Towards an Asian digital trade zone
Published 21 June 2022
Asian countries should consider how broadening digital markets will create opportunities across the region and strengthen their own economic security in the process. While the establishment of a digital single market requires a degree of regulatory integration that few countries are prepared for, many of the benefits of such market can be achieved through a digital trade zone.
Are the Himalayas too high for the internet to pass? The prospect of an Asian digital single market seems remote, especially when India and China seem to be pulling apart. India is busy banning Chinese apps like TikTok, while China promulgates ever stricter rules on data transfer abroad. Asian governments still fail to see that rising above local conflicts might yield enormous dividends, strengthening their own economic security in the process.
Digital single markets permit consumers and businesses to engage across national borders via the internet. They enable broad supply chains, build companies that can compete at a global level and reduce prices for consumers and businesses. Digital single markets help small businesses by reducing prices for key services from design, marketing, customer relations and accounting to hiring employees in foreign countries. But achieving a digital single market is not easy. It requires a degree of regulatory integration that few countries are prepared for. Nations typically agree to abide by the country-of-origin principle, allowing a company to operate across regional markets under the rules of its home country.
Many of the benefits of a digital single market can be achieved through a digital trade zone. Digital trade zones do not require the high degree of regulatory integration or recognition required by digital single markets. Digital trade zones require the dismantling of barriers to trade, but still oblige companies to abide by the laws of the countries where they do business. While digital single markets potentially offer greater dividends in terms of reducing costs for businesses, regulatory integration requirements mean that they are often a distant ideal.
Continent-wide digital markets can be enabling, boosting local businesses and consumers in a myriad of ways, including through the reduction of inflationary pressures. Without an ambitious agenda promoting digital trade, Asian countries risk falling behind and being relegated to providing digital services within shrinking geographies. They also risk being shut out of digital services in many foreign countries.
Many Asian countries have been reluctant to liberalise digital trade for two major reasons — because of its impact on customs duties and to protect local enterprise.
India and other developing countries worry that barring customs duties on electronic commerce reduces much-needed revenues. This is understandable given that the fiscal challenges faced across the developing world have worsened with the pandemic. This worry may be alleviated by a new OECD-led agreement that requires large multinationals to pay at least a 15 per cent tax in countries where they make money. A customs moratorium does not bar internal taxes that are applicable to both foreign and domestic suppliers, and do not single out the internet.
Countries also fear that their domestic industries will wither in the face of foreign competition if digital trade is liberalised. This approach risks protecting a few producers while sacrificing broader economic interests. Antitrust authorities need to be vigilant that foreign (and domestic) companies do not engage in abusive practices to prevent competition. One key to help domestic enterprise grow will be foreign investment, but governments continue to view foreign investment with caution.
National cybersecurity concerns can be dealt with through exceptions or reservations. Cooperation among Asian countries could in fact strengthen cybersecurity for consumers and businesses by allowing for united responses to ransomware and hacking incursions. Fintech providers can make larger investments in cybersecurity if they have larger markets to serve.
Some Asian countries have moved towards greater digital trade. Brunei, Japan, Malaysia, Singapore and Vietnam are all members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes a significant e-commerce chapter. Japan has entered into a Digital Trade Agreement with the United States. Singapore is leading on digital trade through a Digital Economy Partnership Agreement with Chile and New Zealand. But the Regional Comprehensive Economic Partnership’s e-commerce chapter has no dispute resolution provisions, resulting in obligations without obvious enforcement mechanisms.
Meanwhile, the world is forging agreements that will create continental markets for digital trade. The European Union launched its digital single market strategy in 2015. North America is building a digital trade zone among its biggest economies, with an ambitious digital trade chapter in the US–Mexico–Canada free trade agreement. The African Union has begun negotiations for an e-commerce protocol to the African Continental Free Trade Area. Latin American nations in MERCOSUR and the Pacific Alliance have adopted treaties with digital trade commitments.
Even while some nations commit to open digital trade, they simultaneously erect barriers to others. Customs duties, professional licensing requirements, data localisation, data privacy laws and liability rules all pose significant hurdles to cross-border digital trade.
The 2020 decision of the Court of Justice of the European Union in Schrems v Facebook requires that most data transfers to Asian companies undergo expensive impact assessments that ask, for example, whether the Asian country offers redress rights for foreigners with respect to any local surveillance. This complicates transfers to nations in Asia. One mechanism to ease data flows is a ruling of adequacy with respect to data privacy from the European Commission, but Japan and South Korea are among the very few countries in the world that have received such favourable treatment.
Regional arrangements allow governments to pool resources to regulate internet companies. Examining claims of artificial intelligence providers, evaluating cybersecurity protections and auditing privacy practices can all be more readily managed via government cooperation. The Brussels Effect, where EU regulation plays an outsized role, relies on the size of the enormous market that EU regulators can offer to companies that comply with EU standards.
Asian countries should consider how broadening markets will create opportunities across the region. The Himalayas, despite their majestic height, should not prove impassable for the internet.
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