The USTR’s Reversal on Digital Trade Will Hurt Small Business

Last month, the Office of the U.S. Trade Representative (USTR) announced it was abandoning the longstanding U.S. approach to digital trade rules. As we previously noted, this move will directly harm American workers, invite unfair treatment of U.S. companies, and threaten our global competitiveness.

These rules are framed to prevent foreign governments from unfairly targeting American companies. USTR’s shift sends a signal that Washington will no longer protest such discrimination against U.S. companies.

Of primary concern is that American small and medium-sized businesses will be hit hardest. Let’s take a step back to identify the issue and why it’s so critical to the success of smaller businesses across the U.S.

What is digital trade?

Digital trade is commerce enabled by electronic means. In other words, it is anything that is facilitated by digital technologies, whether digitally or physically delivered. For example, digital trade would include the purchase and physical delivery of a paper book through an online marketplace and the purchase and digital delivery of an e-book.

Why does it matter to small businesses?

Digital trade is opening markets to American small businesses, which have seen their overseas opportunities grow thanks to e-commerce platforms and digital advertising tools that allow them to benefit from the following (among many other things):

• find new customers via targeted online search and other tools;
• adopt e-payment systems that ensure quick, economical, and safe transactions;
• employ cloud technology that allows them to operate with the sophistication of a major multinational business; and
• utilize shipping, customs clearance, and fulfillment providers that enable them to send products worldwide.

How will USTR’s move impact small businesses?

Unlike larger companies, smaller businesses with fewer products, service lines, and resources usually cannot carry the increased costs of data localization, forced technology transfers, and arbitrary application of regulation to U.S. firms.

Removing U.S. support for combating cross-border data restrictions will make it easier for other countries to impose costs in the form of tariffs or other measures on critical data flows. It will also make it harder for smaller businesses to move their data across borders. Additionally, removing that same support for source code protections will make it easier for adversaries to carry out cyber and intellectual property theft against vulnerable businesses. Lastly, weakening protections for U.S. companies abroad will incentivize foreign governments to employ discriminatory practices to generate revenue or meet political goals—all at the expense of the U.S. economy.

This all comes at a time when global barriers—like data localization measures and other regulatory restrictions—to U.S. digitally tradeable services exports are on the rise. Left unchecked, the proliferation of these restrictions threatens to deprive American workers and companies of the potential benefits of exporting digitally tradeable services.

Why did USTR do this?

A USTR spokesman stated that the move was made “to provide enough policy space” for debates on digital trade to unfold. The efforts have been driven by Sen. Elizabeth Warren (D-MA), a handful of other senators and House members, and progressive groups that support additional, and costly, restrictions on digital trade. However, USTR’s move has drawn a bipartisan rebuke from a majority of Capitol Hill and the business community.

The opposition to USTR’s action stems in part from the fact that the argument for “more policy space” is inadequate and misconstrued. The international due process disciplines in question — which are already enshrined in tenets of U.S. law, including the U.S.-Mexico-Canada Agreement — are subject to public policy and national security exceptions. The U.S. drafted these legal standards specifically to preserve ample discretion to regulate in the public interest. The disciplines also permit legitimate public policy regulation of how companies might handle customer data, among other related activities.

More importantly, other countries could be enticed to use similar “policy space” arguments to defend discriminatory behavior against U.S. companies.

This decision will harm businesses

USTR’s decision will make it easier for U.S. adversaries to harm our nation’s strategic and economic interests by making it more difficult to protect U.S. government and businesses’ access to overseas data.

Perhaps most importantly, the move further isolates the U.S. from a coalition of democratic countries focused on resisting digitally authoritarian policies writ large, pulling us closer to countries that espouse non-market economy-oriented trade practices.

As noted in a recent letter outlining the decision’s impacts on smaller firms, which was led by colleagues at ACT | The App Association:

“Stepping away from the negotiating table weakens the global competitiveness of U.S. startups and small businesses and cedes leadership to countries like China that remain at the table, buoying anti-democratic and oppressive governance proposals and policies that directly contradict U.S. policies, including those just agreed to by the United States in the G7.”

Small and medium-sized businesses are resilient, but that doesn’t mean they are impervious to the harm wrought by sudden policy changes. They shouldn’t have to worry that the U.S. government won’t have their back.