Digital Economy

Toward Deeper Cooperation on EU-US Digital Trade

Over time and in conjunction with technological developments, the nature of international trade has evolved. Trade is no longer just about the exchange of goods or the provision of simple services. It increasingly involves actions related to various dimensions of the digital economy.

I. Introduction

The European Union and the United States are two major players in the global digital economy, yet the state of trade instruments that apply between them is nowhere close to reflecting this reality. That is a problem for at least two reasons: (i) the two parties are missing out on economic growth from digital trade and denying consumers on both sides of the Atlantic better digital services; and (ii) as the digital economy becomes more sophisticated and mainstream (with technologies such as cloud computing, artificial intelligence (AI), distributed ledger technologies, widespread 5G connections and the internet of things), the two sides are leaving a vacuum for others to establish digital trade rules.

The EU and the United States need to act swiftly to establish the right trade instruments to address these shortcomings, and this paper will share a preliminary view of how they can do it. First, this paper will evaluate the current situation between the EU and the United States on digital trade and propose work at the political level to find common ground on challenges and opportunities in this area, as well as the instruments needed to address them. This paper will then briefly address the technical work necessary to deliver these instruments. Further to trade instruments per se, this paper will underscore the need for either a freestanding EU-U.S. digital trade pact or for an accord embedded in a more general trade agreement, accompanied by another agreement that would expressly enable transatlantic data flows.

II. What is digital trade?

There is not a single authoritative definition, especially since digital trade is a loose term. This paper uses the definition put forth by López González and Ferencz, as encompassing digitally enabled transactions in goods and services that can be either digitally or physically delivered.[1] Although the term “e-commerce” is sometimes used interchangeably, e-commerce is only one facet of digital trade and does not cover the many innovative ways in which it can be carried out. It is therefore preferable to use the term “digital trade.”

Photo by Michael Dziedzic on Unsplash
Photo by Michael Dziedzic on Unsplash

III. EU-US digital trade: The state of play

It is almost impossible to glean complete statistics on EU-U.S. digital trade, especially given the complexity of measuring activities that can constitute its various forms. However, the importance of EU-U.S. digital trade is abundantly clear. For example, the Congressional Research Service [2] notes that the volume of cross-border data flows between the EU and the United States is the highest in the world and that from 2003 to 2017, total EU-U.S. trade in goods and services increased from $594 billion to $1.2 trillion, with ICT- and potentially ICT-enabled services accounting for $190 billion of U.S. exports in 2017.[3]

Things started going badly in 2016, when talks over the Transatlantic Trade and Investment Partnership (TTIP) ground to a halt. In the meantime, the Trump administration has enacted antagonistic trade policies toward the EU, including steel tariffs (to which the EU has responded with countermeasures), while repeatedly threatening to slap tariffs on motor vehicles. The United States also has levied tariffs on a range of products in a dispute over government subsidies for competitors Boeing and Airbus, for which the EU is also considering countermeasures in the absence of a negotiated agreement.[4]

Additional tensions and complications have also evolved in ways that directly affect digital trade. For example, the EU has pushed for a digital tax, which the United States regards as an attempt to target U.S. companies unfairly and for which Washington has threatened to retaliate.[5] In the meantime, the EU’s Court of Justice (CJEU) recently delivered a bombshell judgment that invalidated the EU-U.S. Privacy Shield, which had enabled data to flow freely between companies on both sides of the Atlantic.[6]

Yet, the transatlantic trade relationship is not all doom and gloom. In 2018, then-European Commission President Jean Claude Juncker, together with U.S. President Donald Trump, signed a joint statement laying the foundations for a number of trade initiatives.[7] Ensuing work has been positive, albeit slow.

Nevertheless, these initiatives are not enough to build and maintain a trade relationship as important as the EU-U.S. one, especially regarding digital trade. The path forward on digital trade should begin with political agreement.

IV. The political work: political commitment to do what needs to be done

Work on EU-U.S. digital trade policy has to start in the political realm. The two sides must realize the importance of digital trade, acknowledge that the current trans-Atlantic trade instruments are either unsuitable or nonexistent for digital trade and agree on what needs to be done to address this shortcoming. Then the parties must lay the political foundations for ensuing technical work to commence.

Whether the upcoming U.S. administration be incumbent or new, the incoming presidency presents an opportunity to rework the transatlantic trade relationship. In the best of circumstances this reset should be followed by a strong push to rebuild and modernize the two sides’ trade relationship, especially when it comes to digital trade. This could enable TTIP negotiations to recommence, with such a comprehensive trade agreement containing an ambitious digital trade chapter.

Alternatively, especially if Trump is re-elected, the two sides could add an initiative to the ones outlined in the Juncker-Trump statement to address digital trade instruments. This might enable the parties to agree to a standalone EU-U.S. digital trade agreement. If not even this is possible, the parties could at least agree to use the commitments in the Joint Statement to launch a dialogue to establish standards for conducting digital trade.

The two sides must also reestablish an agreement that serves the purposes of the Privacy Shield, following its invalidation by the European court. Political momentum for change could be maintained through various existing institutions for transatlantic cooperation, such as the EU-U.S. Executive Working Group, the EU-U.S. Information Society Dialogue and the Transatlantic Legislators’ Dialogue.

V. The technical work: the instruments necessary for EU-U.S. digital trade

After politicians have shaken hands, experts must get to work on crafting a digital trade agreement, whether standalone or as part of a broader pact, whilst also replacing or strengthening the Privacy Shield to enable cross-border data flows.

(i) An EU-US digital trade agreement

Both the EU and the United States have agreements with third countries that cover digital trade. The EU began tackling digital trade in a concentrated fashion with the 2011 EU-Korea trade agreement and it has gone further in subsequent pacts, particularly the EU-Japan Economic Partnership Agreement.[8] The United States negotiated an e-commerce chapter with Singapore in 2003 and has addressed digital trade in an evolving fashion since then, including in the U.S.-Korea FTA (KORUS), which is regarded as having the world’s most robust digital trade provisions, and the U.S.-Mexico-Canada Agreement (USMCA), which goes even further in certain areas.[9]

The EU and United States have their own rules and standards and they take different approaches to the digital economy. The United States views data transfers through a national security lens, whereas the EU focuses more on fundamental rights. Given each side’s economic, diplomatic and geopolitical clout, though, it is not likely that either could impose its policy preferences on the other.

To move forward on a digital trade agreement, both sides must build on common policy goals and instruments they already possess. A comprehensive overview of similarities in EU-U.S. trade agreements is beyond the scope of this paper, but a brief overview is nevertheless instructive.

EU trade agreements generally seek to: (1) remove barriers to digital trade (such as requirements to divulge source code or to localize data, customs duties and restrictions on data flows); (2) devise regulations and laws in the EU and in third countries that are digital-trade friendly and that create legal certainty (such as rules for e-signatures); (3) create a secure digital environment for consumers and businesses (such as by regulating spam); and (4) prevent discrimination between digital trade and normal trade (such as doing away with any prior authorization requirements, such as licensing, simply because business is being carried out electronically).[10]

U.S. trade agreements also address a variety of these issues. The USMCA for example deals with disallowing customs duties on digital products, removing requirements to divulge source codes, enabling non-discriminatory treatment of digital products, ensuring the validity of electronic authentication and e-signatures, avoiding localization requirements, ensuring online consumer protection (including against spam), guaranteeing data protection and encouraging cooperation in various areas including regulation. These elements correspond to many EU objectives.

An EU-U.S. digital trade agreement can therefore build on these commonalities. The two parties could at least build a standard digital trade agreement that reflects existing agreements with third parties. The importance of the EU-U.S. digital trade relationship, though, calls for a more ambitious accord, which must address two elements.

The first element entails a comprehensive digital agreement that enables transatlantic data flows while addressing national security and data protection concerns. While the EU takes a harder stance on data protection rights than the United States, in its most recent trade agreements, it has tried to maintain a balanced approach.

A first article in such an EU trade agreement would address barriers to data flows by mandating that parties remove various aspects of data localization requirements. However, a second article would then allow each party to adopt and maintain safeguards to ensure adequate protection of personal data and privacy, including rules for cross-border transfers of personal data. The concern here is that the second article could be used to neutralize advantages of the first article. Another challenge is to ensure that the first article is implemented properly, promptly and in a way that provides legal certainty.[11] Until now, the EU has aimed for more ambitious goals with each new trade agreement. With the United States, however, the EU might have to be more cautious, particularly in light of the blowback from civil society during TTIP negotiations. To a certain extent, the EU-U.S. Privacy Shield and its predecessor, the EU-U.S. Safe Harbor Agreement, sought to ensure safe data flows. But even their utility is gone, now that the court has invalidated both agreements.

The second element entails addressing regulatory cooperation on new technologies in digital trade. The EU and United States should cooperate on regulation and standards for the new technologies that the digital economy will bring into play, such as better cloud computing, 5G and AI, rather than working separately on their own rules. That cooperation should be written into a digital trade agreement or, if no such deal happens, tackled under the commitment in the Juncker-Trump joint statement.

(ii) An EU-U.S. Privacy Shield

The EU-U.S. Privacy Shield allowed the free transfer of data to U.S.-based companies that self-certified by disclosing what type of personal data they collected and how they used it. It also protected the fundamental rights of anyone in the EU whose personal data was transferred to the United States for commercial purposes. On July 16, 2020, however, the CJEU ruled that the Privacy Shield does not sufficiently protect citizens’ rights under the EU’s General Data Protection Regulation.

Since data flows are at the heart of the digital economy, the Privacy Shield has been crucial to transatlantic digital trade. A strengthened version that meets the court’s requirements will also be crucial for the future, however ambitious any EU-U.S. digital trade agreement may be. The EU and United States, therefore, must quickly find a way to fill the gap left by the court’s judgement. In the meantime, companies on both sides of the Atlantic could use standard contractual clauses and binding corporate rules to enable data to flow between them. Under an SCC, a U.S. company would legally commit to observe EU standards on data protection.[12] On the other hand, BCRs oblige EU companies to honor all general data protection principles and enforceable rights to ensure appropriate safeguards for data transfers outside the EU and within a group of undertakings or enterprises. The rules must be legally binding and enforced by every member concerned of the group.[13]

Nevertheless SCCs and BCRs are not a real replacement on their own. As Patel and Lea have argued, they are relatively costly and burdensome for organizations to establish, as they require significant administrative and legal work, such as mapping all data flows.[14] Also, SCCs and BCRs cover individual organizations, unlike the Privacy Shield’s broader application.

A joint statement following the CJEU judgement notes that the EU and United States recognize the vital importance of data protection and the significance of cross-border data transfers for citizens and economies. It also notes that the two sides have started talks on an enhanced EU-U.S. Privacy Shield framework to comply with the CJEU case.[15] However, the EU’s justice commissioner, Didier Reynders, has warned that there will be no quick fix and called for a sustainable solution that delivers legal certainty, in full compliance with the judgment of the court.[16] Reynders also said the political nature of the issue and the imminence of the U.S. election would hamper talks between U.S. and EU officials, as would possible legislative changes to U.S. surveillance law.

VI. Conclusion

The digital economy is already central to the transatlantic economy and it will only grow in importance over time. Without a digital trade deal — whether part of a larger agreement or not — and an accompanying Privacy Shield, the two sides will not only miss out on economic growth but will also risk slipping into irrelevance as technological developments overtake them. Both sides must take immediate action to deliver progress on transatlantic digital trade.

Ideally, the EU and United States should reset their trade relations and develop an ambitious path forward on trade in general, including digital trade. After agreeing on mutual goals, the parties could set in motion the required technical work and push for results within a reasonable period. Considering current political realities, though, an ambitious, stand-alone digital trade agreement is probably more likely. Such an agreement should have all the instruments to remove barriers for digital trade while facilitating regulatory cooperation between the two sides so that they can arrive at common standards on future technologies, thereby also setting standards internationally. At the same time, an agreement should be accompanied by a revamped Privacy Shield or similar instrument that takes the CJEU’s concerns into account. This would be necessary to enable data to flow freely and safely between the two sides.

In a less-than-ideal scenario, the two sides should meet and see whether they can at least have a stand-alone EU-U.S. digital trade agreement based on provisions that the two sides both already have in their trade agreements with third countries. They should then use the commitment on common standards in the Juncker-Trump joint statement as the basis for an agreement to cooperate on standards for future digital technologies. As in the previous case, they would also need to find a way to strengthen the Privacy Shield.

Jan Micallef studied law at the University of Malta and went on to specialise in trade law at the University of Sussex and entrepreneurship at the University of Cambridge. He was policy advisor and parliamentary assistant at the European Parliament from 2007 till 2013 and from 2013 till the end of July 2019 he was Malta’s Trade Attaché at the Permanent Representation of Malta to the EU. Since August 2019 Jan has been doing academic work in his field whilst working on a number of projects related to EU and international trade issues.


Endnotes

[1] Janos Ferencz and Javier López González, “Digital Trade and Market Openness,” (OECD Trade Policy Papers, No. 217, OECD Publishing, Paris: 2018): 10, https://read.oecd-ilibrary.org/trade/digital-trade-and-market-openness_1bd89c9a-en#page1.

[2] Shayerah Ilias Akhtar, Rachel F. Fefer and Wayne M. Morrison, Digital Trade and US Trade Policy – R44565 (Washington, D.C., Congressional Research Service: 2019), 20, https://fas.org/sgp/crs/misc/R44565.pdf.

[3] D.S. Hamilton and J.P. Quinlan, The Transatlantic Economy 2019 – Annual Survey of Jobs, Trade and Investment between the United States and Europe (Washington, D.C., Foreign Policy Institute, Johns Hopkins University SAIS: 2019) 28-32, https://transatlanticrelations.org/publications/transatlantic-economy-2019/.

[4] Jim Brunsden, Peggy Hollinger and Aime Williams, “EU given green light to hit US with tariffs in Airbus-Boeing ruling,” Financial Times, 13 October 2020, https://www.ft.com/content/3198d2ef-c3bb-44b9-a1e0-b27d9c1483de.

[5] Elisa Braun, Melissa Heikkila, Doug Palmer and Mark Scott, “Threat of EU-US trade wars grows amid digital tax stand-off,” Politico, 18 June 2020, https://www.politico.eu/article/europe-us-digital-tax-trade-war/.

[6] Data Protection Commissioner vs. Facebook Ireland and Maximillian Schrems, (Case C-311/18) Court of Justice of the European Union, 16 July 2020.

[7] European Commission, Joint US-EU Statement following President Juncker’s visit to the White House, 25 July 2018, https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT184687.

[8] Jan A. Micallef, “Digital Trade in EU Free Trade Agreements (FTAs): Are EU FTAs Allowing Cross Border Digital Trade to Reach Its Full Potential?” Journal of World Trade 53, no. 5 (2019): 856, https://kluwerlawonline.com/journalarticle/Journal+of+World+Trade/53.5/TRAD2019034.

[9] Shayerah Ilias Akhtar, Rachel F. Fefer and Wayne M. Morrison, Digital Trade and US Trade Policy, 35-36.

[10] Micallef, “Digital Trade in EU Free Trade Agreements,” 864.

[11] Micallef, “Digital Trade in EU Free Trade Agreements,” 866.

[12] European Commission Law by topic website: https://ec.europa.eu/info/law/law-topic/data-protection/international-dimension-data-protection/standard-contractual-clauses-scc_en.

[13] European Commission Law by topic website: https://ec.europa.eu/info/law/law-topic/data-protection/international-dimension-data-protection/binding-corporate-rules-bcr_en.

[14] Nathan Lea and Oliver Patel, EU-U.S. Privacy Shield, Brexit and the Future of Transatlantic Data Flows (UCL European Institute, London: 2020): 9, https://iapp.org/media/pdf/resourcecenter/euusprivacyshieldbrexitdataflowsucleijune2020.pdf.

[15] U.S. Department of Commerce, Joint Press Statement from European Commissioner for Justice Didier Reynders and U.S. Secretary of Commerce Wilbur Ross, 10 August 2020, https://www.commerce.gov/news/press-releases/2020/08/joint-press-statement-us-secretary-commerce-wilbur-ross-and-european.

[16] Samuel Stolton, “Don’t expect new EU-US data transfer deal anytime soon, Reynders says,” Euractiv, 4 September 2020, https://www.euractiv.com/section/data-protection/news/dont-expect-new-eu-us-data-transfer-deal-anytime-soon-reynders-says/.

List of References

Congressional Research Service Report (2019) ‘Digital Trade and U.S. Trade Policy’ - R44565: pp. 1-41. Available at: https://crsreports.congress.gov/product/pdf/R/R44565 (Accessed on 21 October 2020)

Euractiv (2020) Don’t expect new EU-US data transfer deal anytime soon, Reynders said. 4 September 2020. Available at: https://www.euractiv.com/section/data-protection/news/dont-expect-new-eu-us-data-transfer-deal-anytime-soon-reynders-says/ (Accessed on 21 October 2020)

European Commission (2018) European Commission reacts to the US restrictions on steel and aluminium affecting the EU. Press Release - 31 May 2018 – Available at: https://ec.europa.eu/commission/presscorner/detail/en/IP184006 (Accessed on 21 October 2020)

European Commission (2018) EU adopts rebalancing measures in reaction to US steel and aluminium tariffs. Press Release – 20 June 2018. Available at: https://ec.europa.eu/commission/presscorner/detail/en/IP184220
(Accessed on 21 October 2020)

European Commission (2018) EU comments on US Section 232 cars investigation. Press Release – 2 July 2018. Available at http://trade.ec.europa.eu/doclib/press/index.cfm?id=1878 (Accessed on 21 October 2020)

Financial Times (2020) EU given green light to hit US with tariffs in Airbus-Boeing ruling – 13 October 2020. Available at: https://www.ft.com/content/3198d2ef-c3bb-44b9-a1e0-b27d9c1483de (Accessed on 21 October 2020)

Hamilton, D.S. and Quinlan, J.P. (2019) The Transatlantic Economy 2019 – Annual Survey of Jobs, Trade and Investment between the United States and Europe. Washington DC: Foreign Policy Institute, John Hopkins University SAIS. Available at: https://transatlantictrans-Atlanticrelations.org/wp-content/uploads/2019/03/TE2019_FullStudy.pdf (Accessed on 21 October 2020)

López González J., & Ferencz F. (2018) ‘Digital Trade and Market Openness’, OECD Trade Policy Papers, No. 217, OECD Publishing: pp. 1–61

Micallef, J.A. (2019) ‘Digital Trade in EU Free Trade Agreements (FTAs): Are EU FTAs Allowing Cross Border Digital Trade to Reach Its Full Potential’ - Journal of World Trade, Vol. 53(5): pp.855-870

Patel, O. & Lea, N. (2020) EU-U.S. Privacy Shield, Brexit and the Future of Transatlantic Data Flows UCL European Institute. Available at: https://www.ucl.ac.uk/european-institute/sites/european-institute/files/privacyshieldbrexitandthefutureoftransatlanticdataflows1.pdf (Accessed on 21 October 2020)

Politico (2020) Threat of EU-US trade wars grows amid digital tax stand- off – 18 June 2020. Available at: https://www.politico.eu/article/europe-us-digital-tax-trade-war/ (Accessed on 21 October 2020)

Court Judgments

Court of Justice of the European Union – Case C-311/18 - Data Protection Commissioner vs. Facebook Ireland and Maximillian Schrems – 16 July 2020

Other

Joint US-EU Statement following President Juncker’s visit to the White House – 25 July 2018. Available at: https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT184687 (Accessed on 21 October 2020)

Joint Press Statement from European Commissioner for Justice Didier Reynders and U.S. Secretary of Commerce Wilbur Ross – 10 August 2020. Available at: https://ec.europa.eu/newsroom/just/item-detail.cfm?item_id=684836 (Accessed on 21 October 2020)

European Commission Law by topic Website (SCRs): https://ec.europa.eu/info/law/law-topic/data-protection/international-dimension-data-protection/standard-contractual-clauses-scc_en (Accessed on 21 October 2020)

European Commission Law by topic Website (BCCs): https://ec.europa.eu/info/law/law-topic/data-protection/international-dimension-data-protection/binding-corporate-rules-bcr_en (Accessed on 21 October 2020)

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Jan A. Micallef