13 Jan 2016

Digital trade poses dilemmas for regulators

It is becoming evident that the regulation of digital trade demands an update of international trade rules.

A condensed version of an article by Mira Burri in German - Digitaler Handel stürzt Regulatoren ins Dilemma – published in the University of Bern magazine, Unipress

Buying clothes, booking flights and accommodation, streaming music or TV shows, enrolling on a course, and connecting with friends and relatives – these everyday activities are increasingly done online. It is no exaggeration to say the internet has affected most facets of our daily life. The way we work, live and communicate has been utterly transformed.

The internet has altered the nature and conditions of trade too. Three areas are particularly noteworthy. First, the internet has enabled the creation of purely digital goods – such as books and films – that can easily be transported and reproduced across the globe. It has radically increased the number of services tradable across borders – such as accounting or software support - as well as sped up the integration of services into goods. Second, digitisation impacts the physical flows of goods through the use of so-called ‘digital wrappers’ around traditional products – such as embedded sensors - that enable monitoring, data collection and communication between objects. The third shift is associated with the creation of online platforms for production, exchange and consumption. Digital platforms are enabling whole new forms of cross-border exchange, opening up avenues of globalisation where individuals and smaller firms, from both developed and developing countries, can actively participate and trade a great variety of services and products, including those with a relatively low value. 

Outdated rules
But how are these businesses regulated? Do existing rules need to be completely overhauled? Is digital trade free trade?

There are no straightforward answers to these questions. The World Trade Organization (WTO), whose prime goal is to regulate global trade, was not particularly interested in the internet back in 1995 when it was created. Digital trade then meant mostly trade in IT products, such as printers and fax machines. Nonetheless, the comprehensive rules of the WTO that seek to ensure non-discrimination in trading goods and services and set minimum standards for the protection of intellectual property, apply to online trade too. 
Yet, the WTO system faces some serious limitations. It is a fact that its 161 members have not agreed on any update of the existing rules to make them fit for the digital age. There is great legal uncertainty because the presently applicable distinctions between goods and services and between different sectors and subsectors make little sense in a world of data flows and converged communications. 

Due to the lack of adequate WTO solutions, many states, in particular the US, have attempted to find fixes in a series of preferential trade agreements. These close some of the WTO law gaps and advance new rules that seek to ensure freer digital trade. The agreement between the US and South Korea is one of the furthest reaching in this regard; the recently signed Transpacific Trade Partnership Agreement (TPP) between the US and 11 states in the Asia-Pacific region is said to go even further. 
These agreements, however valued by the countries involved, are only an incremental, partial solution to the larger governance questions of digital trade. 

Inherent dilemma
Ultimately, PTAs are no solution to the internet-fuelled tensions between the global and the local and the inherent dilemma that regulators face – between their desire to foster free flow of data and their unyielding wish to protect interests and values fundamental to the nation state. This dilemma becomes only more difficult to solve as the internet becomes an indispensable part of many countries’ strategies to become more efficient, productive and innovative and to position themselves better in the global economy through digital trade. 

At the same time, it is evident that digital trade can affect the capacity of domestic regulators to achieve their regulatory aims in areas as diverse as consumer protection, financial stability and health. The issue of privacy is particularly affected and controversial. The ability to seamlessly transfer large quantities of personal information to a third country with different levels of data protection can undermine privacy goals in the country exporting the data and affect the fundamental rights of its citizens. 
This regulatory dilemma is reflected in the current situation in the European Union (EU). On the one hand, it has proposed a new far-reaching initiative to create an EU Digital Single Market, tearing down existing regulatory walls and ensuring the free flow of goods and services powered by the internet. On the other, the EU Privacy Directive establishes high standards of data protection and prohibits data transfer to countries without an ‘adequate’ level of protection. 

Global services, local rules
It is becoming evident that the regulation of digital trade demands an update of international trade rules. More importantly, it also appears that regulatory design for digital trade will actually depend on internal national regulatory choices, often touching upon controversial issues such as data protection or national security. 

In this sense, the freeing of trade should be matched by principles of regulating trade designed to ensure balance and foster trust in cyberspace. US academic Anupam Chander suggests that we should subscribe to the principle of legal ‘glocalisation’ – requiring global services to conform to local rules, where both the rules and their application to a particular transaction are consistent with international legal norms. Glocalisation rejects protectionism, yet maintains local safeguards over culture and security. In addition and in order to disrupt the race to the bottom, Chander argues that companies engaged in cyber trade should at the very least follow a policy of ‘do no evil’, and make an effort to comport with human rights law, thereby also counteracting authoritarian regimes and their repressive practices.

To conclude, although we talk of digital trade as a relatively narrow area of economic activity, the governance design chosen for the present and future of digital trade will have serious repercussions – for our everyday practices on Facebook and Zalando but much more importantly for our lives as citizens able to make free choices and access the wealth of information and knowledge that the internet has enabled.