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The Trans-Pacific Partnership & the Digital Economy
March 30, 2016
*As prepared for delivery*
I would like to begin by thanking the Commonwealth Club and its Board for hosting this event and to my good friend, George Scalise, for taking time out of his busy schedule to moderate this discussion.
We face a choice this year that is surely among our most important in a generation. A choice that will determine whether America remains a land of innovation and opportunity.
I’m not talking about the presidential election. Join me, if you will, and let’s take an even longer view. Look beyond today’s digital entrepreneurship. Consider the next wave of innovative ideas. Imagine where tomorrow’s big bets might lead.
Looking ahead, the choice that will shape the 21st century isn’t between left and right. It’s between open and closed.
The competition between these alternatives—open and closed—is well underway. You can see it beyond our borders, where digital protectionism is on the rise. You can see it when websites are widely blocked and governments control content. You can see it when barriers obstruct cross-border data flows.
And if we don’t act, if America doesn’t fight for openness, we will see the costs of digital protectionism here in the Bay Area. We will see it as promising technologies like cloud computing are undercut. We will see as startups are knocked down. And ultimately, we will see it in opportunity squandered as the Internet becomes balkanized.
The reason this is so important to the future our country, and Silicon Valley in particular, is that digital entrepreneurs depend, to an unprecedented degree, on being able to scale their businesses quickly: something the Internet has revolutionized, and which we take for granted in the United States.
But even access to the millions of consumers and business also online in the U.S. may not be enough to support our industry where competition is increasingly global.
Today, to truly scale, our digital entrepreneurs need to access marketplaces beyond U.S. borders, where 95% of the world’s consumers and businesses are. Global scalability—and thus the fate of American digital entrepreneurialism—will falter if openness does not prevail.
Winning depends not simply on “doing something,” but doing the right thing. We need to upgrade our policies to reflect the economic realities of today. We need to shape the global economy of tomorrow.
For me, this is borne out of personal experience. I approach these issues with over 20 years of experience in the technology sector. Like George and many of you in this room, I understand deeply both the stakes and the positive role that smart trade policy has and can play.
Getting the rules right for trade matters. American innovators are thriving today in part because of some forward-looking rules that were established two decades ago. But I worry that we have begun to take this success for granted.
There is no doubt in my mind that America’s risk-taking, entrepreneurial spirit remains strong. But for that spirit to continue translating into success, we need to foster the right environment. An environment of openness, access, and expanded opportunity.
With that goal in mind, I’d like to make three observations today:
First, the threat posed by digital protectionism is real, it is rising, and it demands a strong response.
Second, part of that response must include upgrading our rules of the road for trade.
And third, this is urgent. We cannot afford to wait.
Soar or Sink
Let me start by outlining the threat that digital protectionism poses. I realize it can be difficult to imagine our digital universe doing anything other than expanding. We’ve seen tremendous growth during the past two decades.
As recently as the early 1990’s, digital commerce was a dream. Today, according to McKinsey, digital flows now exert a larger impact on GDP growth than the centuries-old trade in goods.
Every day, new users are coming online, boosting the potential for technology to carry information, commerce, and opportunity to more places around the world. Another research firm projects that by 2020, digital commerce will eclipse $3.5 trillion annually.
As more users connect, and as technology improves, the stuff of science fiction is becoming closer to reality. We can imagine, for example, the emergence of entirely new export fields—in telemedicine, data analytics, research and development, and distance education, among others.
As a leading innovator and the world’s largest services exporter, the United States is primed to excel in these areas.
But there is no law of physics that says the digital economy must continue to expand. Indeed, in some alarming areas, it is closing. Our analysts have identified barriers to digital trade in over 20 countries. By way of example, these barriers come in the form of laws that prohibit foreign companies from obtaining the licenses necessary to provide cloud-based services; laws that block data and websites relating to legitimate commercial activity outright; and laws that require companies to use local data centers exclusively. While sometimes motivated by legitimate objectives, these laws apply an overly blunt approach that is more restrictive to trade than necessary.
Without the right rules in place, these barriers will continue to proliferate. And as more digital walls obstruct digital bridges, we risk forfeiting not only the future gains from the digital economy but also its current benefits.
Everyone has a stake in ensuring we keep the Internet open and free—from the dorm room entrepreneur, to the startup south of Mission, to the global tech leaders that have become household names.
Consider a company like Salesforce, which was born in the cloud. They don’t have legacy applications, and they are completely dependent on unimpeded cross border data flows.
Or a company like Cisco, which helped develop the Internet’s open architecture and is now leading the way in developing the Internet of Things.
Or a company you might not have heard of, Nobel Systems, Inc., of San Bernardino, California. Nobel Systems is a minority-owned corporation that specializes in geographic information systems for water utilities. Nobel System’s technology enables government agencies to convert hard copy paper maps into high-quality computer mapping systems and to host that data on the cloud. The company began exporting its service in 2010 and presently serves customers in Asia, the EU, and Mexico.
Each of these companies relies on a free and open Internet. It’s the difference between whether their ideas and dreams will soar or sink.
Who knows where digital entrepreneurs will be in 5, 10, or 15 years? We can’t guarantee that any one idea will succeed. And that’s part of the beauty of innovation.
Rarely do our innovators get it right the first time. As the futurist Paul Saffo has written, “failure is the foundation for innovation […] the destructive renewing force that frees up people, ideas and capital and recombines them, creating new revolutions.”
The government shouldn’t be in the business of saying who will and won’t succeed. But with the right rules in place, we can help ensure that American innovators and entrepreneurs get a fair shot. With the right rules in place, our innovators can shoot for the moon. With the right rules in place, we can unleash the next wave of digital stars.
An Urgent Upgrade Is Needed
Trade policy has a critical role to play in meeting these challenges and giving American innovators a fair shot at success.
Indeed, many of the digital products and services we enjoy today were facilitated by smart, forward-looking trade policies that were put into place during the 1990’s, when cross-border digital trade barely existed.
Then, the Internet changed everything. Along with broadband networks, it established an open platform for delivering any information-intensive product or service instantly and cheaply. Within a decade, an almost seamless global market place had emerged.
What’s even more incredible, then, is that the last major upgrade in trade rules incorporated several key concepts that enabled the digital economy to prosper. Concepts such as the idea that global trade in information-intensive services will not increase without assurances that data can flow freely across borders.
You don’t need to look far to see the positive impact of these visionary rules. Just consider how the technology sector has flourished. Since 1995, the market cap of the top 100 U.S. tech companies has grown by nearly $3 trillion.[iv]
That dramatic growth proves the importance of forward-looking rules. But 20 years is a long time to wait between upgrades. In the meantime, our policies have not kept pace with fundamental changes in the global economy. Put simply, what got us here will not take us where we need to go.
Today, we are on the cusp of a third major empowering evolution. The first was the advent of the PC. The second was the commercialization of the Internet. And today, cloud computing is taking us into a third evolution.
You can see innovative American companies placing big bets in this area. Adobe has moved completely to the cloud. GE is putting significant resources behind a cloud-based industrial and analytics project called Predix.[v]
And these opportunities are attracting some of America’s brightest minds.
Take the Stanford Graduate School of Business, which like most business schools, has historically sent most of its graduates to consulting, finance, and other traditional roles.
But in recent years, roughly half or more of the graduates have entered the technology sector, including subsectors like energy and clean tech, and 16 percent of the class began or joined startups—mostly in technology. Even graduates entering traditional sectors like consulting and finance are heavily focused on the digital economy, particularly in areas like private equity and venture capital.
And the best thing is, you don’t need a degree from Stanford or similarly well-known institutions to tap into these opportunities. Access to massive computing power is now more affordable and more scalable than ever before. With little less than a credit card or personal checking account, you can tap into this open architecture, cheaply and quickly. That makes this open architecture one of the greatest equalizers of opportunity that we have ever known.
Taking a step back, it’s clear that these developments have made us even more dependent on cross-border data flows. Consider the proliferation of mobile devices in the past several years. Cisco estimates that in the next five years, the number of mobile-ready devices in phones, tablets, cars, machines, and monitors will grow to one and a half times the world’s population.
As digitally intensive industries expand internationally, they are seeking to maximize economies of scale by processing and storing their data in locations across their entire geographical network. For example, a smartphone operator might access data stored in the United States and Japan when serving a customer in Korea, and a bank in Singapore might need to give its employees access to software hosted in the United States to better market its products.
But around the world, new barriers are rising in the digital realm. Many governments require that that data be anonymized before being exported to protect the privacy of the user and that the exporters of that data be licensed by local regulators. Others require that all “national” data be stored on local servers. These localization requirements are beginning to balkanize the Internet.
In the recently-concluded Trans-Pacific Partnership, we fought hard for rules that will combat these trends. After five and a half years of negotiations, we brought home a deal with a policy architecture that is constructed around keeping the Internet open and free. It’s the first trade agreement in history with comprehensive rules to do just that.
In fact, TPP contains what I’ve called our Digital Two Dozen—24 cutting-edge obligations designed to support the growth of digital trade. And those obligations fall into three critical categories.
The first category includes rules to ensure that the Internet remains open to permit the free exchange of ideas, goods, and services and that it is safe for both consumers and producers. That includes, for example, requiring our partners to adopt enforceable consumer protections. It affirms the bedrock principle that consumers should be able to access on-line content and applications of choice for all legitimate commercial purposes.
The second category includes rules designed to eliminate and prevent countries from imposing policies designed to force the transfer of technology, to restrict the flow of data, or to localize data processing services for protectionist purposes. For example, we have secured rules that will prevent our trading partners from forcing companies to localize their computing services and to build expensive data centers in every market they seek to serve. We have also secured rules that will prevent our trading partners from requiring companies to transfer their technology, production processes, or other proprietary information to persons in their respective territories as a condition for doing business there.
And the third category includes rules to protect our digital innovators and ensure that they can compete on a level playing field when they trade and do business abroad. For example, TPP requires participants to establish criminal procedures and penalties for trade secret theft, including by means of cyber theft, while preserving domestic laws that protect whistleblowing.
Collectively, these achievements make TPP the first trade agreement with comprehensive rules to keep the Internet open and free. Together, they form a comprehensive architecture that will allow digital entrepreneurship to thrive locally and win globally. And that makes TPP the upgrade we so urgently need.
Speed is Survival
And thankfully, this is an upgrade that is now within our reach. TPP was signed last month by all twelve participating nations, and the ratification process is the final step that remains.
Consider the global significance of that achievement. This is an agreement that brings together a group of diverse economies, developed and developing, and unites them behind a set of high standards. It is an agreement that covers nearly 40 percent of the global economy, making TPP a model for the rest of the world.
This leadership, exercised through U.S. trade policy, is already having a positive impact outside of the TPP negotiations. The ground-breaking work we’ve done in TPP has attracted interest from the European Union, from the World Trade Organization, from the G-20, and others. We’ve set a new baseline for high-standard, 21st Century ambition in these areas.
But not everyone agrees with our commitment to openness. China’s trade alternatives to TPP, for example, don’t include rules to keep the Internet open and free. Nor does Russia’s Eurasian Economic Union. These approaches reflect different views of what tomorrow’s global economy should look like. They don’t reflect the interests and values that have made America a land of innovation and the Bay Area a global leader in technology.
Some have said that Congress could take care of this in the coming years. Years? If you’re an innovative business, that’s a lifetime. In the tech world, speed is survival. How many product cycles and opportunities could be lost if digital barriers continue to be erected without a counterpoint?
Increasingly, the same need for action is true in global trade. Other countries are not waiting on the United States. The longer we delay, the further alternative, less-open models advance. Since 2000, over 100 agreements have been completed in the Asia-Pacific region alone, and none of them have TPP’s rules to promote a free and open Internet.
According to one study on the costs of failing to pass TPP, Americans would pay a heavy cost—an estimated $94 billion in national income annually, or over $700, on average, for every U.S. household.
That says nothing of the longer-term costs that delay would have as digital protectionism continues to climb, raising costs for Internet users, curtailing access to global services and stifling innovation by denying digtal entrpreneurs the platforms, technologies, and clouds of their choice.
Thankfully, as more people learn about the importance of leading on trade, support is growing across the country. Every day, we’re hearing from more Americans, and no one has more on the line than our innovators. That’s why the leading technology-oriented industry groups have stepped up in support of TPP and the importance of leading on trade: ITI, TechNet, the Semiconductor Industry Association, software organizations, the Silicon Valley Leadership Group, the Tech CEO Council, the Telecommunications Industry Association, and the Internet Association among others.
The fundamental choice of the 21st Century—open or closed—will not be decided overnight. Winning the fight for openness is likely to be the work of a generation. But we must do what we can, when we can, to move in the right direction. If we continue taking today’s achievements for granted, we’ll overlook what needs to be done to enable tomorrow’s digital innovators.
Taking a longer view only underscores the need for immediate action. Thank you.
To read the Digital Two Dozen report on the Trans-Pacific Partnership and digital trade, please click here.