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2019: The Year in Digital Trade

· December 18, 2019

The year comes to an end with a number of trade headlines: a new agreement on the U.S.-Mexico-Canada Agreement (USMCA), a “phase one” U.S.-China deal, and World Trade Organization (WTO) gridlock. Trade is all but certain to dominate news yet again in 2020. 

In 2019, digital trade came to the forefront of a number of these trade discussions, indicating how important Internet services and Internet-enabled goods now are to global data flows. The stage was set in January at the World Economic Forum where Japan kicked off their G20 presidency and Prime Minister Abe outlined a vision for digital trade and “data free flow with trust”. Countries officially launched the “Joint Statement Initiative” (JSI) on electronic commerce shortly after. 

Below are a few observations on the state of digital trade in 2019. 

#1. Internet Services Continue to Play a Key Role in Driving Global Exports. 

In April, DisCo discussed how Internet services drive exports. Below are a few additional industry reports that further drive this point and illustrate how different Internet players contribute to global trade flows.

  • Growing Small Business Exports 

An October report by the U.S. Chamber of Commerce Technology Engagement Center and Google shows that small businesses are exporting at an increasing rate. The study surveyed a number of small businesses on their exporting data. 92 percent of those SMEs surveyed reported that they use digital tools such as online payment processing tools, online productivity tools, e-commerce websites, and online marketing. Additionally, 61 percent of all small businesses surveyed believe that technology is key to overcoming top barriers to trade including foreign regulations. 

  • Women-Owned Small Online Business Export Rate

A November report released by eBay showcased how women-owned eBay-enabled small businesses export at an increased rate compared to traditional retailers and even at a higher rate than all small online businesses. Their research showed that 97 percent of women-owned eBay-enabled small businesses in the United States are exporting, reaching an average of 17 markets each year. 

  • Social Media Platforms Enable Exports 

Data collected through the Future of Business Survey, a project between Facebook, the OECD, and the World Bank, shows how social media platforms enable exports. The Survey data was collected through businesses’ responses to their interactions on Facebook and perspectives on trade issues that affect their ability to export. 

Utilizing this data, the Mercatus Center has a series of policy briefs released earlier this year breaking down these numbers and highlighting that firms using Facebook have a higher propensity to export (U.S. here, Australia here). The data shows that businesses, particularly small businesses, utilizing online platforms have a higher propensity to engage in international trade than traditional firms. 6.75 percent of U.S. small and medium-sized businesses (SMBs) on Facebook engage in international trade, compared to 4.33 percent of SMBs not on Facebook. In other reporting countries, the share of businesses who were engaged in trade was up to 30.9 percent (Bangladesh), with other high shares were reported in businesses located in Nigeria, Egypt, Portugal, Pakistan, and the Czech Republic.

#2. WTO Work Continues on Digital Rules, Stakeholders Eye Ministerial Next June.

As DisCo covered over the past year (here, here, here), work continues at the WTO to set global rules on digital trade. To date, 86 countries have joined the initiative and dozens have submitted proposals on language (some are public through the WTO public document portal, some are not). At the next WTO Ministerial in June 2020, members are expected to report their progress. 

As the year concluded, one issue drew significant attention at the WTO. The moratorium on customs duties on electronic transmissions was due to expire at the end of December. Typically renewed every two years at each WTO Ministerial since 1998, the timing of the next WTO Ministerial taking place next summer rather than in 2019 meant that there was a 6-month gap in between renewal. The moratorium has recently been under threat by countries including Indonesia and India. Research by the OECD shed light on the impact that a failure to renew the moratorium would have on the global economy, and the negative impact on a country’s long-term revenue. 

The moratorium was ultimately renewed for a period of 6 months. The permanent extension of the moratorium is included in a number of countries’ submissions in the context of the JSI talks, including the U.S. and the EU. 

#3. Digital Taxes Raise Trade Concerns.

An alarming trend over the past year is the singling out of the U.S. digital economy for additional taxation. To date, the following countries have introduced, or signaled that they will introduce, digital taxes: Austria, Belgium, Canada, Czech Republic, Denmark, the EU, France, Hungary, India, Italy, Poland, Russia, Spain, Turkey, and the UK. The preferred approach to grappling with tax challenges in light of the digital economy is the long-term multilateral solution driven by the OECD’s collaborative process rather than these conflicting interim measures. 

Unilateral actions pursued in the manner of these digital services taxes invoke trade concerns. The Office of the U.S. Trade Representative (USTR) launched a Section 301 investigation in the French Digital Services Tax. A Section 301 investigation is a tool U.S. authorities can use to investigate whether a country’s action is either a violation of trade commitments or otherwise unreasonable and discriminatory against U.S. industry.  On December 2, USTR released its report detailing the findings of its investigation and concluded that the French DST was discriminatory and disproportionately affected U.S. firms. 

USTR indicated that the French case is not unique. Citing the recent taxes of Austria, Italy, and Turkey, Ambassador Lightizer noted that it is USTR’s intention to launch further 301 investigations if these taxes become effective. 

#4. North America Sets Standard for Digital Trade Rules in Free Trade Agreements.

The U.S.-Mexico-Canada Agreement was signed in 2018. However, in 2019 Congress and the U.S. Administration engaged in extensive negotiations on the text in order to move forward on work to implement the agreement into U.S. law. 

As the discussions continued, debates continued on elements of the Digital Trade chapter. With the attention on possible revisions to the Section 230 provisions of the Communications Decency Act in the United States, some critics allege that the inclusion of similar provisions would prevent Congress for legislating in the future. However, as explained by previous DisCo posts, these arguments are inaccurate. Provisions in Article 19.17 in the negotiated text are specifically written at a higher level of generality than U.S. law. The Digital Trade chapter is also subject to Article 32.1 of the USMCA outlining General Exceptions, allowing for parties to enact measures “necessary for the protection of public morals” (consistent with Article XIV of GATS).

Ultimately, the Digital Trade chapter remains unchanged in the updated USMCA text ensuring that Internet services will have sufficient legal certainty to offer services in North America.

As DisCo has highlighted a number of times since the launch of the negotiations of the North American Free Trade Agreement in 2017, this was a key opportunity for the U.S. to set the standard for digital trade. With the bipartisan agreement to move forward with USMCA into the next year, it appears that the U.S. has met this goal. 

#5. Digital Trade Barriers Continue to Rise.

Unfortunately, digital trade barriers continued to rise. A number of tech groups have raised concerns about the rising digital trade barriers including in comments to the U.S. Trade Representative for the annual National Trade Estimate Report. 

Prominent barriers include: restrictions on cross-border data flows and data and infrastructure localization mandates, government-imposed restrictions on Internet content and related access barriers, digital taxation, market-based platform regulation, copyright liability regimes for online intermediaries, imbalanced copyright laws and “link taxes”, extraterritorial regulations and judgments, and threats to encryption and secured technologies. 

A summary of these barriers including recent examples is available here

As countries continue to increase regulatory scrutiny of the digital economy, trade will play an important role in ensuring that national regulations are consistent with international obligations, and do not have the effect of protectionism.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.