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Digital trade

Digital provisions play a key role in Asia Pacific agreements


Published 30 August 2022

Using the CPTPP as a baseline, digital trade provisions in Asia Pacific's trade agreements can be grouped into four categories. But to foster their digital sector, developing countries in the region will need to focus on the build-up of the right infrastructure and a regulatory environment that strikes a balance between risk control and market liberalization.

It has become more commonplace for trade agreements in the Asia Pacific to include a variety of digital trade provisions. To understand the salient features of these agreements, it is helpful to map out their main baseline features. Doing so also indicates where digital trade agreements may be going or need to go.

This mapping covers all free trade agreements (FTAs) with chapters on e-commerce or digital trade since 2000 by the main players in the region — China, South Korea, Japan, India, Australia, New Zealand, Singapore, Vietnam and Malaysia.

It also covers the mega-FTAs in the region — the Regional Comprehensive Economic Partnership, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the United States–Mexico–Canada Agreement, and the EU–Canada Comprehensive Economic and Trade Agreement (CETA) — as well as two standalone digital trade agreements, the Digital Economy Partnership Agreement (DEPA), bringing together Singapore, New Zealand and Chile and the Digital Economy Agreement (SADEA). Using the CPTPP as the baseline, digital trade provisions in these trade agreements can be grouped into four categories.

First, there are six provisions that are designed to facilitate digital trade including the elimination of customs duties on electronic transmissions, non-discriminatory treatment of digital products, domestic electronic transaction frameworks, electronic authentication, electronic signatures and paperless trading provisions. These provisions are intended to open and align the regulatory environment to enable digital trade to function.

Second, there are five provisions that minimize commercial and regulatory burdens for digital services trade providers. These include access to and use of the internet for electronic commerce, free flow of data, prohibition of data localization requirements, prohibition on forced transfer of source codes and open government data. By removing these obstacles, digital services will be able to flow more freely across countries.

Third, three provisions protect the interests of consumers, including online consumer protection, privacy and personal information protection and protection against unsolicited commercial electronic messages. By addressing the main concerns of consumers, these provisions enhance the trust of consumers in digital services trade and boost the take-up rate of digital services.

The last category includes four provisions that preserve the regulatory autonomy of governments, such as those on cybersecurity, exceptions and cooperation. These help governments to reserve the space necessary to address various social policy objectives and ensure national security and safety requirements.

The first type of provisions is the most popular with more than three-quarters of FTAs including at least two from this category. They are intended to lay down the infrastructure or regulatory alignments necessary to facilitate digital trade and do not prescribe a specific regulatory approach on sensitive issues. As such, they face the least resistance from governments.

At the same time, despite these provisions helping developing countries to foster their digital services trade, implementation problems are likely. Implementing these provisions may require additional investment into hardware and software, a challenge for some developing countries. Having sufficient facilities could also be an issue. Instead, the statutory requirements on documentary formalities may need to be modified to consider new ways of contracting and approval.

The second type of provisions facilitate digital services trade by removing or attempting to minimize regulatory barriers that block or impede digital trade flow. As with earlier generations of trade agreements, it is often perceived that the primary beneficiaries of such measures will tend to be overseas services suppliers coming from the larger more developed economies.

Many developing countries are thus reluctant to agree to these provisions. The issue is not just economic as it once again involves a lack of capacity that regulators must grapple with.

But without these policies in place, foreign digital platforms will be hesitant to enter the local market, due to compliance costs, regulatory ambiguity and — in some cases — increased cybersecurity risks. Developing countries will therefore need to understand the benefits as well as the challenges arising from these provisions, at least as a welcoming signal to foreign digital firms.

The third type of provisions do not directly contribute to the development of digital services trade. They make indirect contributions to digital trade by fostering a trustworthy environment that eases concern among consumers. But developing countries often lack the domestic laws and regulations that would enable them to deal with many of the issues in this category.

The fourth type of provisions boost the power of governments vis-à-vis digital firms and so do not appear to be facilitative in nature. Yet, such provisions provide governments the maneuvering space necessary to keep digital services in check. This is crucial for many developing countries as the bulk of digital services trade is provided by foreign suppliers. This also explains the popularity of these provisions, with more than 70 per cent of the surveyed FTAs including at least one provision in this category.

To foster the development of this sector, developing countries in Asia will need to enhance the provisions in the second and third categories. Given the complexity of digital trade, it is unrealistic to assume that the mere inclusion of these provisions will boost trade. Instead, this needs to be coupled with the build-up of digital trade infrastructure and a regulatory environment that strikes a balance between risk control and market liberalization.

It is partially in response to these challenges that the more recent standalone SADEA and DEPA agreements have emerged. The former introduces innovative memorandum of understanding applications as an appendix chapter to directly bring private sector proof points into the agreement, while the latter focuses almost exclusively on digital trade facilitation with a series of modular frameworks that are intended to be recrafted as digital trade channels flourish.

While both agreements challenge whether the existing multilateral trade agreement structure and process is fit-for-purpose in the emerging digital trade era, they also retain the overall traditional structure bridge to existing frameworks and processes. Both agreements also introduce a far more interesting focus on soft initiatives such as the use of regulatory sandboxes, digital identities and the enablement of artificial intelligence. As such, they raise interesting, if confronting, questions about both the viability and direction of the multilateral trade agreement process going forward.

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Author

Henry Gao

Henry Gao is Associate Professor of Law at Singapore Management University and Dongfang Scholar Chair Professor at the Shanghai Institute of Foreign Trade.

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