This paper examines how trade policy institutions can mobilise to support the new digital economy of the 21st century. The paper begins by outlining the core enablers of the digital economy and the intersection between cross-border data flows and policy measures with non-trade objectives, such as privacy. The main focus is on how digital and digitally enabled businesses operate domestically and across borders.

The paper then examines the WTO’s substantial past and present contributions to laying the foundation of digitally enabled trade and investment, including the WTO’s established legal acquis in its agreements as interpreted since 1995. Finally, the authors discuss how the WTO could support digital trade going forward, the TPP’s significance for digital trade, and the challenges for negotiations on a plurilateral Trade in Services Agreement (TiSA).

Executive Summary

In the last months of 2015, two trade policy events demonstrated the increasingly central role of the digital economy in the future of trade policy. First, 12 countries, comprising almost 40 percent of world trade, concluded the ambitious Trans-Pacific Partnership (TPP) Agreement, featuring digitally enabled trade and data flows as a central theme. Second, in spite of almost total disagreement at the World Trade Organization (WTO) Ministerial Meeting in Nairobi, all WTO members agreed to renew the WTO’s moratorium on tariffs on data – and members representing 90 percent of information technology (IT) trade agreed to expand the WTO’s Information Technology Agreement.

This paper examines how trade policy institutions can mobilise to support the new digital economy of the 21st century. Because data flows and digitally enabled trade are essential to global trade and investment, measures to support their growth should be a sine qua non for any trade policy and any new trade agreement.

We start by sketching the core enablers of the digital economy – such as the rapid adoption of connected devices and the skills to use them on the consumer side – and the intersection between cross-border data flows and policy measures with non-trade objectives, such as privacy. Our focus is on how digital and digitally enabled businesses operate domestically and across borders, because it is business that drives economic growth and international trade and data flows. We then lay out the WTO’s substantial past and present contributions to laying the foundation of digitally enabled trade and investment, including the WTO’s established legal acquis in its agreements as interpreted since 1995. Finally, we discuss how the WTO could support digital trade going forward, the TPP’s significance for digital trade, and the challenges for negotiations on a plurilateral Trade in Services Agreement (TiSA).

Our core focus is on cross-border flows of data, which can be divided into three categories:

• Information data (e.g. financial) and company data to support production, marketing, sales, after-market service, and functionality of goods, including personal data;

• The export and import of digitally enabled services and goods, as well as goods ordered through digital means;

• The export and import of digitised content – including software, music, and audio-visual content.

Our view is that trade policy institutions must address obstacles to cross-border data flows as a priority matter.

In the 21st century, all enterprises that trade depend on the ability to move data. Every company that has an office, a customer, a supplier, or a contractor outside its home country depends on cross-border access to data. As Rentzhog (2015) points out, modern manufacturing, most goods trade, and many essential services simply cannot function without a digital component. As a corollary, there is no surer way to stop trade and handicap a national economy than to cripple data flows.

Increasingly, “Internet” means mobile, accessed through smart devices; applications (apps); and broadband. The flourishing app economy, as well as the burgeoning Internet of Things, depends on cloud-based data aggregation and processing, involving data flows to and from data centres, wherever these may be located. The requirement for personal data to be stored in the territory of its collection (Vietnam, Brazil) is a new form of trade barrier.

We ask which obstacles to digitally enabled activities are distinctive to these activities’ use of data transfers, the Internet, or software. We then examine the contribution that the WTO has made, and can make, to freeing data flows. WTO rules and institutions have provided essential support for digitally enabled investment and trade to flourish in the past decades, and they must continue to do so.

• The Information Technology Agreement (ITA) agreed in 1996 made personal computer (PC) hardware; mobile phones; and other information and communication technology (ICT) equipment duty-free in most markets; the ITA expansion agreed in 2015 added advanced technology products worth US$1.3 trillion in trade, facilitating communication, transfer, and consumption of data and further integration of global digital value chains.

• The General Agreement on Trade in Services (GATS) Annex on Telecommunications recognises the importance of data communications to all services. It obligates governments to let service businesses transfer data – to use telecommunications networks and services to move information within and across borders and to access databases or other information stored abroad – in order to supply a service protected by a GATS commitment. The GATS concessions of the 1997 Basic Telecommunications Agreement guaranteed market access and opened markets in digital infrastructure services.

• The WTO has applied the GATS and the General Agreement on Tariffs and Trade (GATT) in disputes to facilitate some digital and digitally enabled trade. Panels and the Appellate Body have correctly understood that GATS commitments are technologically neutral – indeed, limiting rights under the GATS by tying them to the technology of the early 1990s would condemn the GATS to increasing irrelevance. Cutting off data flows amounts to a rollback of bargained-for market access under the GATS.

As we discuss, important questions remain unresolved in the WTO. Multilateral agreement in the WTO to open more markets and increase competition in services would be desirable, particularly for mobile telecommunications, mobile data, and other infrastructure services for the digital economy. Further work in the WTO to achieve better understanding of the benefits could be very constructive, particularly if it builds agreement on important issues of principle. To the extent that the WTO cannot achieve consensus on these building blocks for digital trade, governments that wish to push ahead can and will do so in plurilateral negotiations or in regional trade agreements, such as the recent TPP.