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A China-U.S. Approach to Digital Trade

Mar 22 , 2017
In a February 24th speech, U.S. President Trump made his strategy for trade policy clear. The U.S. will negotiate bilateral, rather than regional or multilateral agreements, and favor U.S. producers rather than market forces. Trump’s approach to trade policy means radical change for the world’s longtime leader of efforts to reduce global trade barriers with trade agreements.
The President’s focus on bilateralism is not only undermining America’s global credibility. Bilateral negotiations are time consuming, entail significant negotiating resources, and, even if “successful,” firms facing a tangle of conflicting rules may see little net benefit. Bilateral trade talks simply would not be useful in negotiating rules to govern cross-border information flows.  After all, the platform for facilitating information flows--the internet-- is designed to be universal, open, and global. Hence, the system of rules governing trade in information flows needs to be global as well. Yet global negotiations to achieve this system of rules have made little progress.
Like the U.S., Chinese leaders also paint an inconsistent picture regarding trade.  China’s inconsistences are particularly visible vis a vis digital trade—goods and services delivered via the internet. On March 2, the Chinese government issued its first broad paper on cyber policy. It advocated that “Countries should respect each other’s right to choose their own path of cyber development, model of cyber regulation and Internet public policies, and participate in international cyberspace governance on an equal footing. No country should pursue cyber hegemony, interfere in other countries’ internal affairs, or engage in, condone or support cyber activities that undermine other countries’ national security.”  In describing its policies, Chinese official Wang Jianchao dissembled, insisting that "China's Internet is fully open. China's government protects citizens' freedom of speech according to the law.” The government also addressed trade policy in its paper. “China advocates formulating cyberspace trade rules and effective policy coordination among countries. It is important to protect intellectual property rights and oppose trade protectionism to create a global market of the Internet and build a prosperous global Internet economy.” However, “China will encourage and support Chinese Internet companies, together with those in the manufacturing, financial and ICT sectors, to take the lead in going global.” In short, while China respects the global and universal network of the platform, China is also determined to empower its digital firms. 
But not all Chinese officials are on board with the approach outlined in the paper.  On March 4, Luo Fuhe gave a very different picture of China’s internet policies. The vice-chairman of the Chinese People’s Political Consultative Conference, the top advisory body to China’s parliament, argued that China’s sprawling internet censorship regime is harming the country’s economic and scientific progress and discouraging foreign investment. He noted that the government is adopting policies that make it harder individuals located in China to get online or to bypass the Great Firewall. As example, just two months earlier, the Chinese government launched a 14-month nationwide campaign against unauthorized internet connections, including virtual private network (VPN) services, which allow users to bypass the country’s infamous “Great Firewall.”
The truth is if China and the U.S. want to prosper thought internet led growth, the two trade giants must find common ground on rules governing cross-border information flows. These flows facilitate trade in ideas, services, data, and other products. Businesses rely on these flows to access and manage markets, facilitate supply chains, and enable transactions around the world.  Individuals rely on these flows for information, to communicate with family, friends, and colleagues, and to access markets. These flows are the foundation for digital trade.
According to the WTO, digital trade is the fastest growing component of world trade.  In 2014, approximately 12 percent of global trade in goods was conducted via an e-commerce platform like Amazon, Alibaba or eBay.  Moreover, trade in information has facilitated education as well as scientific and technological progress. Anyone who can get online can take courses at the world’s most prestigious universities, study computer code or a new language, or search for information. Cross-border information flows also create new ways for individuals to improve their livelihoods, whether driving for Lyft or Uber, renting rooms for Airbnb, or finding part time work on global task sites such as Amazon Mechanical Turk.
Digital trade is particularly important to both the U.S. and China. Of the ten largest internet companies by market value, six call the U.S. home, four are headquartered in China.  Of the next nine, 3 are headquartered in China, 1 in Japan and the other 5 are headquartered in the U.S. These firms operate globally, innovate constantly, and are both competitors and partners. Several of the U.S. or Chinese firms were started by older or larger companies and spun off. But the benefits of their activities don’t just accrue to their shareholders. The U.S. International Trade Commission has estimated that roughly 75 percent of the economic growth created by the internet accrues to companies in traditional sectors such as steel, chemicals or textiles. These traditional industries have used these technologies to become more competitive and to connect with new customers in markets around the world.  
Given this interdependence, broad economic and social implications, and the potential consequences for internet governance, we believe the U.S. and China should pursue a special sectoral agreement on digital trade. Policymakers could build on the bilateral cyber-agreement negotiated under the Obama Administration in 2015. The two countries could invite others to join the negotiations towards a digital free trade zone, with adequate protections for privacy (which the Chinese say they want), access to information, and IPR protections. The agreement should also include default language designed to encourage greater information flows rules to limit digital protectionism, and exceptions for privacy, national security, and public morals.  Both countries would benefit by being rule-makers rather than rule takers commensurate with their influence in trade and online. Moreover, by working towards such an agreement, both countries could achieve multiple goals: preserving the internet as a shared global resource, maintaining the competitive position of their digital firms, building trust, and sending a signal that in the time of Trump, nations can find common ground on expanding trade.  
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