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  August 8th, 2016 | Written by

TPP: USTR Closes a Loophole for Digital Protectionists

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  • The free flow of data across borders is essential to the modern global economy.
  • A growing range of countries are enacting barriers to data flows.
  • USTR's fix to TPP financial data carve out finds middle ground.

The Obama administration has taken a key step in fixing its decision to exempt financial data from the Trans-Pacific Partnership (TPP) trade agreement’s otherwise groundbreaking rules to protect crossborder data flows.

This rule was unnecessary and redundant, and created a dangerous loophole that could be misused for protectionist purposes by other countries, such as China, India, and Russia. Thankfully, this patch by the U.S. Trade Representative (USTR), if successfully applied, will help reduce the likelihood that other countries could misuse this loophole.

The TPP’s special treatment of financial data has become a major issue for the deal’s passage as U.S. lawmakers and firms know that the free flow of data across borders is essential to the modern global economy and that the free flow of data is increasingly at risk of being restricted. A growing range of countries are enacting barriers to data flows as a form of digital protectionism. Allowing forced local storage for financial data on regulatory grounds could have been the start of a slippery slope that allowed these countries to force local data storage for other types of “important” data, such as health and education, based on poorly defined “regulatory” concerns.

The TPP’s ecommerce chapter, while not perfect, took a number of steps to prohibit such a slide as it contains provisions which limit countries from enacting barriers to crossborder data flows. The TPP’s new rules are a much needed update to current World Trade Organization trade rules, which are proving ineffective at protecting data flows, partly due to the fact these rules were agreed upon in the 1990s when the internet as we know it barely existed.

The draft text of the fix shows that USTR, in its negotiations with the Department of Treasury and financial regulators (who both wanted this special treatment for financial data), has achieved an outcome that will go a long way to removing this loophole. In an ideal world, this provision would be dropped completely from the TPP and future trade agreements. However, given the position of financial regulators, the fix seems to find middle ground: It sets out specific steps to facilitate data access, and in doing so makes localization a truly final resort, while ensuring that countries remain committed to not enacting policies that require data localization or other barriers to data flows.

USTR has its work cut out in applying this patch. As it would be untenable to re-open and revise the concluded TPP text—as it would open everything else up to renegotiation—USTR plans to use the Trade in Services Agreement (TiSA) to apply this patch to both eight of the 12 TPP members and 16 other countries negotiating TiSA. The ecommerce chapter in TiSA would become part of a new global norm for digital trade and the free flow of data as it includes a broader set of countries than the TPP. For those four TPP member countries outside of TiSA—Brunei, Malaysia, Singapore, and Vietnam—USTR aims to work with these nations in the TPP implementation plan process.

Applying the patch this way is sensible, but the outcome is by no means assured. For the TiSA option to work, other countries need to agree to the terms of this fix (not a sure thing, especially given the view of European Union consumer and digital rights groups and the implicit preference for data localization in parts of the European Union), and the agreement needs to be completed and ratified. No small feat given today’s political debate over trade. Hopefully, USTR’s decision to use TiSA to apply its patch is indicative of its commitment to concluding an ambitious agreement on e-commerce in TiSA—and soon. For those non-TiSA countries, applying the patch through the deal’s implementation raises other concerns over whether the patch is legally enforceable.

The fix, if enacted, means that the United States will be able to resume its leadership position in helping to establish the rules that govern trade across the global digital economy. As a key player in developing the foundational technologies behind the internet, it is in the United States’ own interest to maintain its reputation as a credible advocate for a free and open digital economy. The carve out for financial data threatened to undermine this position. This patch should be applied quickly and the entire experience should be a lesson that policies around data flows need to be carefully considered and that no sector should be exempt from robust protections for open cross-border data flows.

Nigel Cory is a trade policy analyst at ITIF. He previously worked as a researcher at the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies and in Australia’s Department of Foreign Affairs and Trade.