Remarks by Deputy U.S. Trade Representative, Ambassador Robert W. Holleyman II to the New Democrat Network (NDN):
Digital Economy and Trade: A 21st Century Leadership Imperative
May 1, 2015
*As Prepared for Delivery*
Thank you, Representative Kind, for that warm introduction, and for your leadership of the New Democrat Coalition. The Coalition’s American Prosperity Agenda recognizes the role that smart economic policy can play in sharpening the competitive edge that makes America home to the world’s finest innovators. Your commitment to advancing polices to ensure that the Internet remains open, free, and a platform for global innovation is something that we at USTR share. It is also a key impetus for many of the digital economy initiatives I will describe today.
I would also like to thank Simon Rosenberg and the entire team at NDN for providing me with a platform to explain how the Obama Administration is transforming the rules of international trade to promote the digital economy. As many here today know, Simon and NDN have been early champions in encouraging the United States to play a leadership role in establishing a solid policy foundation to support the global digital economy. For this reason, I could think of no better context in which to shine a spotlight on the comprehensive package of trade rules that the United States is currently negotiating and to explain why the Obama Administration has made promoting the digital economy a key component of its trade agenda.
I am speaking today about the digital economy and trade as a 21st century leadership imperative, because we stand at a cross road. The rules we have in place in the international trading system—historically championed by the U.S. I will add—have served us well, so far. They have helped enable the explosive growth of the Internet and dissemination of new technology, have led to rapid changes that have brought us closer together, allowed us to trade across borders, and have allowed some of the world’s greatest innovations to emanate from our shores.
However, as someone who has worked at the intersection of technology and international trade for over two decades, I can speak with confidence when I say this: the trading rules that have helped us get to where we are today are no longer sufficient. They are no longer sufficient in light of the seismic changes in the way that technology is evolving. They are no longer sufficient in the face of new barriers that are being erected. Barriers that if allowed to proliferate will stand in the way of innovation and impede the ability for U.S. innovators to succeed in the digital future as they have in the digital past. One of the most important aspects of President Obama’s 21st century trade agenda is centered on the digital economy and digital trade. It is this agenda that I am glad we can talk about today.
I call the rules I will describe today our “digital dozen.” Before I get to that it should be said that we are negotiating many more disciplines in our trade agreements to support the free flow of goods, services, and data across the Internet. But the dozen rules I will describe in detail today, building on other fundamentals of the agreements we are negotiating, will help ensure that the digital economy and the Internet remain as central to America’s competitiveness and prosperity in the next 20 years as they have been in the past 20.
The principles we are looking at today are designed to secure not only our ability to compete in the 21st century digital economy, but also the very parameters of that economy itself. Our digital agenda is designed to address questions such as:
- Will the Internet continue to remain open, accessible, and free?
- Will the Internet drive growth as powerfully in the next 20 years as it did in the last 20?
- Will the Internet continue to create opportunities for small businesses, deliver high-quality health care and financial services to rural areas and marginalized people, and continue to fulfill its promise to lift people out of poverty and oppression?
- Or will it become fractious and balkanized, disintegrating into regional and national networks that our farmers, exporters, creators, and innovators can only access for an exacting price?
To get the right answers, we must be sure that global rules continue to play a key role in protecting the free flow of information that is the foundation of the digital economy. However, the current rules date to the 1990s and have growing gaps. Gaps that need to be filled to meet the needs of citizens connected across the globe via the proliferation of mobile devices. Gaps that need to be filled to support emerging business models based on interconnected information networks. And gaps that need to be filled in light of protectionist policies that threaten to break up the Internet and impede the flow of goods, services, and data around the world.
That is the challenge as we see it. And that is the challenge we have set about trying to solve.
How the Internet Has Transformed the Global Economy
Let us now look back just a few years—to the last major shift in trade rules. This was the shift that happened at the time the parties to the General Agreement on Tariffs and Trade created the WTO and updated the rules that would govern trade in goods and services. That shift took place in 1995—obviously a generation ago—a time before the Internet was of critical commercial significance and cross-border digital trade barely existed.
In 1995, only 45 million people had access to the Internet. Last year, that figure reached nearly 3 billion. In 1995, Amazon and eBay were launched, but widespread adoption of e-commerce remained a thing of the future. Last year, Amazon sold a record 2 billion items worldwide and eBay accounted for US$225 billion in commerce. In 1995 there were no tablets, smart-phones, or similar devices available at all—and now there are over 12 billion of them.
In 1995, the founders of Facebook were pretty much still in grade school and the founders of YouTube in high school. Social and media were rarely terms encountered together. Today, Facebook has roughly 1.4 billion active users, approximately 83 percent of whom live outside the United States and Canada. Today, YouTube has more than 1 billion users, is localized in 75 countries, and available in 61 languages.
We know that the Internet has brought the world closer together and has had significant democratizing effects. But the Internet has also had a transformative effect on our economy. It has transformed the products and services we buy, how we buy them, and dramatically reduced the cost of moving products and services across borders. One of the most compelling assessments of the Internet’s impact comes from the OECD, which asserts that the overall impact of the Internet and IT on global productivity may surpass that of any other technology in history, including electricity and the combustion engine.
At the request of Congress, the U.S. International Trade Commission (ITC), issued two recent reports on digital commerce. Whether measured simply, as the volume of products and services ordered and delivered over the Internet, or broadly, as trade in which Internet-based technologies play a significant role, the ITC reported on the profoundly positive effect of digital trade on the U.S. economy. Consider these ITC stats:
- total online sales of products and services in “digitally intensive” sectors was about US$935.2 billion—or 6.3 percent of U.S. gross domestic product (GDP)—in 2012;
- digital trade has likely caused real wages to increase by 4.5 to 5.0 percent and increased U.S. aggregate employment by up to 1.8 percent;
- the Internet has reduced the trade costs of U.S. exporters and importers in digitally intensive sectors by 26% percent, on average.
Importantly, it is not just technology companies that benefit from these reduced trade costs. According to McKinsey, more than three quarters of the value created by the Internet accrues to traditional industries. In 2012, our manufacturers exported US$86.5 billion in products and services ordered on-line, while they imported only US$50.7 billion in goods and services on-line the same year. In other words, we have a US$36 billion “digital trade surplus” that we are currently seeking to expand across a range of trade agreements—not only for the benefit of our tech companies and manufacturers—but for companies and workers in every sector of the economy.
Internet-enabled and digital technologies have driven the development of global data networks. These are networks that foster economic development. Networks that enhance agricultural production and advance environmental protection. Networks that protect public health and safety throughout the world.
When considering the development impact of the Internet, take, for example, Kiva, the world’s largest online platform for micro-lending. Since it was founded in 2005, Kiva has facilitated more than US$700 million in micro loans to more than 1.5 million people in 190 countries. Many of those people would have had no access to capital in traditional markets. Crowdfunding sites such as Kickstarter and Patreon have also democratized access to capital for projects of all sizes.
Digital technologies and data flows are transforming agriculture—both in the developing world and here at home. Take shea nut harvesters in West Africa. They are using mobile applications to scan and protect the shea nut products that they are exporting, as well as to transmit pricing and market information to buyers all over the world. The use of this mobile, Internet-enabled technology has increased both the output and income of these farmers and ultimately resulted in more jobs. Here at home, the Internet has enabled growers to promote smart, “prescriptive planting” by combining data on crop spacing and yields with information on weather patterns and crop performance. Eventually, farmers all over the world will have access to this prescriptive planting technology, which should significantly improve global food security and feed rapidly growing populations whose needs cannot be met using traditional farming means alone.
Perhaps most fundamentally, the Internet has resulted in a dramatic expansion of the information and communication technology sector in the United States and around the world. The ICT sector today is orders of magnitude bigger than it was 20 years ago and includes a much more diverse set of players. Today the sector includes companies that develop hardware, software, smartphones, content, applications, networking, cyber security, and support services. Apple, IBM, Intel, Cisco, Microsoft, Google, Amazon, and Facebook are all now global leaders. Companies and people all over the world depend on the digital products and services they currently provide. And they have new emerging competitors every day coming out of tech incubators, universities, and labs. We have faster and more democratized innovation coming about through new, affordable access to massive computing power through the cloud. This allows innovators to scale up quickly whether they are located in Boston, Austin, LaCrosse, or San Jose.
The sum total of this innovation fueled by the architecture of the Internet and now the cloud cannot be overestimated. In a 2011 study, McKinsey estimated that the Internet contributed to almost a 21 percent increase in GDP in mature economies during the 2006-2011 time period alone. The National Foreign Trade Council reports that the goods, services, and content flowing through the Internet during the same five-year period were responsible for a 15 percent growth in U.S. GDP. That is all the more striking given that the period spanned the Great Recession.
Put simply, the Internet and broadband networks have transformed the global economy by establishing an open platform for delivering information-intensive products and services instantly. They have enabled the emergence of an almost seamless global market place.
Existing Multilateral Trade Rules Could Not Fully Combat the Rise of Digital Protectionism
When key global trading players last set about renegotiating the rules of the global trade system, the Internet was in its infancy and digital trade was virtually non-existent. Digital delivery of services was extremely limited. Although the transformative nature of the Internet could not have been fully foreseen at the time, trade agreements from 20 years ago—particularly the General Agreement on Trade in Services, or the “GATS”—incorporated several key concepts that enabled the digital economy to prosper across borders.
In 1995, the GATS Parties agreed to cover all internationally-traded services including, banking, telecommunications, computer, tourism, and professional services. The GATS Parties agreed further that their commitments in each of these areas were “technology neutral.” In other words, they would not depend on the means by which those services were supplied. This technology neutrality obligation has ensured that many commitments taken by the GATS Parties’ remain meaningful today. For example, China’s GATs commitment to offer non-discriminatory market access to music distributors would be of little use if it were not tech neutral, as the distribution and sale of musical content has migrated increasingly to digital platforms in recent years.
Additionally, WTO Members recognized the importance of ensuring the free flow of data in two sector specific annexes to the GATS Agreement. The GATS Parties committed to ensure that service suppliers of other Members could use public telecommunications systems (1) for the movement of information across borders and (2) to access to information contained in data bases or stored electronically in the territory of another Party.
Similarly, the GATS Parties committed to refrain from adopting measures that prevent the transfer or processing of financial information, including the cross-border transfer of data by electronic means. These provisions were critical to telecommunications and financial service providers who had historically relied on gathering, processing, and analyzing customer information in regional centers, and whose businesses depend on reliable access to communications networks, as well as cross-border data flows.
The United States Has Introduced New Disciplines in its 21st Century Trade Agreements to Ensure that the Digital Economy Continues to Thrive
The digital economy has developed in ways that make companies and individuals alike even more dependent on cross-border data flows. Consider the proliferation of mobile devices in the past several years. The World Bank estimated that by July 2012 around three quarters of the world’s inhabitants had access to a mobile phone. In fact, the number of mobile subscriptions in use worldwide had grown from fewer than 1 billion in 2000 to over 6 billion in 2012—5 billion of those were held in developing countries. A recent cover story of The Economist heralded that by 2020, 80 percent of adults will have an internet-enabled phone, or supercomputer, in their pocket.
As mobile service providers and digitally intensive industries expand internationally, they seek to maximize economies of scale by processing and storing their data in locations across their entire geographical network. For example, a service supplier supporting a smartphone might access data stored in the United States and Japan when serving a customer in Korea. Similarly, a bank in Singapore might give its employees access to software hosted in the United States to better market its products.
However, many countries have embraced a form of data nationalism that threatens to prevent this kind of expansion. The use of data localization requirements—requirements that data be stored and processed locally—is growing in foreign markets. According to USTR’s research, at least 20 countries have considered or adopted measures that would require data localization of some kind. In their most egregious form, such policies require a company to build data centers in country in order to serve that market, at a cost often reaching tens, if not hundreds of millions, of dollars. Such requirements undermine a key advantage of cloud-based services, which leverage the economies of scale of a reduced number of computing centers to provide cheaper and often more secure data processing and storage services.
Some forms of data nationalism are even more pernicious. As Senator Ron Wyden has explained forcefully, “repressive regimes in Russia, China, and elsewhere are conspiring to build walls around the Internet that cut off the flow of information at national borders.” He rightly observed that “even democratic regimes with a lesser history of honoring free speech than the U.S. are proposing unacceptable restrictions on the Internet.” These types of localization requirements are beginning to “balkanize” the Internet. Barriers like these have the potential to hit at the heart of the digital economy and nullify many the Internet’s trade facilitating effects.
Barriers to digital trade come not just in the form of localization requirements, but also market access limitations, IPR infringement, inflexible data privacy and protection requirements, and uncertain legal liability rules, among others. The ITC’s econometric models estimate that removing those barriers could result in an increase in U.S. real GDP in the range of tens of billions of dollars for U.S. suppliers.
In the Trans-Pacific Partnership agreement, or TPP, the United States has proposed additional rules in the telecommunications, e-commerce, investment, and intellectual property chapters to combat these trends that harm the digital economy. These rules draw on extensive consultations with Congress and other key stakeholders meant to identify barriers to digital trade—existing and potential—and develop the most effective trade policy response. I like to refer to these rules as our digital dozen. They represent the highest standard and most comprehensive combination of pioneering disciplines designed to promote an open Internet and an Internet-enabled economy in any trade agreement to date:
First, the Internet should remain free and open. We are working with our trading partners to affirm the bedrock principle that consumers should be able to access on-line content and applications of choice for all legitimate commercial purposes. In trade rules we focus on commercial suppliers, but this principle also has broad benefits for social and civic engagement.
Second, we have proposed a complete prohibition on customs duties for digital products. This will ensure that our trading partners cannot erect customs tollbooths impeding the flow of music, video, software, e-books, and games throughout the trade area. This will ensure that our creators, artists, and entrepreneurs get a fair shake in markets around the world.
Third, we have proposed that our trading partners refrain from putting any digital products of another Party at a competitive disadvantage in their markets. With this, we have ensured that the basic non-discrimination principles that are at the core of the global trading system for goods and services also apply to digital products.
Fourth, as I have described, barriers to cross-border data flows threaten to destroy the considerable benefits associated with cloud computing and other innovative technologies. Therefore, we are acting directly to confront the discriminatory and protectionist barriers to cross-border data flows that many countries are erecting. These rules are subject, of course, to reasonable safeguards that countries put in place to ensure things like the protection of consumer data when exported.
Fifth, we have proposed rules preventing our trading partners from forcing companies to localize their computing services and to build expensive data centers in every market they seek to serve. This will ensure that digitally intensive companies can fully utilize their existing networks and process their data efficiently and cost effectively.
Sixth, we have proposed rules prohibiting our trading partners from requiring companies to transfer their technology, production processes, or other proprietary information to persons in their respective territories.
Seventh, we have sought to include binding commitments ensuring technology choice that prohibit our partners from requiring companies to purchase and utilize local technology. Our objective here is to ensure that companies operating within the trade area can use technology of their own choosing—for example, preserving their ability to choose among wireless transmission standards like WiFi and LTE.
Eighth, we have proposed a provision which ensures that companies and consumers can develop and use technologically-neutral electronic signatures and authentication methods of their own choice.
Ninth, we have proposed that that our partners provide enforceable consumer protections in their markets so baseline consumer trust is enhanced. We believe consumer protections, including with respect to privacy, should be embraced by our trading partners.
Tenth, we have proposed provisions to safeguard network competition. We have long championed the ability of our suppliers to build networks in the markets they serve—whether landing submarine cables or expanding data and voice networks—to better serve consumers and businesses.
Eleventh, we have introduced a provision that aims to foster the development of innovative and effective encryption products to meet consumer and business demand for product features that better protect security and privacy. We have also sought to prevent countries from taking actions that stifle innovation and block companies from using the strongest available security technologies in the marketplace.
Twelfth, we have proposed an adaptable platform for our services and investment commitments to ensure that new and innovative digital products and services are protected from discrimination and other barriers. The upshot of this approach is that the services and investment commitments we negotiate will extend to entirely new business models and services that emerge, unless a specific negotiated exception applies.
There you have it. Our “digital dozen.” They reflect the Obama Administration’s decision to play a leadership role in developing a global legal framework to support the digital economy.
Of course, the TPP will also contain dozens and dozens of additional disciplines in the intellectual property, services, financial services, investment, telecommunications, and small and medium enterprise chapters that will support the digital economy.
We know that IP-infringement, in particular, is a huge concern for content producers and rights holders operating in foreign markets. What we have found in the United States is that IP protections do not simply benefit rights holders—they have a ripple effect on our entire economy. In fact, IP protections have led to the development of the most innovative, Internet-enabled products and services in the world today—from the content on Netflix to the software on Adobe’s cloud. Therefore, in the TPP IP Chapter, the United States has proposed a strong and balanced legal framework for intellectual property rights protection to promote the dissemination of content, while reducing obstacles to the development of new technologies and business models.
More specifically, we have sought to advance existing global IP standards by insisting upon provisions to protect against the theft of trade secrets, whether by cyber means or otherwise. We have proposed anti-circumvention provisions used by both traditional content companies as well as new digital content and service providers. We have sought Internet Service Provider safe harbors aligned with the Digital Millennium Copyright Act. We see these as valuable to the digital economy. Our policy proposals also provide space for policymakers to adapt to new technological developments when necessary in the public interest. Additionally, as a complement to the copyright protection and enforcement commitments, the United States is also supporting provisions—for the first time in any trade agreement—that will promote balance in copyright systems through exceptions and limitations for legitimate purposes, such as criticism, comment, news reporting, teaching, scholarship, and research, including with respect to the digital environment.
I want to reserve time for questions so I will stop there. But before I do so, I would like to say a few words about the 2015 Bipartisan Congressional Trade Priorities and Accountability Act.
Importantly, the 2015 TPA Bill reflects Congress’s desire to ensure that the trade agreements the Obama Administration and future administrations negotiate recognize the importance of the Internet as a fundamental international trading platform. It also provides specific negotiating objectives to secure cross-border data flows, non-discriminatory treatment for digital products, and to combat mandatory directives for local storage and processing of data. These objectives go well beyond the negotiating objectives around e-commerce included in the 2002 TPA statute. They reflect the challenges we face today, the needs of 21st century Internet users, and the evolving technological architecture of a mobile, social, networked world.
As I have sought to demonstrate today, the rules included in our digital dozen are designed to accomplish the objectives that Congress has identified. Furthermore, the Obama Administration believes that the principles we are espousing will become key components of the 21st century global trading system. And when a group like this gathers 20 years from now, it is our hope that we can say that these rules provided opportunities for growth, innovation, and prosperity that enable our digital future to be even brighter than our digital past.
To view a copy of the Digital Dozen, please click here.