USTR abandons the digital rule book—to China's potential benefit

The success achieved by US companies competing in global markets rests on the protection of their intellectual property and other rights enshrined in trade agreements over many years. Most recently these rights, applied to US high tech companies engaging in what is known as digital trade, were part of the US-Mexico-Canada accord enacted in 2020.

It was therefore a shock to the US business community and many other places when US Trade Representative Katherine Tai announced in October that negotiators would suspend pursuit of protecting digital rights in future World Trade Organization (WTO) negotiations. She later added that such rights would not be sought in the Indo-Pacific Economic Framework for Prosperity (IPEF), the accord aimed at enhancing US leadership and curbing China's influence in East Asia.

True, Ambassador Tai has made no secret of her hostility to trade deals. She has often excoriated trade as harmful to US workers. But the Biden administration has advocated strong rules for labor and environmental protections in trade deals. And until a few weeks ago Ms. Tai had advocated stronger rules for intellectual property rights as well, with an American flavor, for commerce with other countries. Her suspension of efforts to try to secure those rights produced surprise and consternation in the business sector and throughout Congress—and according to news reports, also among officials in the State and Commerce Departments, which raises questions about lack of economic policy coordination in the Biden administration. The big winner of the new policy is likely to be China.

Digital trade is essential for 21st century commerce. The abrupt U-turn threatens small and large US firms alike with a lawless world. If State Department officials a century ago had told foreign partners that they could discriminate against US cargo ships, that would have seemed foolish at the time and doubly foolish today. But Ambassador Tai has essentially given trading partners a potential green light to discriminate against US digital trade. Moreover, US abdication encourages other countries, especially China, to take the lead in writing their own digital rules that reflect their own cyber norms.

In 1998, WTO members first agreed not to impose customs duties on ecommerce, and the moratorium has since been renewed every two years. In 2006, President George W. Bush spelled out anti-discrimination digital rules in Article 15 of the US-Peru free trade agreement (FTA). In 2016, President Barack Obama codified core principles of the digital rule book in Article 14 of the draft Trans-Pacific Partnership Agreement (TPP). In 2018, President Donald Trump inserted those core principles in Article 19 of the US-Mexico-Canada Agreement (USMCA). Three of those core principles embedded in the USMCA and previously at the heart of the US negotiating agenda are now at stake.

One principle is the free flow of data within a business organization, coupled with guardrails to protect personal information. China adamantly opposes the free flow of data, fearing that seditious information will stir political discontent. Instead, China advocates "cyber sovereignty," meaning that each country should have the power to determine what flows over the internet. Other authoritarian countries share China's vision. By interrupting the free flow of data, adversaries can hamper US business firms operating abroad. China's "Great Wall" costs the US economy billions of dollars each year by shutting US companies out of the world's largest web market. Following its U-turn, USTR is signaling that it will no longer resist such obstructions.

A second core principle is the protection of "source code," i.e., instructions in machine language run by computers. Source code is the essential intellectual property of any website, whether a local restaurant directory, country music platform, tax accounting system, or social media profile. Source code can cost millions to create, but it is not effectively protected by patent or copyright laws, although hacking a website to obtain source code, which can contain sensitive information like database passwords and secret keys, is illegal under US law. The USTR U-turn could prompt countries to require tech firms to disclose their source code as a condition of doing business. This is forced technology transfer, pure and simple, and even worse, if allowed, enables China or other countries to obtain extremely sensitive information. It could also enable a foreign intelligence agency to more easily discover digital flaws that can be exploited in cyber-attacks.

A third core principle is no localization requirements, for computer hardware such as servers, for personnel who manage software, or for personal data. Again, China and like-minded countries insist that computer equipment, software personnel, and personal data be located within the national territory. These are essentially 100 percent local content requirements. Localization requirements also impose unnecessary costs on foreign firms, and they can indirectly lead to embedding adversary technology, such as back doors, in software abroad.

Ambassador Tai's stated reason for abandoning the core principles was to create "policy space" to further "worker-centric" rules advocated by the administration. But it is far from clear how the U-turn will protect millions of well-paid American jobs in US tech firms. Moreover, Congress shows no appetite for abandoning core principles, and without congressional support the administration cannot rewrite the digital rule book that applies within the United States. Meanwhile, the U-turn potentially invites US trading partners to write rules to their advantage on international digital trade and by extension the global future of the internet. Many countries will be happy to step up, China among them. Rules they advocate may well penalize US tech firms, large and small.

A New York Times columnist celebrated Tai's U-turn as a slap to Big Tech—Meta, Google, Amazon. Progressive congressional Democrats echo that view. What is bad for Big Tech, they presume, must be good for the average American, without realizing that the 93 percent of Americans who use the internet would face higher costs if web companies' digital rights are not protected. Tai also contends that the United States must sort out its position on artificial intelligence (AI) rules in trade before proceeding with digital rules in the WTO and IPEF. To pursue digital rules before AI rules, she maintains, would be "massive malpractice." But AI issues can be addressed without shelving core principles on data flows, source code, and localization.

Critics of big tech firms also overlook the fact that they employ almost 2 million Americans, workers at risk from the U-turn. As former WTO official and PIIE colleague Alan Wm. Wolff puts it: "What other government turns on its own industrial champions in international fora?" Equally relevant is the foreseeable harm that digital rules written in Beijing and elsewhere could do to small and medium size US firms.

Influential members of Congress from both sides of the aisle vigorously object to the USTR's new negotiating stance. Senate Finance Committee leaders and 30 other senators have urged President Biden to reverse USTR's policy. The White House is reported by some sources to have assembled an interagency committee to investigate how the USTR decision was reached. As dissenting voices weigh in, hopefully the White House and other Cabinet officials will seek to reign in Ambassador Tai or ask her to reconsider her priorities.