Development of International Rules for Digital Economy: Japan and Australia Should Take the Initiative and Encourage Involvement of the U.S. and China

Vice President, RIETI

Visiting Fellow, RIETI

Amid the COVID-19 crisis, digital transformation has accelerated around the world, resulting in the spread of online provision of services in a broad range of fields. In Japan as well, remote work has become popular, triggering a rapid expansion of data traffic. At the same time, wellsprings of innovation taking advantage of digital technology are spreading beyond developed countries to China and emerging countries.

In order to make sure that the benefits of digitalization lead to the growth of national economies, productivity improvement and more fulfilling lives for ordinary people, it is essential to promote free cross-border flows of data and to ensure cybersecurity and to protect personal information as a precondition for doing so.

However, as the confrontation between the United States and China deepens, the absence of international rules that govern cyberspace is accelerating the fragmentation of the digital economy. The trend of digital protectionism, which refers to efforts to keep data within national borders, is spreading. At a time when the United States finds it difficult to exercise leadership in the field of international trade, middle power countries, such as Japan and Australia, should take the initiative in promoting the development of international rules for cyberspace.

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Japan and Australia should first cooperate in ensuring the United States' engagement with the Asia-Pacific region, and then mediate between the United States and Europe in their dispute over privacy protection and work out a plan for expanding a network of like-minded countries to develop international rules for the digital economy. Such activities will also be effective in encouraging the United States to engage with the Asia-Pacific region once again on trade and economic fronts.

Even under the Biden administration, the possibility is slim that the United States will return to the TPP (Trans-Pacific Partnership) in the near future. On the other hand, the Biden administration is placing emphasis on Indo-Pacific policy. It is also interested in cooperating with like-minded countries to set high-level rules focused on the field of digitalization and develop codes of ethics and conduct that are well-suited to addressing social challenges presented by emerging technologies, such as AI and FinTech.

In the Asia-Pacific region, there are bilateral and intra-regional rules related to digital trade, including the Japan-U.S. Digital Trade Agreement, the Australia-Singapore Digital Economy Agreement, and digital rules under the TPP11 (see the table below). The most realistic approach is to use those rules as the basis for increasing the number of countries that observe digital trade rules.

Table. Movement Toward Development of Digital International Rules
Table. Movement Toward Development of Digital International Rules

Ultimately, digital rules in the Asia-Pacific region should be conceived as a "digital TPP agreement" incorporating elements well-suited to this new era, such as codes of ethics and conduct concerning AI, FinTech, and blockchain (decentralized ledgers) based on digital rules under the United States-Mexico-Canada Agreement (USMCA) and TPP11.

An agreement like this will help to keep digital protectionism at bay and present a new vision of the economic integration of the Asia-Pacific region, which is a growth center of the "era of data." The proposed digital TPP agreement should be conceived of as a network of like-minded countries aiming to conclude a high-level cyberspace accord regarding matters such as free flows of data, security, and privacy protection through cooperation with the EU without being constrained by the geographical framework of the Asia-Pacific region.

Ultimately, Japan and Australia should encourage China to be involved in this initiative, restrain moves by Southeast Asian countries to keep data within national borders, and develop rules and codes of ethics and conduct that promote the growth of the digital economy in a free and open manner.

The United States, China, the EU have all committed to the Data Free Flow with Trust (DEFT) concept, which was proposed by Japan at the G20 Summit in Osaka in 2019. It is necessary to ultimately conclude an agreement on multilateral rules for digital trade at the WTO by building on this concept.

At the WTO, Japan, Australia and Singapore are co-hosting digital trade negotiations. The negotiations have been joined by nearly 90 WTO members, including not only the United States, China, and the EU but also emerging countries in Asia, Latin America, the Middle East and Africa, among other regions. Whether or not successful results can be achieved in the new field of digital trade will also be a consequence of the reform of the WTO.

Multilateral rules with a wider global reach have already been developed based on intra-regional cooperation in the Asia-Pacific region. As a prime example, the WTO Information Technology Agreement (ITA), which has realized the abolition of tariffs on information and communications products, including computers, semiconductors and semiconductor-manufacturing equipment, was formulated based on the foundation of the Asia-Pacific Economic Cooperation (APEC) forum.

Regarding trade rules in the era of digitalization as well, it is important to pave the way for the development of common rules geographically encompassing China, India, Latin America, Africa and other regions by starting with an Asia Pacific-wide initiative and by also involving Europe and Southeast Asia.

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It may be difficult to immediately conclude an agreement on common rules in some fields. For example, with respect to codes of ethics and conduct regarding emerging technologies, including AI ethics and FinTech governance, it is not easy to conclude an agreement on international hard law (treaties and other forms of international law). The realistic approach is to start by engaging in international dialogue and cooperation and sharing best practices in order to promote confidence building.

As for privacy protection and cybersecurity, which form the foundation of the data economy, APEC has already promoted various sorts of cooperation. It is important to enhance interoperability between national regulations and standards by sharing best practices through various fora of cooperation while bringing together knowledge and knowhow from the government sector, industry and experts.

With respect to the scope of matters covered by such cooperation, it is essential that it be able to handle a broad range of issues, including those that have not been sufficiently covered by existing trade agreements, such as privacy protection and security, and competition policy in the era of digitalization. It is important that individual countries hold in-depth discussions on how to ensure the appropriateness and transparency of procedures which governments use to access personal data for public policy reasons.

The question of how to mitigate cybersecurity risks may be resolved in some cases by providing solutions using blockchain and other new technologies or by promoting competition between different platforms. That is because when the platform market, which is dependent on the network effect generated by the presence of numerous users, is competitive, and when users' cost of switching platforms is not unreasonably high, platforms lose market share as soon as they lose consumer trust.

For platforms in every country, there must be incentives for enhancing cybersecurity and protecting users' privacy based on highly transparent terms of service.

As the confrontation between the United States and China intensifies, the digital economy is about to become fragmented along geopolitical fault lines. In some cases, national security issues may require special considerations. However, instead of sitting idly by, we must act to restrain the rise of digital protectionism under agreed multilateral rules while upholding high standards that should be followed. We must promote competition between countries, including the United States and China, as well as innovation, and reduce global business risks.

To that end, Japan and Australia should take the initiative to form a united front of middle power countries and demonstrate how comprehensive and feasible cooperation can be realized toward the development of international rules in the era of digitalization.

>> Original text in Japanese

* Translated by RIETI.

August 9, 2021 Nihon Keizai Shimbun

September 10, 2021