Regulating across the digital divide

The increasing digitization of the global economy is changing how products and services are produced, distributed, and sold across borders. Technologies like cloud computing, artificial intelligence, autonomous systems and "smart devices" are spawning new industries, and changing old ones.

But, while these changes could bring important benefits, the speed of digitization has also created daunting governance challenges, both within and across countries. Existing global rules - embedded in multilateral, regional and bilateral trade and investment agreements - are being challenged by the new processes that digitization is enabling.

This is creating more space for national governments to intervene in the digital economy. China, for example, has established its own digital industries, using policies such as internet filtering and data localization (requiring internet companies to store data on domestic servers). This has supported the emergence of major Chinese digital companies such as Tencent and Baidu.

Governments elsewhere increasingly view such digital policies as a way to catch up with advanced digital economies such as the United States. But, while some countries have managed to take advantage of the current regulatory environment to advance their own digital capabilities, many developing countries risk being left behind, because, among other things, the effectiveness of existing global rules is being eroded.

The World Trade Organization's General Agreement on Trade and Services, for example, governs trade in services through different "modes of supply". Many developing countries agreed to liberalize cross-border delivery of services ("mode one" trade), never anticipating just how dramatically the digital economy would revolutionize cross-border economic opportunities and enable more services to be delivered across borders. Today, these earlier commitments are paying off, increasing the pressure on many developing countries.

In recent years, debates on how to govern the digital economy have intensified. Multinational digital companies, mostly based in the US, have pushed for globally harmonized rules that would provide predictability and limit the space for national governments to intervene in digital flows.

Supporting such efforts, the Barack Obama administration made the digital domain a core part of US trade policy. Provisions on the free flow of data, together with prohibition of data localization and forced technology transfer, were included in "21st century trade agreements". The aim was to bring digital oversight to two major markets - the Asia-Pacific (under the Trans-Pacific Partnership agreement) and the European Union (under the Transatlantic Trade and Investment Partnership) - as an important first step toward global rules in these areas.

The election of Donald Trump as US president, however, has called into question the future of digital rulemaking. Trump's decision to withdraw from the TPP was received negatively by the US digital industry. It remains to be seen how digital trade regulations will fare under the TTIP, which Trump has suggested he might revive.

Trump's trade moves notwithstanding, efforts to update global rules governing the digital economy are continuing - within the WTO, and also as part of the talks among the US, Canada and Mexico to renegotiate the North American Free Trade Agreement. These debates will only become more urgent in the coming years.

So far, regulatory ambiguity has not severely affected developing countries. That may change, however, if the world's three major economies - the US, the EU and China - were ever to harmonize their approach to regulating digital trade and global data flows.

Proponents of new rules could advise developing countries to accept them openly, arguing that to operate outside a global regulatory system would hurt domestic digital development and make it difficult to participate in new technological fields. But new rules could also revive the inequities wrought by the "Uruguay Round" of trade negotiations, which created the WTO and drove North-South free trade agreements.

In multilateral and bilateral agreements, developing countries accept restrictions on their "policy space" in exchange for better market access to advanced economies. Many scholars now believe this "bargain" undermines developing countries' ability to enact policies that encourage economic diversification and structural change, making it more difficult for them to catch up economically and technologically with developed economies.

A new framework for digital trade and e-commerce must be crafted with these concerns in mind. As rules are created to manage how countries interact, regulators must work to ensure that digital-trade policies do not exacerbate the inequities that the traditional trading regime has exposed.

The author is an assistant professor of international development and international political economy at the University of Bath and a visiting fellow at the London School of Economics and Political Science.

Project Syndicate