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Correcting the Record on Discrimination Rules in Trade Agreements

On May 16, an ad hoc coalition of companies wrote to the U.S. Trade Representative Katherine Tai and Department of Commerce Secretary Gina Raimondo with a bold request that the United States use the nascent Indo-Pacific Economic Framework to reverse decades of precedent in digital trade rules, thereby undermining the longstanding trade policy goal of combatting discrimination.  

While couched as a call for flexibility in international rules, necessary to develop competition-inspired domestic regimes governing digital markets, what this coalition is proposing is much more radical.  In fact, it would upend a core concept undergirding 66 years of trade policy, from the inception of the General Agreement on Tariffs and Trade in 1947, through the cumulative commitments of over 160 World Trade Organization members, and every subsequent Free Trade Agreement and bilateral investment treaty (BITs) the United States has concluded.

At the heart of this coalition’s argument is the assertion that rules designed to combat discrimination (i.e., the “national treatment” rule of the GATT that has analogs in services, intellectual property, investment, and digital trade) could be used to counter efforts to apply competition-based constraints on large technology companies.  As stated by the coalition: 

[W]e strongly oppose TPP-USMCA-style rules that categorize any policies that could have a greater impact on dominant tech platforms as illegal trade barriers… Neutral laws designed to combat anticompetitive behavior by platforms will necessarily target larger firms with market power – because they have monopoly power, not because they are American.

The confusion of this argument lies in the fact that trade rules do not, on their face, categorize any policy as “illegal”, and nor do they presume that differential treatment resulting from governmental measures is animated by nationality-based discriminatory intent (unless explicitly drafted as such).  If trade rules did this, they would not permit safety regulations applying large civil aircraft, since only the United States and Europe produce them; or allow asymmetric regulation applying to dominant telecommunications operators, who might be foreign; or enforcement actions that target a subset of market participants who happened to be from one country (e.g., investigating the Volkswagen’s  software designed to evade emission testing requirements).  Trade rules do nothing of the sort.

Rather, trade rules (including those applying to digital products and services) require that a party alleging discrimination demonstrate that the design of a governmental measure disproportionately affects a foreign supplier, to the benefit of existing or potential local competitors, and that there is no legitimate basis for such discrimination.  (In IPEF, such claims would be restricted to governments, since investor-state dispute settlement is not being proposed.)

What this coalition (which oddly, includes Swiss and Canadian companies, who have no direct stake in these negotiations) appears to be calling for is limiting the application of non-discrimination rules to measures that explicitly target suppliers by nationality, and thus give freer rein to foreign governments’ efforts to discipline anticompetitive conduct, on the basis of facially nationality-neutral factors.

To be clear, rules addressing explicit discrimination on the basis of nationality are one part of trade goals; and governmental efforts to combat anticompetitive conduct are a legitimate governmental goal that trade rules should not constrain.  However, rules that are not explicitly based on nationality, and that a government may seek to justify under competition (or other) grounds, may not always merit being shielded as presumptively legitimate.  

If a measure is not explicitly based on nationality, but disproportionately affects a subset of participants who happen to be foreign, the burden is on the complaining party to demonstrate that the disproportionate treatment is not justified and that it undermines the competitive opportunities in a market that the foreign supplier should reasonably expect to enjoy. 

It should be obvious that such claims should be permitted: if they were excluded (as advocated by this coalition), a country could simply design a regulation that was facially neutral, and invoke any number of policy objectives as justifying differential treatment for suppliers that all happen to be foreign.  Absent a more comprehensive trade rule, such treatment could never be challenged.  That would upend 66 years of trade policy, and do a profound disservice to open markets and the accountability we expect from governments committing to adhere to such openness. 

The harms of such a narrow approach to national treatment, were it to be applied consistently,  would be felt far beyond the confines of Silicon Valley.  U.S. exporters, large and small in every single industry would have to operate in an environment where a government in any given market would be free to adopt rules obstructing their business operations and benefiting local competitors without challenge as long as the policy never explicitly stated nationality as the basis for imposing restrictions to the detriment of foreign firms. 

There are myriad examples that demonstrate the vital importance of covering de facto (i.e., facially neutral, but designed to discriminate on the basis of nationality), as well as de jure (explicitly nationality-based) discrimination as a core trade policy goal.

One of the most well-known sets of challenges against de facto discrimination, prevalent in numerous markets, involved the taxation of alcohol. To protect local distillers, many countries including Japan, Korea, and Chile designed tax regimes that applied rates to distilled alcohol on the basis of its color or grape variety to protect domestic liquors (shōchū in Japan, soju in Korea), or the native pisco (Chile) through imposition of a higher tax rate imposed on varieties of liquors that tended to be imported–putting liquor like whiskey at a competitive disadvantage.  Such rules were facially neutral and not based on nationality, but the effect was the same: they disadvantaged the predominant category of imports, and effectively protected domestic suppliers from competition.

More recently, many countries have instituted or proposed digital services taxes (DSTs), and have sought to shield their local suppliers (who provide “like” services) from a comparable burden by instituting arbitrary (but, facially, nationality-neutral) revenue thresholds.  These thresholds had the effect of sweeping in foreign (mainly U.S.) suppliers and excluding local suppliers.  It was this clear gerrymandering of thresholds that convinced the United States to challenge such practices under Section 301 of  the 1988 Trade Act, a challenge the Biden Administration continues to support.  But for an argument based on de facto discrimination, the United States would have no basis to challenge such measures.

The specific rule this coalition objects to, non-discriminatory treatment of digital products, would be similarly rendered ineffective if its scope were restricted to explicitly nationality-based claims. For example, a country might seek to ban an online music app on the basis that songs were not fully screened for controversial lyrics (a measure China enforced against foreign suppliers).  However, by not enforcing this administratively challenging requirement against local suppliers, a country could create a sanctuary market, effectively excluding foreign competition.

What this demonstrates is that while the putative goal of a measure may well be legitimate, if applied in a manner targeting mainly foreign companies, to the exclusion of comparable local suppliers, a discriminatory result may be reasonably adduced, and should be subject to a reasonable challenge.
Finally, it is worth noting the fallacy of suggestions that U.S. congressional action is constrained by advancing time-tested approaches to discrimination. Even putting aside the wisdom of U.S. efforts to copy the European Union in regulating internet suppliers, the fact remains that trade rules do not discipline how a country treats its own suppliers—rather, trade rules are designed to discipline how we treat foreign suppliers, and how foreign governments treat our companies.  On the other hand, if the goal of this coalition is to promote foreign regulation of certain U.S. firms, without a commitment to fairness and accountability that robust national treatment rules provide, then this also challenges core U.S. values–the very values that have also underpinned 66 years of well-established trade policy, memorialized in the affirmative right governments have agreed on to provide redress to demonstrable discrimination.

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.