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Key Barriers to Digital Trade
The Office of the U.S. Trade Representative (USTR) works to identify and reduce obstacles for U.S. companies. In this year’s National Trade Estimate (NTE), USTR maintains and deepens its focus on barriers to digital trade.
Digital trade is a broad concept, capturing not just the sale of consumer products on the Internet and the supply of online services, but also data flows that enable global value chains, services that enable smart manufacturing, and myriad other platforms and applications. Some portion of nearly every business is digitally enabled, and every industry leverages digital technology to compete internationally. For example:
- The Internet of Things already ties together over 5 billion objects: cars, refrigerators, locomotives, airplanes—even entire buildings. By 2024, an estimated 27 billion devices will be constantly generating data and sending it across the room or across borders.
- The manufacturing sector creates more data than any other sector of the economy. This data is generated at every link in the value chain—from R&D, to factory operations, to service—and firms use this data to increase productivity and drive down costs.
- Metals companies are gathering data from every step of their production processes. Analyzing production costs and plant constraints alongside the physical properties of their materials allows them to reduce energy consumption and improve efficiency.
Most digital trade already occurs outside the United States—half of all people on earth are now online and the billions of objects newly connected to the Internet each year are located around the world. But in recent years, many governments have sought to control digital trade in blunt and disruptive ways. Some of these government actions are explicitly protectionist; others have imposed unnecessary burdens on digital trade while seeking to address legitimate public policy goals. The NTE organizes its discussion of digital trade barriers for each country into four categories:
- Data Localization Barriers: Including unnecessary requirements to store data within a particular jurisdiction or locate computing facilities locally, as well as outright bans on cross-border data flows.
- Technology Barriers: Including requirements to meet onerous and unnecessary security standards and requirements to disclose encryption algorithms or other proprietary source code.
- Barriers to Internet Services: Including inappropriate application of old regulatory regimes to new business models and unreasonable burdens on Internet platforms for non-IP-related liability for user-generated content and activity.
- Other Barriers: Including issues surrounding electronic authentication and signatures, internet domain names, digital products, electronic payment platforms, and other discriminatory practices.
USTR works to monitor all measures restricting digital trade and remove barriers where appropriate, so that U.S. companies can continue to compete and win in a 21st century global economy. The NTE highlights trade barriers faced by U.S. suppliers of digital goods and services, and identifies specific issues on which USTR will focus efforts over the coming year. Some of the key barriers to digital trade identified in the 2017 NTE include:
- Web Filtering and Blocking in China: For over a decade, China’s filtering of cross-border Internet traffic has posed a significant burden to foreign suppliers, hurting both Internet services suppliers and users who often depend on these services for their businesses. Eleven of the 25 most popular websites globally are currently blocked in China, imposing significant costs on both suppliers and users of web-based services and products. In addition, China’s requirement that all Internet traffic must be routed through a national firewall adds delays to transmission that can significantly degrade the quality of the service, in some cases to a commercially unacceptable level, thereby inhibiting or precluding the cross-border supply of certain services.
- Restrictions on Cloud Computing and Data Flows in China: China does not allow foreign-invested enterprises to directly offer cloud computing services within China, which is of enormous concern to U.S. companies—both those that supply cloud computing services and those that need to source such services. In addition, China is proposing to introduce new restrictions on services currently offered in China on a cross-border basis by prohibiting Chinese telecommunications operators from offering consumers leased lines or virtual private network (VPN) connections to reach overseas data centers. Use of leased lines and VPNs to transfer data across borders is critical to U.S. companies’ effective operation. Elements of China’s new Cybersecurity Law, issued in November 2016, authorize Chinese agencies to further restrict market access for cloud computing and other internet-enabled services through data and facilities localization requirements that apply to services that the government deems critical.
- Restrictions On Location-Based Data in Korea: In 2016, the Korean government again rejected an application for a license to export from Korea location-based data necessary for the cross-border supply of services, such as traffic updates and turn-by-turn directions. Korea has never approved such a license, and has rejected 10 applications to date. This effective restriction on the transfer of location-based data, which is almost unique to Korea, disadvantages foreign suppliers that utilize globally distributed data centers, compared to local competitors that rely on local data processing centers.
- Data Localization Requirements in Russia: Russian law requires that certain data on Russian citizens collected electronically by companies be processed and stored in Russia. Because ensuring local storage and processing is either technically or economically infeasible, many U.S. companies face a choice between withdrawing from the Russian market and operating under significant legal uncertainty. In November 2016, Russia blocked access to the website of a U.S.-based business networking service based on a finding of non-compliance with this law.
- News Aggregation Fees in Several European Union Member States: Online aggregation services, such as search engines and portals, provide users with information about links to websites and services, often including snippets of text and thumbnail images from those other websites and services. Certain EU Member States have instituted measures that require news aggregation services to remunerate the original sources for the use of such snippets. One Member State has proposed a similar measure for the use of thumbnail images. These measures effectively impose a tax on firms that provide a valuable service, helping to drive traffic to publishing sites, thereby increasing viewership and revenue. Elements of the EU publishing industry are advocating the adoption of similar measures EU-wide.
- Restrictions on Online Advertising in Vietnam: Vietnam requires Vietnamese advertisers to contract with a Vietnam-based advertising services provider as a condition of placing advertisements on foreign websites targeting Vietnam, preventing cross-border suppliers from interacting directly with customers. Foreign websites are also required to notify the Vietnamese government of the name and main business lines of the Vietnamese agent that has facilitated the advertising service in Vietnam at least 15 days before publishing an advertisement. This is a highly impractical requirement given the dynamics of this marketplace, which typically functions through automated real-time auctions for ad space.
- Barriers to Internet Services in Indonesia: In 2016, Indonesia proposed two new packages of regulations with the potential to hinder foreign providers of Internet services from participating in the Indonesian market: (1) a circular entitled “Concerning the Provision of Application Services and/or Content over the Internet (OTT)”; and (2) an e-commerce roadmap issued as part of the government’s 14th Economic Reform Package. The packages include proposed requirements to establish a local business entity to do business with Indonesian citizens, to use a national payment gateway, to use local IP numbers, and to store data within Indonesia. Both of these packages threaten to inhibit foreign firms’ participation in Indonesian e‑commerce, create trade barriers, and harm Indonesian consumers.
- Data Localization Barriers in Indonesia: Indonesian regulations require providers of a “public service” to establish local data centers and disaster recovery centers in Indonesia. Indonesian officials have indicated that “public service” is defined very broadly, creating uncertainty for service suppliers across sectors. In the last six months, Indonesia has issued regulations that require certain private data to be processed in Indonesia, and that require certain financial services to locate data centers and disaster recovery centers in Indonesia. Such requirements prevent service suppliers from leveraging economies of scale in data processing. While some larger companies may be able to absorb these costs, these data localization requirements may be prohibitive for small- and medium-sized businesses.
- Data Localization Barriers in Turkey: In 2016, the Turkish Parliament passed the “Law on the Protection of Personal Data,” which limits transfers of personal data out of Turkey and in many cases requires firms to store data on Turkish citizens within Turkey. A separate law requires suppliers of Internet-based payment services to maintain key information systems within Turkey. This requirement has caused at least one foreign supplier to leave the market, since the economies of scale involved in operating global payment platforms often preclude investing in facilities in every market, even one as large as Turkey.