U.S. digital services exporters are facing a thicket of barriers in key foreign markets that undermine a major source of U.S. export competitiveness. This was a key takeaway from the annual National Trade Estimate (NTE) report released recently by the Office of the United States Trade Representative (USTR). The NTE report details the obstacles U.S. exporters across industries face around the world.
This year’s report highlights the vast hindrances that the digital economy faces on the international stage, undermining the very promise the internet offered in expanding open and interconnected markets.
The following blog post summarizes the following key barriers in the report:
- Restrictions on Cloud Computing Services
- Restrictions on Cross-Border Data Flows and Data and Infrastructure Localization Mandates
- Government-Imposed Restrictions on Internet Content and Creeping Digital Authoritarianism
- Network Usage Fees
- Taxation of Digital Services
- Forced Revenue Transfers in Online News
- Unbalanced and Discriminatory Platform Regulation
Restrictions on Cloud Computing Services
USTR highlighted the trend some countries have started, where they impose arbitrary certification frameworks for cloud services providers motivated in part by protectionist goals. Such frameworks depart from well-tested technical and security standards used by global firms with the goal of disincentivizing (and in some cases prohibiting) foreign participation in the local market. Given U.S. companies’ strength in cloud services, these trade restrictions threaten tens of billions of dollars alone.
An example cited by USTR is a proposal in Europe now under consideration to condition the certification for certain cloud services on majority European ownership so as to be “immune” from non-European Union laws, which disadvantages non-EU suppliers. This is modeled after France’s approach, where a cybersecurity certification requirement, dubbed “SecNumCloud,” is now in force. SecNumCloud governs cloud providers seeking contracts with government bodies and non-governmental critical infrastructure entities. USTR warned that expansion of this requirement to the French private sector could “further hamper U.S. cloud service providers from providing services in the French market.” This framework could soon be EU-wide. The European Union is pursuing the European Union Cybersecurity Certification Scheme for Cloud Services (EUCS), which could impose similar data localization, ownership, and corporate governance requirements with the goal of ensuring suppliers are “immune” from non-EU laws. USTR reported that it expects the EUCS to “be made mandatory for certain public sector and possibly select private sector cloud services,” while noting that the EU is required to offer non-discriminatory access to cloud providers from the United States and other signatories to the WTO’s Government Procurement Agreement.
Elsewhere, obligations imposed by South Korea’s requirements through its Cloud Security Assurance Program (CSAP) certificate were highlighted by USTR, as they have made it economically infeasible for U.S. cloud providers to comply with Korea-specific requirements, thus restricting access to contracts at the federal, provincial, and local levels. The requirements included physical isolation of the cloud facilities for government workloads, Korea-specific security certifications and encryption algorithms inconsistent with international technical norms, and onerous mandates for personnel and resource localization. As USTR detailed, “The potential market from which U.S. providers are being excluded is large and growing.”
USTR also pointed to developing restrictions for cloud services providers in Saudi Arabia, China, Mexico, and the Philippines.
Restrictions on Cross-Border Data Flows and Data and Infrastructure Localization Mandates
Many countries, in the name of data security or “digital sovereignty,” have pursued restrictions on the free movement of data out of the country, supplemented with infrastructure or personnel localization requirements. These measures reflect a flawed and counterproductive attempt at industrial policy and continue to rise at a dramatic rate—despite evidence that localization is associated with a decrease in overall trade and national GDP. Although often cited as a rationale, data localization not only does not help privacy or security, but actually does the opposite, placing more data at risk. Despite the vast benefits associated with the free flow of data internationally—including the powering of the global internet itself—restrictions to data flows and requirements to store data locally continue to represent one of the most prominent barriers to digital trade worldwide.
In Vietnam, several overlapping regulations restrict the movement of data and impose localization and ownership restrictions. The most prominent of these requirements highlighted by USTR stems from the country’s 2018 Law on Cybersecurity and 2022 implementing regulations, which require all companies that collect and process personal data in Vietnam to physically maintain that data in-country in conjunction with a locally-established company. USTR separately raised concerns about the country’s draft Personal Data Protection decree, which the agency noted imposes many obligations that “appear infeasible for companies seeking to supply services in Vietnam on a cross-border basis.”
The European Union’s proposed Data Act was chronicled in the report as well. The proposed legislation seeks to restrict the export of industrial data in a similar manner to personal data while implementing other troubling obligations such as “the disclosure and making available of data that may be protected by the data holder’s or a third party’s trade secrets, copyright, or other IP,” as highlighted by USTR.
USTR also pointed to barriers posed by policies including but not limited to those in Saudi Arabia, Indonesia, China, and South Korea that limit the transfer of data.
Government-Imposed Restrictions on Internet Content and Creeping Digital Authoritarianism
DisCo has written extensively about the harms posed by online censorship to not only freedom of expression, but also to international digital commerce. Foreign governments continued to leverage new restrictive online content rules and the enforcement of non-digital-specific laws about speech that is harmful to the exchange of information online. In line with the findings of the U.S. International Trade Commission in 2022 that digital repression harms economic output, USTR highlighted a broad set of online authoritarian policies in this year’s National Trade Estimate Report.
India’s Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules of 2021 have been a landmark example of harmful rules to internet services and freedom of discourse. “Significant” social media companies—those with more than five million users, thereby enveloping many U.S. suppliers—are required to “identify the first originator of information, a requirement to appoint a local compliance officer, and imposition of impractical compliance deadlines and take-down protocols,” as detailed by USTR. Individual employees are given personal criminal liability for any infractions incurred by the company, as perceived by the government. These powers are particularly concerning given the trend in recent years identified by USTR of U.S. companies being “subject to an increasing number of takedown requests for content and user accounts related to issues, often political, of domestic concern.”
USTR raised alarms regarding two pieces of Bangladesh law that hinder both digital services and freedom of expression. The first, the Information and Communication Technology Act of 2006 (most recently amended in 2013) empowers the Bangladesh government to access any computer system, to intercept the transmission of data through any computer resource if it seeks information, to shut down data or voice calls, and to censor communication conducted online. The same agency then published the Regulation for Digital, Social Media and Over the Top (OTT) Platforms in 2022, which established a framework to govern content online including through the implementation of traceability within end-to-end encrypted services. USTR noted that stakeholders from industry and civil society have raised concerns that “the regulations will grant the government broad-sweeping powers to dictate online content with the threat of criminal liability for firms and employees deemed noncompliant.”
USTR also labeled the blocking of online services and excessive takedown demands of online content in Pakistan, Russia’s rules requiring streaming services with more than 100,000 users per day to effectively carry 20 channels worth of Russian propaganda, Thailand’s aggressive controls, and Vietnam’s draft regulations that would impose “burdensome, impractical, or technically infeasible requirements on a wide range of suppliers of Internet services and content providers” as digital trade barriers.
USTR warned that Turkey’s recent law restricting social media companies from sharing what the government determines to be disinformation through a host of obligations for online platforms raises “potential privacy concerns and risks for third-party social media companies” as well. Further, the agency reiterated concern over Turkey’s 2020 law that imposes a host of requirements on social media providers—such as local representation and the rapid fulfillment of government takedown requests for larger platforms—in an effort to control their influence over the sharing of what it considers information harmful to the government.
Network Usage Fees
Several jurisdictions are considering imposing payment obligations on large online content services for the transmission of data through the concept of “network usage fees.” Such a policy would be to require services dependent on high volumes of data to pay ISPs to deliver their content to end users. The policy upends decades of highly-successful, commercially-based negotiations at the heart of the internet ecosystem that has transformed the global economy and society—seeking telephony-era regulations to leverage a monopoly on reaching customers and line the pockets of large, local telecommunications providers with revenues from foreign online services providers.
South Korea has considered expanding obligations on foreign online services suppliers to pay local internet service providers through several iterations of legislation in recent years. USTR expressed concern, noting that forcing a U.S content provider to pay fees to ISPs that also competes in the content sector could be “anti-competitive by further strengthening Korea’s ISP oligopoly of three major providers to the detriment of the content industry” and could contravene Korea’s trade obligations to the United States.
Elsewhere, the European Union has launched a consultation studying the issue of network contribution. This consultation follows a report from the European Telecommunications Network Operators Association arguing that more investment from content and application providers is needed if European networks are to further advance in their capabilities. USTR noted opposition from some EU member states as well as the Body of European Regulators for Electronic Communications (BEREC), which published a report concluding that the ETNO proposal was not justified by objective data and “could be of significant harm to the Internet ecosystem.”
Taxation of Digital Services
Governments have introduced unilateral measures to tax U.S. online services firms through digital services taxes (DSTs). These proposals that have surfaced in the EU and elsewhere discourage foreign investment and are inconsistent with international trade obligations, and have been subject to wide-ranging investigation by USTR, based on Section 301 of the 1974 Trade Act. With the agreement in 2021 of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting Project, many of the countries subject to the § 301 action reached agreement with the United States. However, the continued threat of unilateral measures remains if the OECD framework is not implemented within the timeframe as many countries, including France, are currently collecting under a DST. And despite the OECD framework, some countries—namely Canada—have pursued DSTs even after the OECD framework was announced. USTR highlighted concerns with DSTs in Canada, the European Union, the United Kingdom, India, Indonesia, and Kenya.
Forced Revenue Transfers in Online News
One contention gaining traction in digital policymaking around the world is, generally, that the online platforms generate substantial earnings, so they should share such earnings with local industry incumbents in the the local sector of choice. As with network usage fees outlined above, a similar policy has gained traction with respect to news. In Australia, the government passed its News Media Bargaining Code in 2019 to force designated online information services providers—namely Google and Meta—to pay news publishers for the right to host any of their content. USTR cited the Australia legislation in its roundup of global trade barriers, as well as measures in Canada, referring to Bill C-18, the Online News Act (as well as Bill C-11, the Online Streaming Act), which seeks to similarly mandate that “digital news intermediaries” pay news publishers for the presence of any of their content on their services, including links and headlines. USTR committed to monitor the development of both policies, as both countries have free trade agreement obligations to the United States.
Unbalanced and Discriminatory Platform Regulation
Many jurisdictions continue to pursue regulations promoting competition on large online platforms. Although this can be a reasonable and worthy goal, governments have implemented these policies in unbalanced manners, substituting ill-considered ex-ante regulation for evidence-based enforcement, and often targeting U.S. suppliers based on speculative harms. USTR highlighted imbalanced enforcement of digital competition regulations in Japan and South Korea, citing industry concern regarding the “enforcement of Japan’s existing competition laws in digital market and technology sectors in which Japanese companies are significant participants” and that the Korea Fair Trade Commission has “targeted foreign companies with disproportionate enforcement efforts.” Meanwhile, USTR again cited the European Union’s Digital Markets Act—which gives the European Commission the power to oversee the business practices of “certain large digital services suppliers,” as USTR notes—as a trade barrier, noting in particular the “expansive authority” that the European Commission grants itself to implement more pieces of regulation.
Strength of Digital Service Exports
Having reviewed the cataloging of digital export barriers across the globe in the NTE, it is important to remember what is at stake. These obstacles to digital trade jeopardize the $683.86 billion U.S. companies generated by digitally-enabled services exports (by far the largest driver of U.S. services exports) and $158.9 billion generated by information and communications technology goods exports in 2021. The digital economy further supported 8 million U.S. jobs and provided $1.24 trillion in compensation in 2021, with the average annual earnings per worker in the digital economy having increased over the past 20 years.
Digital trade has also been found time and time again—especially during the economic shock of COVID—to benefit small businesses—the very stakeholders most affected by, and least equipped to adjust to, restrictive barriers. Foreign markets represent a key area for growth for small businesses, even outside of the digital context. The U.S. Census Bureau has estimated that 97.4% of the more than 277,000 U.S. companies that exported goods in 2021 were small and medium-sized enterprises (SMEs), which in turn contributed 34.6% of the country’s $1.5 trillion reported revenue from goods exports. For internet-enabled services and goods that rely on a global network by nature, international markets are critical to achieving growth, and barriers of the kind cited in the NTE will thus affect U.S. long-term competitiveness.
Hurdles to U.S. commerce abroad in the digital economy are not new, but as protectionist policies proliferate globally, often in copy-cat style, a disturbing trend emerges, well-cataloged by the NTE. Breaking down these barriers is critical to maximizing the potential of the digital economy for U.S. stakeholders.