Free Trade Zones

Towards an Asian digital trade zone – Analysis – Eurasia Review

By Anupam Chander*

Are the Himalayas too high for the internet to pass? The prospect of an Asian digital single market seems remote, especially when India and China seem to be going their separate ways. India is busy banning Chinese apps like TikTok, while China is enacting ever stricter rules on transferring data overseas. Asian governments still fail to see that rising above local disputes could pay huge dividends, bolstering their own economic security.

Digital Single Markets enable consumers and businesses to engage across national borders via the internet. They enable broad supply chains, create businesses that can compete globally, and lower prices for consumers and businesses. Digital single markets help small businesses by lowering the prices of key services ranging from design, marketing, customer relations and accounting to hiring employees in foreign countries. But achieving a digital single market is not easy. This requires a degree of regulatory integration that few countries are prepared for. Nations generally agree to abide by the country of origin principle, allowing a company to operate in regional markets under the rules of its home country.

Many of the benefits of a digital single market can be achieved through a digital trade zone. Digital trade areas do not require the high degree of integration or regulatory recognition required by digital single markets. Digital trade zones require the dismantling of trade barriers, but still require companies to respect the laws of the countries where they do business. While digital single markets potentially offer greater cost-cutting dividends for businesses, regulatory integration requirements mean they are often a distant ideal.

Continent-wide digital markets can be empowering, boosting local businesses and consumers in myriad ways, including reducing inflationary pressures. Without an ambitious program to promote digital trade, Asian countries risk falling behind and being relegated to providing digital services in declining geographies. They also risk being excluded from digital services in many foreign countries.

Many Asian countries have been reluctant to liberalize digital trade for two main reasons: its impact on tariffs and the protection of local businesses.

India and other developing countries fear that banning e-commerce tariffs will cut much-needed revenue. This is understandable given that the fiscal challenges facing developing countries have worsened with the pandemic. This concern could be alleviated by a new agreement led by the OECD which obliges large multinationals to pay at least 15% tax in the countries where they earn money. A customs moratorium does not prohibit internal taxes applicable to foreign and domestic suppliers, and does not target the Internet.

Countries also fear that their domestic industries will wither in the face of foreign competition if digital trade is liberalized. This approach risks protecting a few producers while sacrificing broader economic interests. Antitrust authorities must ensure that foreign (and domestic) companies do not engage in abusive practices to prevent competition. Foreign investment will be one of the key elements to help domestic businesses grow, but governments continue to view foreign investment with caution.

National cybersecurity concerns can be addressed through exceptions or reservations. Cooperation between Asian countries could actually strengthen cybersecurity for consumers and businesses by enabling united responses to ransomware and hacking incursions. Fintech providers can invest more in cybersecurity if they have larger markets to serve.

Some Asian countries have moved towards greater digital trade. Brunei, Japan, Malaysia, Singapore and Vietnam are all members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes an important chapter on e-commerce. Japan has concluded a digital trade agreement with the United States. Singapore leads in digital trade through a Digital Economy Partnership Agreement with Chile and New Zealand. But the e-commerce chapter of the Regional Comprehensive Economic Partnership contains no provisions on dispute settlement, resulting in obligations without obvious enforcement mechanisms.

Meanwhile, the world is forging deals that will create continental markets for digital commerce. The European Union launched its digital single market strategy in 2015. North America is building a digital trade zone among its largest economies, with an ambitious chapter on digital trade in the free trade agreement. exchange between the United States, Mexico and Canada. The African Union has started negotiations for an electronic commerce protocol in the African Continental Free Trade Area. Latin American countries of MERCOSUR and the Pacific Alliance have adopted treaties with digital trade commitments.

Even as some countries commit to opening up digital trade, they are simultaneously erecting barriers for others. Customs duties, business licensing requirements, data localization, data privacy laws and liability rules all pose significant barriers to cross-border digital trade.

The 2020 decision of the Court of Justice of the European Union in Schrems versus Facebook requires that most data transfers to Asian companies be subject to costly impact assessments that ask, for example, whether the Asian country offers recourse rights to foreigners in the event of local surveillance. This complicates transfers to Asian countries. One mechanism to facilitate data flows is a data privacy adequacy decision by the European Commission, but Japan and South Korea are among the very few countries in the world to have received such favorable treatment.

Regional agreements allow governments to pool their resources to regulate Internet companies. Investigating complaints from AI vendors, assessing cybersecurity protections, and auditing privacy practices can all be more easily handled through government cooperation. The Brussels effect, where EU regulation plays an outsized role, relies on the size of the huge market that EU regulators can offer to companies that comply with EU standards.

Asian countries should consider how expanding markets will create opportunities in the region. The Himalayas, despite its majestic height, should not prove impassable for the Internet.

*About the author: Anupam Chander is the Scott K. Ginsburg Professor of Law and Technology at Georgetown University.

Source: This article was published by East Asia Forum and appears in the most recent edition of East Asia Forum Quarterly“Asia’s Digital Future”, Vol 14, No 2.