Digital: Trump on Digital Trade Regulations - "Overseas Extortion", "Unfair Fines" and violations of "American sovereignty"
Last month we got to see the Trump Administration’s most direct action yet on digital trade issues in the form of a Memorandum on “Defending American Companies and Innovators from Overseas Extortion and Unfair Fines and Penalties”. As Simon Lester notes, it’s an interesting demonstration of Trump’s bifurcated approach to Big Tech - fighting hard for it internationally while still harbouring some scepticism around the sector domestically. Unsurprisingly, the Memorandum foreshadows an aggressive agenda for the United States’ return to pursuing its digital trade interests globally, opting for unilateral measures as opposed to negotiated outcomes.
In line with past US concerns, the Memorandum targets digital services taxes (DSTs), discriminatory regulations, data flow restrictions, and local content requirements. But the Memorandum also goes further, requiring an investigation into European Union countries and United Kingdom measures that require or incentivise the “use or development of United States companies’ products or services in ways that undermine freedom of speech and political engagement or otherwise moderate content” and its operative language capturing any measure that “could inhibit the growth or intended operation of United States companies”.
The response to these measures will be tariffs and “such other responsive actions necessary to mitigate the harm to the United States and repair any resulting imbalance.” For now, though, the Memorandum requires the:
United States Trade Representative (USTR) to look at renewing its section 301 investigations into DSTs in the European Union and United Kingdom, and commence new investigations into any other country that has a DST;
USTR to determine whether to pursue a “panel under the United States-Mexico-Canada Agreement” on Canada’s digital services tax (following a process started in August last year), this being the Memorandum’s one recognition that international trade agreements can be useful tools to deal with trade irritants;1
USTR, Treasury Secretary and Secretary of Commerce to report on problematic digital trade regulations and recommend further actions as part of the American First Trade Policy report that is coming in April;
Treasury Secretary, in consultation with the Secretary of Commerce and USTR, to also look at countries that apply “discriminatory or extraterritorial taxes” to US citizens or companies or “has any tax measures in place that otherwise undermines the global competitiveness of United States companies…”;
USTR to identify how the US could get its trading partners to agree “a permanent moratorium on customs duties on electronic transmissions”; and
USTR, in consultation with others, to put in place a process for American business to report taxes and regulations of concern to the USTR.
It makes sense for the US to be a strong advocate against protectionist digital trade measures, so from that perspective the Memorandum is directionally correct in re-emphasising the size and importance of the US’s digital economy for the US’s broader economic interests. However, the Memorandum’s framing of these issues2 and the resulting measures that we can expect to see are likely to be counterproductive to finding real solutions to its concerns.
One of the difficulties of negotiating international digital trade rules is finding the right balance between clear rules against improper protectionism and ensuring that legitimate regulations can still be implemented. It is hard to see how other jurisdictions will just accept the unilateral imposition of US rules, standards and norms, particularly in relation what are extremely sensitive policy issues. Indeed, the many references to violations of US ‘sovereignty’ and illegitimate ‘extraterritorial authority’ are somewhat ironic given that one reading of the Memorandum is that it seeks to impose America’s particular model of digital trade regulation on the rest of the world.
That said, these moves by the Trump Administration will likely make many governments think twice about imposing new regulations on digital trade and social media (although this may also be muddied somewhat by the imposition of the other tariffs that are expected as part of the so-called “Fair and Reciprocal Plan”). But, as others have noted, unilateral measures by the US also have a mixed track record in achieving durable results and countries may determine that conceding to unilateral threats may only serve to encourage further such threats.3
Conversely, international processes have been making progress on digital trade issues and international agreements do affect domestic policy-making, including in ways that are in the US’s interest. The WTO’s e-commerce plurilateral is close to having 80+ economies agree not to impose customs duties on electronic transmissions. Australia recently held off on imposing local content requirements on online streaming companies, in part due to concerns about its trade agreement with the US. And the USMCA dispute settlement process was being pursued to contest Canada’s DST. Unilateral action undermines these processes and deals. It also harms the US’s ability to work with others that share an interest in promoting open digital trade.
In the end, the Memorandum takes what could have been done through negotiations or specific disputes to enforce trade rules, and instead wraps these issues up into an unnecessarily antagonistic escalation of trade tensions. Hopefully there is a grand bargain to be found in all of this after 2 April.
Although there is some irony in the idea of the US trying to enforce USMCA rules against Canada while at the same time imposing a range of measures against Canada that seem to be in clear breach of the USMCA.
As Tom Wheeler notes at Brookings: “The presidential instructions strike an outraged tone: ‘foreign governments have increasingly exerted extraterritorial authority over American companies.’ Yet, such ‘extraterritorial authority’ is neither new nor unique. American products sold abroad have always had to comply with local regulations. From drug and medical device approval to food labels such as what can be called champagne, foreign countries govern their own markets—as does the United States.”
This Cato brief notes that “An assessment by political scientist Krzysztof J. Pelc examining 189 U.S. trade actions from 1975 to 2000 came to similar conclusions about the inefficacy of American unilateralism: when the U.S. chose to act unilaterally, it was 34 percent less likely to secure concessions from the countries it was targeting…. By contrast, U.S. trading partners were more amenable to changing their policies via multilateral negotiation and dispute settlement…”.