Digital Trade and Cross Border Data Flows in the Trans-Pacific Partnership

A core issue that will define the success of the Trans-Pacific Partnership (TPP) negotiations will be the agreed commitments on cross-border data flows and digital trade. In 2012, international digital trade in services exceeded one trillion dollars and the United States remained the world’s leading trader of digital services. Asia’s over one billion individuals connected to the Internet currently provide approximately one quarter of U.S. international digital service trade. However, with Internet penetration estimated at between 25 and 40 percent, Asia holds the largest growth potential for this dynamic sector. The freedom of data to flow across borders is the fundamental principle that makes global digital trade profitable, but international rules would help to guarantee this principle and the trade it fosters. The TPP negotiation is the first forum of its kind in which countries in Asia can attain this goal.

Q1: What factors are driving the explosive growth of business activity on the net?

A1: When the Internet was opened to public use two decades ago, its governance was left largely to a nongovernmental organization. Innovation thrived in the highly competitive environment that emerged. While change and growth in this sector continue to outrun metrics, there is some data that provides context. According to the U.S. International Trade Commission’s report on Digital Trade in the U.S. and Global Economies, E-commerce generates nearly 50 percent of total revenue in the manufacturing sector and nearly a quarter of total revenue in the wholesale trade and travel arrangements sectors. In the entertainment industry, digital trade now represents over 50 percent of music sales, 40 percent of games sales, 30 percent of video content consumption, and 20 percent of book purchases. A growing proportion of these sales are U.S. exports.

The development of Internet games business is illustrative. Thousands of software designers have developed and offered hundreds, if not thousands, of games for Internet users to play during leisure time. The sector continues to grow rapidly. Likewise, the introduction of smart phones in 2007 fostered explosive new development that is forecast to yield 81 billion app downloads from the Internet in 2013. Google, Facebook, and Twitter, all three of which were founded within the last two decades, are now multibillion dollar companies that began as ideas about how to use the Internet to provide its users with valuable services.

Q2: What are the risks to continued rapid growth of this dynamic sector?

A2: Some governments are actively pursuing policies that will slow growth of commercial Internet activity. Trade policies such as joint-venture and local content requirements, mandatory IPR transfer and other technology transfer provisions, unnecessary or disproportionate restrictions on trans-border data flows, and local data storage obligations, lower welfare by raising costs and prices as well as reducing product quality and availability. Meanwhile, government surveillance and actions that deny access to the Internet reduce public trust. Diplomatically, a coalition of countries—Russia, China, Iran, India, and the Arab states—that systematically pursue some or all of these policies have been steadily building momentum in the International Telecommunications Union (ITU), the global body that historically supported nongovernmental Internet governance, towards the ITU taking over international regulation of the Internet (see February 2013 testimony of FCC Commissioner Robert McDowell,).

Business transactions over the Internet necessarily transfer vital personal information that can cause significant financial harm to consumers if compromised. Criminals actively seek, and frequently gain, illicit access to this information, harming consumers, businesses, and the economy at large. Businesses understand that protecting their customers’ personal information is critical for their credibility and commercial success. To meet this obligation, businesses have been investing substantial sums in cybersecurity and cooperating with governments to protect themselves and their customers, who, for their part, generally believe that market forces will continue to incentivize businesses to protect consumer privacy.

Q3: What provisions does the TPP need to promote Internet economic opportunity?

A3: With over 500 million Internet users among the TPP negotiating countries and Internet penetration ranging from a low of 34 percent (Peru) to a high of 88 percent (New Zealand), the TPP negotiating partners have the right balance of market experience and commercial opportunity to guide the development of new rules for international digital trade and cross-border data flows. We should be able to expect TPP negotiators to achieve binding commitments not to implement trade-related measures that impede digital trade in goods and services, restrict cross-border data flows, or require local storage or processing of data. We would also normally anticipate that our TPP partners would agree to pursue legitimate domestic regulation of electronic trade and cross-border data flows through provisions that are least trade restrictive, nondiscriminatory, transparent, and that promote an open market environment. However, achieving these commitments may be challenging with the global spotlight shining on data privacy protection, Internet crime prevention, and government surveillance. Obtaining binding commitments in the TPP in these areas would not only provide a stronger trade policy framework, but also set an important precedent for the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations and ongoing discussions at the ITU about Internet governance.

The Internet is a product of U.S. innovators, collaborating over the past 25 years. The U.S. government has pursued policies that have encouraged low-cost, open access to this invention for people around the world. The explosive economic growth the Internet has fostered demonstrates the power of open, competitive market structures. Obtaining the right commitments in the TPP is the first step to ensure that legacy for the world’s future.

Greg Hicks is a State Department fellow at the Center for Strategic and International Studies in Washington, D.C.

Critical Questions 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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