Published
January 19, 2024
The ability of U.S. companies of all sizes to access and move data globally drives wealth creation and is critical to America’s prosperity. Over the years, the U.S. and its allies have negotiated agreements to support cross-border data flows among reliable trading partners, guard against digital protectionism, and allow parties to pursue non-discriminatory domestic digital policies.
However, the Office of the U.S. Trade Representative (USTR) announced in October it was walking back longstanding U.S. support for strong digital trade rules, even though these represent well-established and bipartisan positions that were most recently enshrined in U.S. law in the United States-Mexico-Canada Agreement (USMCA).
Specifically, USTR withdrew support for proposals on:
- Due process measures with respect to cross-border data flows and data localization restrictions;
- Protections for source code vis-à-vis forced access; and
- Protections from trading partner discrimination against U.S.-made digital products.
What’s lost in the debate is that this decision doesn’t hurt “Big Tech” so much as the multitude of sectors of the U.S. economy, as well as American small businesses, workers, consumers, and entrepreneurs that depend on the digital economy. This includes industries such as semiconductors, manufacturing, biopharma, medtech, agriculture, insurance, financial services, auto and transportation sectors, to name a few. Consider these:
Semiconductors
The seamless and unimpeded flow of semiconductor research, designs, software, manufacturing information, and other development data within and across borders has been essential in making the U.S. semiconductor industry strong.
Every step in the semiconductor manufacturing value chain involves the movement of data—from design to wafer manufacturing to back-end assembly, testing, packaging, sales, and distribution. A single semiconductor fab can generate several petabytes of data per day.
This data can include information about the chemical composition of materials used in the manufacturing process, measurements of the physical characteristics of individual chips, and data from sensors that monitor the manufacturing equipment. Much of the relevant data crosses international borders on a daily basis.
For R&D specifically, the semiconductor industry requires round-the-clock collaboration between companies, universities, and research institutions across different countries and regions, as global teams work in various markets to bring new innovations to market. The free flow of data is critical to facilitating this collaboration, as it enables researchers and developers to share information, insights, and expertise across borders.
Under this international R&D structure, semiconductor designs, design tools, engineering skills, research methodologies, and other data associated with component development are transferred from location to location, crossing multiple international borders along the way. Digital trade barriers will threaten this collaboration that has helped to generate new innovations and technologies that fuel the advancement of this industry.
Biopharma and Medtech
For biopharmaceuticals and medical technologies, the picture is similar. Biopharmaceuticals are increasingly developed, tested, and analyzed for safety and efficacy in different countries. To perform this R&D, scientists, regulators, and others depend on the capability to transfer data securely across international IT networks.
Even before the launch of preclinical studies and clinical trials, the global R&D ecosystem depends on cross-border access to medical journals, scientific collaboration, and real-world evidence. Cross-border R&D collaboration has also proliferated in response to the COVID-19 pandemic, which saw the rapid development of vaccines that often include inputs from more than a dozen countries.
Cross-border data transfers help improve preclinical studies and clinical trials by reducing development cycles, improving data quality, facilitating participant adherence, and leading to more conclusive safety and efficacy findings. The cross-border transfer of clinical study data includes data at all stages of the trial, including supply chain transparency, such as when samples are delivered to and from patient facilities and laboratories.
Limits on cross-border data flows would also require reconfiguring the global logistics networks that have been developed so that such medical technologies can arrive at hospitals and reach patients with the latest software. It would likely require the abandonment of some locations and stages in the processes in ways that would forgo the talent and innovation they provide—and it could dramatically raise costs and depress innovation. Such limits could furthermore limit the development and delivery of cutting-edge digital medicines.
Finally, overly strict cross-border data flow restrictions could inhibit the collection of medical product safety data from across markets and reporting of that data to the FDA and other regulators. This further demonstrates that the lack of strong digital trade rules could impact the development, availability, and safety of innovative medical products to patients in the U.S. and around the world.
Manufacturing
When offering industrial software supporting design, testing, and execution for customers of all sizes, U.S. companies’ source code and algorithms allow their products to function and provide value to customers by increasing efficiency and lowering total costs, in some cases as much as 20%. The customers these companies serve make up the backbone of economies from automotive to aerospace to food and beverage.
If a third-party government were to have access to the kernels of these companies’ products—as the administration’s move portends to do—it would essentially create a competitor with a duplicate product in the market, hurting their market opportunities and ability to continue to reinvest in their products and U.S. business. Industry leaders are stunned that the Biden administration, despite its oft-repeated commitment to manufacturing in America, seems in this instance to be supporting the forced transfer of U.S. technologies to our competitors abroad.
On the other hand, the protections included in the USMCA’s digital trade chapter would, if applied more broadly, prohibit countries from requiring the disclosure of source code to software (including algorithms) as a condition for selling or using that software in the member state’s territory.
Financial Services
The United States is an established leader in the provision of financial services globally. The American financial services industry generally accounts for 15-20 percent of U.S. GDP and is an increasingly digitally-enabled and data-intensive sector.
There is an opportunity through digital trade to support workers and businesses that are increasingly reliant on the use of digitally enabled financial services. For example, as a result of the pandemic, firms of all sizes – including small, minority-owned, and rural- businesses – dramatically increased their use of digital payments. Digital payments often serve as the first point of access to formal financial services for these small businesses and allow them to become a part of global value chains and reach customers in international markets.
Policies that restrict digital trade — including data localization and similar measures — are proliferating. Restrictions on the free flow of data negatively impact growth and productivity, which can be especially detrimental for small businesses. Countries whose policymakers prioritize strong digital trade rules and infrastructure will have an advantage as more and more consumers seek to use digital payments and as smaller firms look to expand their e-commerce capabilities.
Strong digital trade rules can also help improve organizations’ overall cybersecurity posture. When governments enact data localization and other measures restricting the movement of data across borders, they make it more difficult and costly for companies to secure their data from potential cyberattacks.
Data security is critical for insurance companies, in particular, given this sector deals with large amounts of sensitive personal and financial data to do business. Unfortunately, governments around the world continue to enact digital trade barriers in this space, including preventing insurers from transferring data outside of the country or placing restrictions on the use of cloud services. While some governments argue that these measures will make data more secure, such restrictions can actually lead to the opposite result and undermine the very same policy goals that governments set out to achieve in terms of protecting the data of their citizens. That’s why it’s imperative that today’s trade rules include prohibitions on data localization and similar requirements for insurers and the rest of the financial services sector.
Autos
Retreating from strong data flow standards will hinder how auto companies transfer data between domestic headquarters and their global affiliates. Whether it’s data on customers, employees, or vehicle safety, the absence of strong digital trade invites new restrictions and impedes firms’ ability to move data across borders. This would undoubtedly increase costs and stifle innovation and R&D by making it more difficult to capture data aimed at making vehicles safer, smarter, and more sustainable.
Additionally, without strong digital trade commitments, a number of large emerging markets could impose data localization requirements that force companies to store data generated or collected in a country on servers located within that country. The added cost and inefficiency would be baked in without advancing privacy, cyber, or other policy goals.
Agriculture
Agriculture companies rely on strong digital trade rules, given their focus on digital logistics and e-commerce technologies when exporting goods. Paring these rules down will make exporting to new markets that much harder for this trade-dependent sector.
These companies use data in transactions, advertising, R&D, harvesting, and climate monitoring, among other areas. Furthermore, digital solutions are key to achieving progress on environmental sustainability goals and increased crop yields. The pursuance of high-standard digital trade rules will facilitate U.S. agricultural exports to new levels.
Biotech companies’ agricultural business will be negatively impacted if the U.S. abandons internationally recognized cross-border data flow principles, especially when it comes to sharing digital data with designated research centers for plant genotyping and phenotyping.
Cumulatively, these impacts will increase costs for biotech companies’ agricultural businesses and depress the availability of these digital tools and services in different parts of the world. This could also potentially become a barrier to access to smallholder farmers, who cultivate crops on a limited scale in areas that could most benefit from more regenerative approaches to agriculture.
Logistics and Transportation
Transportation companies are also beneficiaries of strong digital trade rules that ensure data can flow freely across borders, unimpeded by forced localization rules.
Global supply chain constraints during the Covid-19 pandemic illustrated the need for increased transparency within supply chains. The ability of companies in the logistics sector to track upstream and downstream suppliers and assess real-time data on products’ locations was critical in getting goods to market amidst congestion at ports. Companies were then able to provide their customers with this data globally based on the system of rules that allowed them to send data freely from one location to another.
Access to digital services is a key driver of supply chain diversification and resiliency, with digitally-enabled firms twice as likely to export goods as non-digitally-enabled firms.
Jobs Depend on Digital Trade
USTR’s reversal of digital trade rules threatens new costs, reduced innovation, depressed investment, and suppressed hiring for a wide variety of American sectors and companies. Millions of American jobs, U.S. exports, and the nation’s competitiveness depend on digital trade. The Biden administration needs to correct course — before it’s too late.
About the authors
Isabelle Icso
Isabelle Icso, senior director of international policy at the U.S. Chamber of Commerce, advocates for the Chamber’s international trade and investment priorities before the administration, Congress, and foreign governments.
