Nearly one year ago, the United States and 13 partners in the Asia-Pacific region launched the Indo-Pacific Economic Framework for Prosperity (IPEF). The Asia-Pacific region holds much promise for U.S. diplomatic, economic, and political engagement, but many U.S. trading partners in the region have imposed barriers that limit or constrain opportunities for U.S. companies. Furthermore, regional partners are moving forward with new trade agreements – which are likely contributing in part to increases in intraregional trade compared to overall trade – while the U.S. government has withdrawn from the now-Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and decided against seeking new trade agreements in the region.
Making IPEF as meaningful and impactful as possible means addressing existing barriers to trade and establishing rules of the road so that U.S. workers and companies can thrive today and in the future. More specifically, addressing barriers to digital trade in IPEF Pillar 1 will help to provide the enabling environment to underpin more meaningful and sustainable outcomes in Pillars 2-4: Supply Chains, Clean Economy, and Fair Economy. After all, increasing access to digital trade can build supply chain resilience, and incorporating digital products and services can improve energy efficiency and contribute to sustainability goals.
The good news? USTR already knows many of the policies and regulations that put U.S exporters, workers, and investors at a disadvantage. Each year, USTR publishes the National Trade Estimate Report on Foreign Trade Barriers (NTE Report) to catalogue the trade and investment challenges that U.S. companies are facing around the world. The 2023 iteration, released on March 31, demonstrates the proliferation of barriers to digital trade and e-commerce – including in some important U.S. trading partners’ markets such as India, Vietnam, and Korea.
Barriers to digital trade present challenges that extend far beyond the “tech sector,” as the entire economy is digitalizing and companies of all sizes and in all sectors incorporate digital tools to manage supply chains, employ state-of-the-art cybersecurity, and better serve customers, among other activities. Digital trade enables companies of all sizes to scale by reaching customers worldwide and better integrating into global supply chains from day one.
ITI’s submission to the drafting of the 2023 NTE Report called for the administration to meaningfully address trade barriers in its bilateral and regional economic initiatives. IPEF represents the strongest current opportunity for the United States to do just that in the Asia-Pacific region. A successful IPEF will include outcomes to address several high-impact digital trade challenges and provide the dialogues and tools needed to prevent future barriers to trade while enhancing digital economy partnership opportunities among the U.S. and its trade partners.
ITI has identified three examples of digital trade barriers in this year’s NTE Report that the U.S. government should address in IPEF:
- Indonesia’s establishment of a customs process for electronic transmissions: In 2018, Indonesia established harmonized tariff system (HTS) lines for “Software and other digital products transmitted electronically,” which effectively treats an electronic transmission as a customs “import.” While it is not clear how the Indonesian government will implement the requirements, the regulations challenge the World Trade Organization (WTO) Moratorium on Customs Duties on Electronic Transmissions and are an unprecedented attempt to apply goods-focused customs rules to digital services – the regulatory and policy need for which is unclear. Securing an IPEF commitment to prohibit the imposition of customs duties on electronic transmissions would ensure individuals, businesses, and governments can continue to benefit from global connectivity.
- Korea’s addition of country-unique requirements to government procurement opportunities: Korea’s Cloud Security Assurance Program (CSAP), a mandatory certification for entry into the public cloud market, includes Korea-unique requirements that effectively prevent non-Korean cloud companies from receiving CSAP certification and therefore providing services to Korea’s public sector. Affected companies include multinationals that offer best-in-class cloud solutions and have been certified under numerous respected international certification regimes. To address problematic policies such as CSAP, IPEF should incorporate binding commitments to provide non-discriminatory treatment, prohibit data localization, safeguard against the forced use of local encryption models, and prohibit the forced disclosure of source code.
- India’s restrictions on cross-border data flows: India’s data localization requirements restrict trusted cross-border data flows, and as the NTE Report notes “could be particularly challenging for smaller firms.” While India is not currently participating in negotiations for the trade pillar, other countries have and will continue to look to India as an example, and new data localization measures will undermine efforts to achieve other potential IPEF outcomes.
Conclusion
As the U.S. government drives an ambitious negotiating schedule for IPEF, it is critical that the negotiators seek to address the many current challenges identified in the NTE Report that are not only problematic as standalone measures but also inhibit progress in achieving IPEF’s broader objectives. The NTE Report is intended to support the U.S. government in trade negotiations – let’s put it to use in IPEF.