Avoiding fragmentation of the digital economy

Two and a half decades later, it is obvious that regulation has not caught up with reality. The protection of data and the extent to which governments and corporations can trade and access private information as well as store and process data outside a national geographic location lies at the heart of some huge and growing divides internationally. Even the moratorium on tariffs on electronic transmissions, one of the signature accomplishments of the 1998 Declaration, has come under attack from India and South Africa.

The internet is at risk of fragmenting along geopolitical lines, as national regulation forces international companies to adhere to radically different rules when offering the same product in different jurisdictions — or simply do not compete in multiple markets at all. The recent launch of Meta’s Twitter rival Threads revealed the growing faultlines: the app was not offered to consumers in the European Union due to concerns that Meta’s data practices would violate EU privacy law. China has for many years prevented products like Google from competing with home-grown alternatives that co-enforce the government’s censorship regime. Early this year the US state of Montana banned the use of TikTok entirely, a move unlikely to survive court challenges to its incompatibility with the US constitution’s free speech protections.

In digital regulation, as elsewhere in the global trading system, the European Union, the United States and China each believe that their market is large enough that they can unilaterally impose rules that other countries will be forced to follow, whether explicitly through bilateral trade agreements that reflect the preferences of the more dominant partner, or implicitly, through regulatory alignment on the part of smaller economies.

For small and medium-sized countries, this is an unappetizing prospect. Instead of shaping the rules which govern their digital trade, they will be forced simply to choose between regulations devised and decided upon in Brussels, Beijing or Washington. The alternative — a truly global set of rules and principles — would be extremely difficult to agree upon, but it is the only outcome that avoids an ever-widening splintering of the internet into feudal blocs governed by the rules of competing geopolitical powers.

Any durable set of rules and institutions on digital trade will have to include both China and the United States. The problem, as the geopolitical environment deteriorates further, is to find a forum in which discussion is possible. As Ken Heydon argues in this week’s lead article, while a Chinese accession process to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) might have been an ideal point of leverage, the Trump administration’s decision to abandon the deal left the United States without a way of engaging with China on these issues in a setting where it held all the cards.

If progress is to be made on prosecuting these issues, it will have to take place elsewhere: perhaps, as Heydon suggests, in the WTO’s e-commerce Joint Initiative, driven by Australia, Japan and Singapore. The advantage of working through the WTO is the potential for broad-based buy-in, including from both China and the United States. Useful work can also be done through APEC, which will discuss digital trade issues this year. The Regional Comprehensive Economic Partnership (RCEP) could also provide a fruitful venue for discussion, since it includes all three of the countries driving the WTO Joint Initiative as well as China.

Of course, the venue is one thing: agreement on the kind of rules that are needed to govern digital commerce will be elusive as long as there remain differences between governments on issues of privacy, censorship, national security, transparency, and economic growth.

States with robust domestic and bilateral frameworks for managing the intersecting risks presented by the international trade in digital goods and services, like the three states driving the Joint Initiative, should be willing to defend a vision of digital trade rules that emphasizes liberal, open values.  As Heydon states, ‘[a] particularly timely objective for co-chairs Australia, Japan and Singapore would be to promote the concept advanced in 2019 by former Japanese prime minister Shinzo Abe of Data Free Flow with Trust. This approach, now attracting interest within government and among academic experts, would be far removed from what Beijing would likely seek to impose within the China-ASEAN FTA.’

At the WTO Ministerial Conference that agreed to the Declaration on electronic commerce in 1998, Bill Clinton reminded attendees that the global trade regime had been set up to promote free exchange in the service of global peace. As the digital economy starts to fracture along geopolitical lines, and the power of AI gathers strength, middle powers in Asia must act quickly and decisively to ensure that global trading rules are finally brought into the internet age, reflecting values of openness and transparency.