Trump trade deficit obsession could hurt digital industries

This is a corner of the global economy where the United States is unmistakably dominant.

By David Lynch / The Washington Post

In the nearly 10 hours that it takes a Boeing 737 to fly from Sao Paulo to New York, its twin engines will transmit a flood of digital data roughly equivalent to 15,000 Blu-ray movies.

That electronic Niagara provides a continuous readout on the jet’s performance, giving ground-based technicians a head start on unanticipated repairs and reducing costly down time.

This is a corner of the global economy where the United States is unmistakably dominant: the trade in digital services such as “big data,” cloud computing, and streaming video.

Now, President Donald Trump’s trade policy may be risking U.S. dominance in the data-rich industries of the future in a bid to protect the metal-bending businesses of the past.

China, Russia, the European Union and various nations are erecting barriers to the free flow of data that companies increasingly sell as a product or use as a tool. Those obstacles threaten roughly $400 billion of annual U.S. exports and the bottom line of companies including IBM, Citibank, Federal Express and Visa.

To combat such digital protectionism, the Trump administration wants to “modernize” the 23-year old North American Free Trade Agreement to prevent U.S. trading partners from requiring that data be processed or stored within their borders. Such measures create the equivalent of gated internet communities, hurting U.S. companies, driving up technology costs and crimping economic growth.

While NAFTA governs U.S. trade with just Mexico and Canada, business leaders hope its digital terms will serve as a model for other agreements around the globe.

But the NAFTA talks are snagged on Trump’s demands for concessions from Mexico and Canada involving traditional industries such as automobiles, raising the prospect of an impasse that could leave U.S. companies without the new digital trade rules they seek. Trump has repeatedly threatened to quit the pact.

“It’s obviously clear that the Trump administration has a set of different priorities: autos, government procurement, etc., that are designed in such a way that it puts everything else at risk,” said Nigel Cory, an analyst with the Information Technology and Innovation Foundation.

Emily Davis, spokeswoman for the administration’s chief trade negotiator, Robert Lighthizer, declined to comment on whether the U.S. approach in the NAFTA negotiations could jeopardize digital free trade. But she noted that the administration had identified the subject as one of its objectives in the renegotiation.

In trying to update NAFTA, which was written before the internet age began, negotiators are grappling with questions such as how freely computer data can flow across national borders, whether companies should be compelled to provide foreign governments the blueprints or “source code” for their software in return for market access, and whether third parties could be held liable for what others publish on their websites.

While the president often gripes about foreign traders taking advantage of Americans, the United States last year enjoyed a $159 billion surplus in the broadest measure of digital services trade, including an $18 billion bulge with Mexico and Canada, according to Commerce Department figures.

More than half of the global U.S. services surplus — and nearly 20 percent of total U.S. exports — is linked to digital markets.

Mexico and Canada already have agreed to new digital rules in a separate trade deal, the 11-nation Trans-Pacific Partnership. But Trump withdrew the United States from that pact in January.

“We don’t have great rules on digital trade,” Sarah Thorn, Walmart’s senior director of global government affairs, told a recent conference in Washington. “We’re just starting to think … about what’s going to happen in the next 10 or 15 years, as technology moves faster and faster and faster.”

For the United States, digital services represent both a lucrative export and an essential operational tool. Four companies — Amazon, Google, Microsoft and IBM — dominate the $90 billion annual global cloud computing market, according to a U.S. International Trade Commission study released in August.

Cloud storage is just one example of a business that did not exist when NAFTA debuted in 1994. NAFTA language allowing data to flow beyond national boundaries is needed so that other innovative technologies, such as artificial intelligence and algorithms, can flourish, companies say.

But it’s not just internet titans such as Google and Facebook that want new trade rules barring countries from discriminating against foreign providers of digital products or imposing customs duties on them. The financial services industry is also seeking NAFTA language that would bar a country in most circumstances from requiring that data gathered within its territory be processed and stored there.

“It is the ‘modernization’ in modernizing NAFTA,” said Kevin Propp, director of policy for BSA, a trade group also known as the Software Alliance. “… NAFTA is silent on this set of issues because this form of the U.S. economy didn’t exist 25 years ago.”

The stakes were evident earlier this month when Amazon Web Services suddenly announced it was selling its cloud computing servers in China to its Chinese partner, Beijing Sinnet Technology, for $302 million. The U.S. company acted to comply with new Chinese cybersecurity regulations that broadened an existing prohibition on overseas data transfers.

Lighthizer, the administration’s trade negotiator, complained last month that Mexico and Canada were dragging their feet on including in NAFTA the digital trade language that they had accepted in the Pacific deal. They are unlikely to formally accept those provisions while Washington insists on a radical rewrite of the parts of the agreement governing traditional industries, analysts say.

The standoff is complicating a push by U.S. companies to secure trade rules that allow them to store data wherever it makes the most commercial sense – not divided into separate and duplicative facilities in individual countries.

Otherwise, the result could be a balkanized Internet, as trading partners in Asia and Europe favor their own companies at the expense of the United States, some executives say.

“It would be very damaging if we weren’t able to reach agreement,” said Christine Bliss, president of the Coalition of Services Industries.

The drive for new trade rules reflects the explosive growth of internet networks. By 2015, cross-border data flows were 45 times larger than a decade earlier and were forecast to grow another nine times by 2020, the McKinsey Global Institute reported last year.

“Flows of physical goods and finance were the hallmarks of the 20th-century global economy, but today those flows have flattened or declined. Twenty-first-century globalization is increasingly defined by flows of data and information,” McKinsey said.

Each day, for example, Rio Tinto mining equipment in the United States, Mongolia and Australia exchanges about 30 gigabytes of data with a central facility in Perth, Australia. That allows the company to save millions of dollars by deploying its gear more efficiently.

Yet even as digital devices and services proliferate, countries such as Vietnam, Russia, Indonesia and Brazil have been raising barriers to such trade: Eighteen 18 countries block accounting, tax and financial information from transiting their electronic borders while 13 restrict the flow of digitized personal information, according to the ITIF.

U.S. companies complain that such localization measures force them to invest in expensive and redundant servers. They also drive up computing costs in those markets by 30 percent to 60 percent, according to a 2015 study by the Leviathan Security Group.

“One reason that governments do that is to favor their national champions and their local banks,” said one U.S. banking executive. “Those are negotiations where, frankly, we don’t have much leverage.”

On November 18, the U.S. Chamber of Commerce opposed the Brazilian Central Bank’s proposed cybersecurity regulations that would bar financial institutions such as Citibank and JPMorgan Chase from using data processing and cloud computing services based abroad. The prohibition would raise costs, make fraud detection more difficult and place a “huge burden” on banks, the chamber said.

Mexico and Canada have largely eschewed such trade barriers, although the Canadian provinces of British Columbia and Nova Scotia require personal information collected by public agencies to be stored on domestic servers.

China — home of “the Great Firewall” that blocks services such as Facebook and Google — introduced a series of measures designed to reduce data flows after former NSA contractor Edward Snowden’s 2013 revelations of widespread U.S. electronic spying.

Among them was a regulation requiring all health and medical data on Chinese citizens to be stored on servers located inside the People’s Republic.

The regulations mean that IBM must install costly additional servers in China, even if its facilities outside China have unused capacity, while the company’s hospital customers get a less-capable version of IBM’s data analytics.

The IBM application is designed to compare health records against a global disease database of perhaps 10 million patients. But because a Chinese hospital is prohibited from sending patient data outside the country, its records can only be compared against the smaller Chinese population with the same symptoms.

A new Chinese cybersecurity law this year extended the limits on data transfer beyond health care to all computer network operators.

“You’re not going to get ‘big data,’ ” said one executive. “You’re going to get ‘medium-sized data’ and that leads to worse outcomes.”

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