The trade issue nobody is talking about

Most U.S. trade talk these days is about tariffs — the steel and aluminum tariffs, the China tariffs and maybe even soon-to-take-shape auto tariffs. But that talk has obscured an issue that may be even more important in global trade: digital flows of data and information across borders. 

Digital flows are essential to today’s commerce, yet they’re threatened by new restrictions being imposed by other countries. By focusing so much of our attention on tariffs, we have left a void that may be filled with more harmful protectionism.

{mosads}Buying or selling just about any good or service these days is likely to involve a cross-border flow of data. Restricting these flows means restricting commerce, especially in technological sectors where the United States is strong.

So keeping digital highways — and entry and exit ramps — free and clear of unnecessary roadblocks is key for U.S. firms and workers’ access to both domestic and export markets.

Digital flows are invisible but touch just about everything that is bought or sold at home or abroad. From cosmetics to heavy manufacturing, companies keep databases in the cloud to allow all of their offices around the world to do their jobs better.

Big data is being interpreted and leveraged in ways that are literally changing how companies of all sizes and across all sectors operate.

For instance, the cosmetics industry uses big data to “maximize the sensory perception of a perfume, better target the sampling campaigns, better understand customer behavior and optimize a cosmetic formula.”

The clothing industry uses big data on a global scale to monitor trends and lifestyles on city streets around the world. 

Auditing on behalf of a firm can now include the analysis of entire cross-country populations, not just samples. Heavy manufacturer Caterpillar uses Cat® Connect Technology and Services to collect real-time data analytics on grading accuracy and help users get more out of “every asset and jobsite.” 

The United States and Japan were key drafters of the chapter in the Trans-Pacific Partnership (TPP) aimed at protecting the free flow of data (subject to some public-interest protections). Leaving the TPP may hinder our ability to continue this work in other regions of the world. Japan, thankfully, may be carrying the mantle for now. 

The U.S.-Mexico-Canada Agreement went a bit further than TPP and prohibits signatories from restricting cross-border data flows “unless necessary to achieve a legitimate public policy objective.” But this is, of course, a regional pact. 

Other countries, meanwhile, are all too eager to restrict data flows. Lately there has been a sharp rise in the number of policies doing just that.

This year, the European Union instituted an important change in data privacy: Data is only allowed to leave the EU if it is going to a country that has been pre-approved. The United States is currently not on that list.

The EU notes that General Data Protection Regulation (GDPR) will “fundamentally reshape the way in which data is handled across every sector from healthcare to banking and beyond.”

Russia, China and Turkey are among the most restrictive on data flows. Recently, however, France, Germany, South Korea and Vietnam have also instituted new restrictions.

Data privacy is a legitimate policy goal, and countries, with their different histories, have different views on privacy. Those should be respected and followed, but trade economists know there is a fine line between using a regulation to achieve a domestic policy goal and using it as a trade barrier.

Global trade rules help to ensure this, maintaining that “technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective.”

{mossecondads}McKinsey reports that the total bandwidth used across borders has exploded in recent years, from 4.7 thousands of gigabits per second in 2005 to 211.3 today. Recent evidence indicates that firms of all sizes are using the internet, digital platforms and digital data flows to access foreign markets.

Just as the emergence of digital data flows has helped these firms, new restrictions will hurt them. One study found that restrictions on the cross-border movement of data significantly reduce imports of services, especially data-intensive services. There is some evidence the restrictions hit smaller firms the hardest. 

For decades, the United States has been one of the world’s leading voices on emerging trade issues. But now it appears that we are abdicating our leading role. In doing so, we risk leaving a void that may be filled by protectionism that will harm America’s interests at home and abroad.

As Congress and trade policymakers look to reset the agenda in 2019, I hope they turn to this key emerging trade issue. 

Christine McDaniel, a former White House senior trade economist, is a senior research fellow with the Mercatus Center at George Mason University.