USTR’s Internet Evolution: Trade Negotiators Beginning to Recognize the Importance of the Internet

Last week, the head U.S. trade negotiator, Ambassador Michael Froman, delivered a speech addressing the Trade in Services Agreement (TiSA).  What got my attention was the prominence that the Internet and Internet-centric commerce received in the speech.

Although this might seem like common sense given the immense role that the Internet plays in international commerce (particularly trade in services), the international trade regime has been slow to embrace this technological revolution.  As I have written before on this blog, Internet trade has traditionally received relatively short shrift from traditional trade negotiators.  However, at least in the U.S., that trend is changing.

[As an interesting aside, watch this presentation by J. Bradford Jensen to get a better understanding of the importance of trade in services to the U.S. and global economy.]

Before I chronicle the USTR’s evolution on Internet-enabled trade rhetoric and action, I want to throw out a few recent examples of why trade negotiators — in the U.S. and the rest of the world — should focus on facilitating a free and open Internet if they want to help consumers and global commerce.

At the risk of stating the obvious, I need to lay out the keystone fact up front for the purposes of my argument:  the Internet has an enormous positive effect on international commerce: particularly for small businesses.  The Boston Consulting Group estimates that the G-20’s Internet economy will be worth $4.2 trillion by 2016 and that more than one-fifth of the growth of modern economies from 2007-2012 is attributable to the Internet.  These effects are predicted to significantly increase as Internet penetration grows in the rest of the world.

For major U.S. Internet companies, international markets have become increasingly more important.  And the potential for international competition has become more robust.  In the latest installment of Mary Meeker’s routinely fabulous annual report on internet trends, she documents this phenomenon.  While nine out of the top ten “global Internet properties” are made in the U.S.A., 79% of their users come from outside the U.S.  Compare this to 2005, when Google’s total international revenue was 39% of its overall sales.  Now, 56% of Google’s revenue comes from overseas.  For Facebook, it is a similar story.  Currently, 86 % of Facebook’s users are international, while less than 50% of Facebook users were international as of 2008.

The fact that the U.S. has generally positive legal concepts — such as fair use, intermediary liability, and copyright safe harbors — which have allowed the Internet to flourish, doesn’t mean the rest of the world does.  In fact, international trade law has become increasingly important for Internet companies because it offers a closer approximation to the borderless nature of the Internet than a hodgepodge of domestic laws and regulations.  Global Internet companies, whether headquartered in San Francisco or Shanghai, suffer when there is a patchwork quilt of legacy regulations and laws that don’t recognize the realities of the Internet age.  More problematic still, increased regulatory and legal uncertainty and heterogeneity disportionately hurt startups who can’t afford the cost of compliance in multiple jurisdictions, while larger competitors can.

As far as macro trends, Mary Meeker’s report also proves insightful.  Given that the U.S. is farther along the Internet adoption cycle than most of the rest of the world, the rest of the world also has a greater potential for future growth.  (Ambassador Froman also notes an illuminating statistic.  Between now and 2030, the number of middle class consumers in Asia is set to grow from 525 million to 2.7 billion.)  As a result, American Internet companies are targeting international consumers with a greater intensity.

However, as Ambassador Froman also highlights (and we have noted), increased Internet penetration and innovation also floats all boats — not just U.S. ones.  Given that the Internet is predicted to have a greater economic impact than the steam engine or electricity, it truly is an invention that grows the economic pie for everyone.  In fact, the increased penetration and utilization of the Internet is likely to benefit developing countries and small businesses even more than developed countries and large companies, because it provides them with shortcuts to more expensive institutions that have been necessary in the past to engage in global commerce.  (As one economist notes, “[a]s online markets help overcome market and government failures, the reduction in trade costs is larger where it is most needed: in remote countries with weak institutions that export information-intensive goods.”)

An Abridged History of the USTR and the Internet

With that backdrop in mind, it is important to recognize and applaud the steps that the USTR has made over the last decade in becoming an advocate for Internet commerce.  The USTR has come a long way in a short amount of time.  To put Ambassador Froman’s recent speech in perspective, a little history is required.

In 2006, a full three years after the “Great Firewall of China” came online and blocked Chinese citizens from using many popular U.S. websites and services, the USTR failed to mention Internet censorship as a concern in its “top to bottom” review of U.S.-China trade relations.  (In fact, the report only mentions the word “Internet” five times, and all of them are in relation to Internet piracy.)

In 2007 the first hints of progress came when the USTR included language — albeit in a non-binding, aspirational footnote — in the Korea-U.S. FTA that “recognized the free flow of information in facilitating trade.”

In 2009 the USTR (along with the Secretary of Commerce) raised trade objections, including citations to WTO rules such as notification obligations, to China’s short-lived attempt to mandate that all new computers sold in China come preloaded with the controversial, and technically flawed, Green Dam Youth Escort filtering software.  And a year later, Ambassador Ron Kirk, then the head U.S. trade negotiator, made some promising noises about bringing a WTO complaint against China for Internet censorship, but at the same time admitted he would rather negotiate then bring an official complaint (not the strongest ex-ante negotiating posture).

Fast forward a few years, and the U.S. and the EU issued a joint declaration on “Trade Principles in Information and Communications Technology Services,” which in part noted:

2. Open Networks, Network Access and Use: Governments, preferably through their regulators, should promote the ability of consumers legitimately to access and distribute information and run applications and services of their choice. Governments should not restrict the ability of suppliers to supply services over the Internet on a cross-border and technologically neutral basis, and should promote the interoperability of services and technologies, where appropriate.

3. Cross-Border Information Flows: Governments should not prevent service suppliers of other countries, or customers of those suppliers, from electronically transferring information internally or across borders, accessing publicly available information, or accessing their own information stored in other countries.

And, after several years of increasingly promising rhetoric, the USTR took action and proposed real language on these topics in the trade agreements that it is currently negotiating.  As part of the Trans-Pacific Partnership (TPP) negotiations, the U.S. tabled language on the free flow of information, as well as language that affirmed the importance of copyright limitations and exceptions to the digital economy.   Although the other major trade agreements the U.S. is negotiating — including the Transatlantic Trade and Investment Partnership (T-TIP) and TiSA — are not as far advanced, the USTR has committed to pushing for key provisions like free flow and bans on server localization requirements as part of its negotiation position.

Even though these recent proposals are just the tip of the iceberg, the long term trend is encouraging. [For a more comprehensive selection of pro-Internet trade agreement proposals, see here.] Froman certainly hit the right notes in his recent speech.  Now, let’s hope that the USTR can bring home results in TiSA, and in the T-TIP and TPP too.

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Some highlights from Froman’s speech:

References to the explosive growth of the Internet and its effect:

Since 2009 – the few years since President Obama took office, the count of Internet users has grown from 1.7 billion to 3 billion, nearly half the world’s people.  In Africa alone, from 4 million to 172 million.  These are people newly connected to the world – interested in everything from World Cup updates to mobile wallets, movies, and m-Health.

And as a result, since 2009, the volume of data crossing the Internet via cable and satellite beam has grown 4-fold, from 11 petabytes to 40 petabytes per month.  These are the videos, diagnoses, insurance payments, traffic alerts and news bulletins that are the new world of trade in services.

In effect, container shipping opened the world for manufacturers a half-century ago; the Internet is doing the same for services – and commerce more generally — today.

Froman also clearly articulated how specific restrictions on the free flow of information or requirements to locate data centers in individual countries can affect U.S. businesses, particularly small businesses:

Here in the United States the concept of a level playing field is deeply established, but in other countries we often see a patchwork of discriminatory laws and regulations that curb competition.

One is that restrictions on the flow of data across borders or requirements that companies duplicate their IT infrastructure in a country in order to serve that market makes it harder for companies of all sizes, based in all countries, to compete, and for buyers of all types to connect.

These policies are particularly hard on the increasing number of U.S. small and medium-sized enterprises that now can offer their services online on a global basis.

Small businesses in areas like software development or online retailing get locked out if government rules require them to establish a physical presence in every country.

Let me give you a real-world example of how this works.

I’m sure many of you have gone on-line to look for a particular product and found the retailer with the best price is a tiny shop located in Illinois, or California, or Nebraska.

Now think about how that connection is made? How do you find that retailer?

Well, you find them by using communications and technology services, and you pay for the product using electronic payment services, and then of course the product arrives at your home using delivery services.

In the old days that small retailer relied on the yellow pages and could only hope to serve the local market.   But now they can reach across the country to 300 million consumers, and beyond our borders to billions more.

In fact, according to EBay, US commercial sellers that use EBay’s platform to reach foreign markets sell to 19 different countries, on average.

And they aren’t alone.  Tomorrow I’m going to be talking with sellers from the website Etsy who are increasingly working to sell their crafts to international consumers.  Eighty-eight percent of Etsy’s sellers are women, most of whom run their businesses out of their homes.

But what happens when regulations abroad block advertising content, disrupt search engines, or prevent access to these websites?

What if instead of using the most efficient payment systems, payments have to be channeled through a local bank?  Or delivery services have to be routed through a state owned postal monopoly?

You can see how these impediments can build upon each other, adding costs and blocking tiers of buyers at each step, and ultimately become prohibitive.