Trade Forum Features

The digital trade oversight

10 July 2017
ITC News
How ignoring the internet opened a backdoor to de-globalization

Two decades into the digital revolution, the notion that the internet and mobile connectivity are transforming trade and bridging the digital divide is a staple talking point at diplomatic conferences on trade and development. Needless to say, tariff cuts and digitalisation have combined to boost productivity and create a new breed of exporting firms, especially among small and micro-businesses in developing countries.

However, this Brave New Trade should not be taken for granted. Trade on the internet is increasingly fragmented by government measures designed to disrupt open exchange of data. To date, at least 36 jurisdictions have banned moving bits and bytes across borders – most of them enacted in the last five years, through measures commonly referred to as ‘data localisation’.

As access to information online is conducive to all trade, this fragmentation of the internet does not only block new services like social media. At least half of all trade in services is supplied via the internet. Even trade in traditional offline services – typically outsourcing business, consultancy services, or logistics – can be severely hampered through data localisation and other regulatory requirements. As a result, many countries have effectively rolled back their commitments in their trade agreements, without a single shot being fired.

In addition, bans on performance requirements in investment treaties are being circumvented through privacy and financial regulations that force foreign investors of all sectors to place infrastructure, servers and staff in every host country. Calls for doubletaxation of foreign online services – first where they are headquartered, and again where the customers are based – risk making exports a loss-making endeavour for app developers, advertisements or web sites.


Far from the lawless high seas to which it has been likened, the internet has become subject to a myriad of overlapping jurisdictions and conflicting obligations. Domestic laws are routinely enforced extraterritorially on trading activities that takes place overseas – for example, the US Department of Justice has argued (albeit unsuccessfully) in court that subsidiaries of US corporations must release any data they keep to US law enforcement agencies, even when the data resides in a European jurisdiction. Similarly, Europe’s privacy laws apply globally and forbid businesses in other countries to touch the personal information of European citizens: An Indian site developer, a Kenyan craftsman or a Thai tailor collecting the user preferences of European customers is likely to be in violation of EU law.

Other countries are far too impatient for extraterritoriality, and block foreign websites and e-commerce platforms outright. Online censorship is prevalent for various political or illegal content in many countries, but blocking also occurs for harmless and apolitical content. Such is the case of China and other economies where internet management practices have at least some commercial objective.

Furthermore, it is not just governments that are interfering with open trade flows. In the absence of effective antitrust rules, private entities could hamper trade. Telecoms operators could deny network access for foreign web services or outsourcing enterprises by imposing unfair commercial terms or by slowing down traffic. Not just non-market economies, but even the US has been subject to such complaints.

The internet is hardly the first conflict between the trading system and domestic regulations. But digital protectionism often serve objectives that are related to national security, political stability or right to privacy. Such ‘hard’ objectives go beyond the typical pretexts for commercial protectionism, and are nearly impossible to address in bilateral or multilateral trade negotiations. Even already existing rules (for example in the Telecom Annex of the General Agreement on Trade in Services) tend to remain unused.


By losing sight of the internet, the trading system has opened a backdoor to de-globalisation and rollback of existing commitments. Since the trading system is now so closely interlinked with the internet, they are likely go down together. There are no signs of an end to this trend. Even like-minded and strategically allied countries have chosen to tackle cyber crime, privacy and tax issues unilaterally, rather than through judicial cooperation. Attempts to harmonise e-commerce, tax or privacy rules in international forums have proven to be a relatively arduous affair, as regulatory divergences between countries are simply too wide.

As other forms of cooperation fail, the WTO and trade agreements are often singled out as the only way to deal with fragmentation. The Trans-Pacific Partnership (TPP) came close to set a new standard for various trade-related aspects of digitalisation – including data localisation as well as the accessibility of websites, devices or apps – but likely to be watered down in subsequent agreements. In fact, most of the coming preferential agreements are likely to contain more carve-outs than the WTO rules they were supposed to improve upon – not least in Regional Comprehensive Economic Partnership (RCEP) or in the EU-Japan trade agreement and other pending European foreign trade agreements.

This also raises the question whether new digital trade rules can be conceived at the WTO. Relatively well-crafted proposals may be on the table in Geneva, but still beg the question: can the WTO membership – the same governments that cannot agree on non-tariff measures for electrical insulation – agree on e-commerce? For one, a hypothetical renegotiation of the WTO exception would certainly lead to a worse result today on services than in the 1990s when the current provisions were drafted – and should that effort be worthwhile, when already existing WTO rules are not used to convene consultations or settle disputes?

It is perhaps easy to conclude that the ship may have sailed on digital trade – and with it, much of the existing commitments on traditional services and goods. Only a few visionaries saw the impact digitalisation would have on commerce and its rules – and understandably, trade negotiators were typically not among them. Ironically, while technology is often said to make globalization inevitable, the risk of de-globalization actually gets worse the more people and products are digitalised: fragmentation affects an ever-larger share of trade, while the underlying policy concerns over cyber security, privacy or pure protectionism remain irreconcilable.