An Open Alliance for Digital Trade

May 27, 2020

This commentary is part of the Strategic Trade series supported by the Atlas Network.

Like the last great power rivalry, the emergent competition between the United States and China is a competition between two different economic systems, and two very different political ideologies. This time, much of the competition will play out in digital space and over rules to govern our digital world. Just as the allies gathered at Bretton Woods in 1944 to chart a path for the post-war global economy, governments are now negotiating at the World Trade Organization (WTO), the Organisation for Economic Co-operation and Development, and other forums on policies, standards, and guidelines for the digital economy and digital trade. Who writes these rules—and whether they favor an open, liberal digital economy or one that is top-down, closed, and government-controlled—will have an outsized impact on power and governance in the twenty-first century.

Digital trade is, first and foremost, about the movement of data across borders. It’s a cloud computing company storing and processing data for a foreign client; it’s a farmer getting insight into environmental conditions and agricultural markets through artificial-intelligence-driven data analytics services; it’s an aircraft engine producing data streams that are shot around the world and back again to identify necessary maintenance before anything breaks down. The economic value of these data flows is immense. In 2016, the consulting firm McKinsey found that cross-border data flows already generated more value for the global economy than trade in goods. That value continues to grow, and the importance of international rules to govern that trade has grown commensurately.

The United States has used its recent trade negotiations to promote an open global digital economy in which data can flow freely. The United States participated in the Trans-Pacific Partnership negotiations that broke new ground on digital trade, and the United States-Mexico-Canada Agreement and the U.S.-Japan Digital Trade Agreement include rules guaranteeing that firms can move data freely across borders and prohibiting mandates to store or process data on local servers. In contrast with the Trump administration’s broader trade policy, which has rejected multilateralism and pumped the brakes on seven decades of liberalization, the United States continues to prioritize rules promoting the free flow of data in digital trade negotiations at the WTO and elsewhere.

China’s approach to digital trade reflects its own vision for the global digital economy, emphasizing its “cyber sovereignty.” In WTO digital trade negotiations, China promotes a regime that empowers governments to restrict data flows, filter the internet, and block foreign digital services. This approach protects its domestic system: China’s Great Firewall prohibits many foreign firms from reaching Chinese customers, and its cybersecurity law restricts the outbound transfer of wide range of data and requires the local storage of all “important” information. Such measures would violate U.S.-style rules on digital trade, so China advocates for weaker alternatives—or none at all.

China’s advocacy for a closed approach to digital trade is also part of a strategic effort to build a coalition of countries with separate, sovereign internets characterized by greater government control over information and data. The growth of this bloc validates China’s domestic approach and enhances its global influence. What is more, where this strategy succeeds, Chinese firms are well-positioned to compete. One of the competitive advantages of Chinese internet companies is that they have grown up in a restrictive, state-centric economy. Censorship and control are the default settings for these firms, and they are primed to succeed under similarly restrictive systems. Where its firms flourish, the Chinese government can leverage its control over domestic companies to facilitate surveillance, propaganda, and disinformation campaigns that boost its strategic interests.

The alternative is a digital environment that defaults toward free commerce, the free exchange of ideas, and the free flow of data. Openness, of course, comes with its own challenges. An unconstrained information environment can be fertile ground for disinformation, and unconditional data flows can put privacy at risk. To address such challenges, the United States should regulate its domestic digital economy more assertively in the coming years. Following its allies abroad and domestic public opinion, the U.S. Congress is inching toward national privacy legislation; a new law should constrain the transfer of sensitive personal data to jurisdictions that lack the transparency, accountability, and due process necessary to guarantee privacy. Similarly, the United States has, in narrow cases, limited the free flow of data for national security reasons.

But such constraints should remain narrow and exceptional, and the United States should address these challenges without adopting authoritarian methods of censorship, control, and discrimination. Even with discrete conditions for the free flow of data, the overwhelming interest of the United States will continue to lie in advancing digital trade rules that reject China’s top-down vision for the internet. An authoritarian approach that controls speech and limits political activity isn’t just bad for U.S. exports and anathema to democratic values, it also creates very real barriers to coordinating internationally and responding to the global threats that face the world today—such as a global pandemic. An open information ecosystem, on the other hand, does not just benefit U.S. exporters and consumers: it is essential to democratic institutions and the success of democratic governments in competition with China.

Trade is just one area in which this competition will play out, but it is an important one. Having concluded high-standard digital trade rules with Canada, Mexico, and Japan, the United States should focus on working with its largest trading partner: the European Union. Digital trade has been a stumbling block in transatlantic negotiations, and the European Union’s recent emphasis on bolstering its own “technological sovereignty” has lent unhelpful rhetorical support for Beijing’s far more restrictive model of data governance. For its part, the United States’ continued failure to enact a federal privacy law is an obstacle to  bridging the substantive divide.

But with shared democratic values and a commitment to market-based economics, the United States and Europe each have much to gain from finding consensus on rules that promote an open global digital economy. A shared approach would present a democratic alternative to China’s approach and a clear model for the many other governments that are weighing their options. Given the centrality of the digital economy to politics, power, and life, building this coalition of support for free digital trade will be central to building a democratic bloc that can compete effectively in the twenty-first century. The alternative—continued transatlantic divergence on digital trade—only opens the door wider for authoritarian approaches to prevail, and for China’s relative strength to grow.

Sam duPont is deputy director of GMF Digital at the German Marshall Fund of the United States.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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