The Taiwan Banker

From its early stages, US president Joe Biden structured the Indo-Pacific Economic Framework (IPEF) as a non-trade agreement specifically in order to avoid congressional scrutiny, apparently anticipating a quick foreign policy victory. Instead, Senate Democrats have turned into the greatest domestic obstacle. Negotiations on the trade pillar in the November ministerial talks at the sidelines of the APEC summit in San Fransisco failed to come to an agreement as vulnerable politicians – particularly in the so-called rust belt of the Midwest – pressured the president to avoid anything involving even the appearance of trade in a pivotal election year. Further IPEF negotiations will presumably take place in a second Biden term; if Trump wins a second term, further progress will be dead on arrival. The delay has echoes of the US withdrawal from the Trans-Pacific Partnership (TPP) which it originally initiated, leaving China to dominate Asia trade policy. It also leaves the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor to the TPP, as the dominant economic framework in the region, despite the non-participation of the US in that initiative either. Although two of the other pillars of IPEF – clean energy and anti-corruption – were agreed in San Fransisco, and supply chain resiliency was formally signed, without the final component of trade, IPEF as a whole cannot be called successful. It was the digital trade component of trade which elicited the most ideological domestic criticism, causing the Biden administration to drop out of the relevant negotiations in early November. At the same time, digital trade was never an attractive component for trade partners seeking to increase their exports. In other words, as originally conceived, digital trade appears to be negative-sum, another surprising irony for an agreement intended mainly to build consensus in preparation for a more substantial free trade agreement. Democracy through trade Over the 2010s, the US became dissatisfied as it noticed that China would add nebulous “security” exceptions to any data agreement intended to constrain government power, an apparent reflection of its non-democratic system of governance. The US has however become increasingly outspoken in opposing such clauses. The General Agreement of on Trade in Services (GATS) under the WTO provides exceptions “necessary to protect public morals or to maintain public order.” China has also signed bilateral trade agreements including e-commerce, confounding the skeptics. Even the CPTPP allows the parties to restrict cross-border data flows “to achieve a legitimate public policy objective,” and also does not prohibit data localization requirements for the financial sector. The United States-Mexico-Canada Agreement (USMCA) and US-Japan DTA however prohibit such restrictions, and also include financial services within their scope. With the increasing complexity of cybersecurity and tech sector regulation, however, it is becoming increasingly difficult to treat digital services in a modular fashion. It appears that a decision has to be made at the start of negotiations as to whether one trusts the overall governance of one’s counterpart. The US is hoping to woo several non-democratic Asian countries into an anti-China alliance, and must find an agenda which will be beneficial to the interests of all. Beyond that ideological background, however, the US approach also seems to misunderstand the economics of the cloud. Trade partners of the US are not hesitating to move their data overseas in order to promote their own infant cloud industries. In many cases, their domestic cloud providers would be US-owned anyway. Instead, they are more concerned about security concerns, which are likely to resolve themselves in favor of data mobility as IT skills and regulatory understanding grow. In the longer term, migration to the international cloud is often a better solution, facilitating centralized management, but the relevant tradeoffs stand in their own right, outside of trade policy. Politics and big tech Digital trade opponents on the US side are likewise unconcerned about import competition, in contrast to other trade opponents with ties to the manufacturing sector. In May, Democratic Senator and former presidential candidate Elizabeth Warren released a report entitled “Big Tech’s Big Con” criticizing the role of the tech industry in formulating trade policy. Warren accused the industry of using international trade policy to circumvent the normal policymaking process, even as domestic and international debates on policies involving privacy, anti-monopoly, bias, and a variety of other regulatory areas are still ongoing. “Big Tech’s tactic is nothing new, and was successfully used by Big Pharma in the 1990s to hamstring US attempts to crack down on patent abuses,” the report wrote. “Moreover, Big Tech has been pursuing this strategy for years. Indeed, Big Tech was particularly effective getting its anti-regulation digital trade agenda included in the USMCA, which was negotiated by the [former president Donald] Trump Administration and signed into law in 2020.” Pharmaceutical industry regulations were also one of the factors which undermined political support for the TPP. In late October, the US Trade Representative (USTR) reversed demands to the WTO also dating back to 2019 regarding data flows, data localization, and source code, giving the legislative branch more room to enact future regulation. Business groups opposed the move, pointing to the precedent created by USMCA, as well as the US-Japan DTA. “Between these two agreements, the digital trade rules that USTR abandoned this week have governed US trade with three of our top four trading partners for years – benefitting many Americans and harming none,” wrote the US Chamber of Commerce. It is common to copy language across trade agreements, and with this stance, it was nearly impossible that the USTR would have gone through with the IPEF digital trade negotiations a couple of weeks later. Opportunity arises from exclusion Rather than legal philosophy, cybersecurity could provide an alternate foundation for digital trade. It is a growing economic and geopolitical concern for trading partners, regardless of income level or political system, making it a good target for an approach featuring high-standards trade. It is also a concern for the US, through supply chains. Recent trade agreements have tended to mention cybersecurity as a minor area. Little-noticed provisions mentioning information sharing can pull disproportionate weight, as smooth coordination is essential to combat cross-border threats, but that only covers offensive cybersecurity. Cyber defense is just as important. It is also more difficult, requiring a society-wide approach facilitated through standards with widespread enforcement. Recent government-to-government partnerships between the US and Taiwan involving their commerce and defense agencies provides a model, respectively through the Technology Trade and Investment Collaboration (TTIC) and US Taiwan Cybersecurity Resiliency Act. These efforts are largely positioned around supply chains, such as in the semiconductor industry. Despite not involving enforceable agreements, the US push for cybersecurity in Taiwan might demonstrate the utility of industry-specific strategies, facilitated by intergovernmental collaboration. It would also be possible to incorporate standards like the ISO system directly into agreements. Finally, because Taiwan was excluded from IPEF, its replacement is the Initiative on 21st Century Trade, which also has a section on digital trade, which will be covered after the second round of negotiations is completed. It remains to be seen what the content of that section will include, now that the US appears to have rejected the premises of its original plan. Taiwan offers a valuable laboratory for the US to test trade policy approaches isolated from domestic political pressure, so it may end turning into a model for the region.