The debate is echoed in EU-US trade talks and in Geneva, where diplomats
from two dozen countries are trying to update the two-decade-old rules
governing the global trade in services.

Anupam Chander, a cyber law expert at the University of California, Davis,
and the author of *The Electronic Silk Road*
argues that ensuring the free flow of data has become one of the biggest
issues confronting business, trade negotiators and consumers who often do
not realise how dependent they have become on such free movement.

When a fire damaged a Samsung data centre in South Korea in May, he points
out, users of “smart” televisions in the US were surprised to see them
switch off as a result. “The ‘smarts’ of these TVs were actually sitting in
an office building in Korea,” he says.

Innovation in some sectors is outstripping the trade rules designed to
govern them. We still tend to define trade as either in goods or services.
Yet in today’s world much of what makes a product such as a car valuable is
the data-rich services embedded in it, whether it is the immediately
apparent, such as satellite navigation, or the communication systems that
allow manufacturers to track performance in real time.

“The distinction between a good and a service vanishes with a smart watch”
and all the apps that it contains, Mr Chander says. And yet, he adds, “the
global trade infrastructure doesn’t have the conceptual framework to deal
with that”.

It is also clear that, as the debate set off by the Snowden revelations has
shown, not everyone is comfortable with the consequences of the new digital

In a July “joint statement of principles” over the EU-US trade talks, the
biggest trade unions in the US and EU called for any transatlantic trade
deal to enshrine the right to online privacy. They also demanded a ban on
free data flows across borders “if national privacy laws cannot be enforced
for data located outside national borders”.

Russia’s parliament recently passed a bill requiring technology companies
such as Google  <http://markets.ft.com/tearsheets/performance.asp?s=us:GOOG>to
keep their Russian users’ data within the country. Brazil last year
proposed doing the same but subsequently backed down. And at least two
provinces in Canada require public contractors to keep personal data in the

The US, as it tries to repair the damage caused by the Snowden leaks, is
using existing talks in an attempt to prevent other countries from adopting
similar measures to block the free trade in data.

Robert Holleyman, President Barack Obama’s nominee to be the deputy US
trade representative overseeing trade relations in Asia, the TPP talks and
the negotiations on services, spent 13 years as the head of the Business
Software Alliance, which represents technology heavyweights such as Apple
<http://markets.ft.com/tearsheets/performance.asp?s=us:AAPL>, Intel
<http://markets.ft.com/tearsheets/performance.asp?s=us:INTC>and Microsoft

Mr Holleyman told the Senate finance committee in July that one of his top
priorities, alongside mounting a robust response to China’s ever-growing
presence in global trade, would be ensuring that the US was at the
“forefront” in establishing the rules of digital trade. He would, he told
the committee, fight for rules to guarantee the free flow of data across
borders and stop discrimination against goods and services traded online
rather than physically.

The push is driven in large part by fears in the US tech industry that
existing agreements such as the 1990s- era General Agreement on Trade in
Services, written in a pre-internet world, can do little to stop digital
trade barriers from popping up.

Victoria Espinel, a former White House intellectual property adviser and Mr
Holleyman’s successor at the software alliance, says: “It is clear that the
rules are not fit for today and are certainly not going to be adequate for
where the economy is going in the future. The question is what do you do
about it?”

The software group, which has long called for the inclusion of strong
intellectual property rules in trade agreements, has turned its attention
to securing guarantees on the free cross-border flow of data.

The negotiations for an EU-US trade area and the TPP have both seen the US
push for strong data rules. The move, argues Ms Espinel, offers an
opportunity to establish a blueprint to influence global talks. She also
likens the current situation to the 1990s Uruguay round of trade
negotiations and efforts to convince governments that such agreements ought
to tackle intellectual property rights.

“Any time you negotiate something new it is very, very difficult,” says Ms
Espinel, a former US trade negotiator. “You are asking the negotiators . .
. to talk about, to think about, something that is cutting edge. Something
that is not necessarily a problem they have to deal with at the moment. And
that is a hard thing to do in trade agreements, which are already hard to

But the need is urgent. Cross-border internet traffic grew 18-fold between
2005 and 2012, researchers from the McKinsey Global Institute stated
a report this year.

Together with the continuing rise of emerging economies, the McKinsey
report’s authors argued that growing digital trade and new technologies
such as 3D printing could see global flows of capital, data, goods and
services more than triple from the $26tn recorded in 2012 to $85tn by 2025.

Digital commerce has come up against barriers before. While ecommerce, the
buying of retail goods online, has soared across the world during the past
two decades, it has remained an often local phenomenon. US consumers spent
$384.8bn online in 2013 but only $40.6bn of that was cross-border.

Even within the EU’s single market the situation is similar. In the UK,
nearly 70 per cent of people reported buying at least one item online, the
McKinsey researchers wrote, but only 10 per cent said they had bought
anything from sellers in other EU countries.

Language gaps and consumers’ fear of online fraud are blamed for the slow

However, the McKinsey authors also cited a 2012 Swedish Board of Trade
paper that concluded that “customs barriers, tax regulation, and
cross-border data transfer issues were all having a substantial drag on
cross-border flows”.

Researchers are only just beginning to quantify what digital trade barriers
could mean for the global economy.

In one study examining existing and proposed data localisation and related
privacy and security laws in seven economies, including China and the EU,
analysts at the European Centre for International Political Economy
<http://www.ecipe.org/media/publication_pdfs/OCC32014__1.pdf> found that
they were a significant drag on growth.

In the case of both China and the EU, introducing restrictions on the free
flow of data would cause a 1.1 percentage point contraction in the gross
domestic product growth rate.

Governments may feel compelled for security reasons to crack down on
cross-border data flows, the ECIPE authors acknowledged, but added: “The
economic evidence however proves that unilateral trade restrictions are
counterproductive in the context of today’s interdependent globalised

Hosuk Lee-Makiyama, one of the authors of the ECIPE report, is among those
who argue that the debate over data and digital trade between governments
and among trade negotiators is only just beginning. And very few policy
makers are considering the real impact of something like Ms Huang’s 3D

The debate now is about data flows. But he predicts it may soon be about
finding new ways to protect domestic industries and fiscal demands. How,
for example, does a government levy taxes on emailed production files?

Then again, for governments, as is often the case with technology and
innovation, battling that emerging reality may ultimately be a fruitless
endeavour, Mr Lee-Makiyama says: “If you have the *Star Trek* technology
there is really nothing that trade barriers can stop.”

*The internet of things: A morning routine with international repercussions*

Fast forward a decade and imagine your morning routine.

You wake up gently at a time carefully selected by a bracelet monitoring
your sleep patterns after drawing on weeks of data stored on a server that
lives somewhere in the American west. You trudge to the bathroom and step
on to the scales, which quickly shoots your weight to that same server and
helps determine just how long and how strenuous your next session on the
treadmill will be.

Breakfast is a special protein-rich cereal ordered a few days before by
your fridge and a pot of coffee brewed extra strong with your meeting-heavy
Google calendar in mind. Later, your toothbrush sends updates to a dental
service and, spotting the early signs of a cavity, books an appointment.

Welcome to the “internet of things”, and the sort of not entirely
far-fetched scenario now perplexing trade negotiators and experts on
digital trade.

It is easy to ignore but each of those functions could contain what amounts
to a trade quandary or a cross-border transaction governed by international
rules and standards.

Were you to live in Europe those sleep records stored on a US server could
easily violate data localisation and privacy laws. The same applies to the
incriminating information shared by your bathroom scales.

Your fridge and coffee pot might well be communicating via a server in
South Korea or China, which in turn is liaising with a Google server in
Ireland to check on your calendar. The first six months of your dental
service came free with the Chinese-made toothbrush you bought at a local
chemist but renewing it means paying your fees to the service in Germany
that relays your data to a virtual clinic staffed by experts in Bangalore,
who send your particulars to the local dentist.

Goods, services and plenty of free-flowing data are all part of a morning
routine that the world’s trade negotiators are beginning to ponder.

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