Hello from Brussels. Now here’s an odd thing out of Washington that has people here and at the World Trade Organization in Geneva puzzled. The Trump administration has been chuntering for years about pulling out of the government procurement agreement of the WTO (in fact the WTO in general, but specifically the GPA) given the constraints it puts on Buy American support for domestic industry. So on Friday there was an actual decision-making meeting of all the relevant administration bigwigs in Washington, which sounded ominous enough that US senators from both parties started sounding the alarm.
And then . . . nothing. Silence. We gather that last week was the deadline to take the decision in time to implement the withdrawal before Joe Biden takes over as president. So if the aim was to give Biden a nasty political dilemma about whether to reverse it, it’s too late. One theory is that the administration hopes Biden might even countenance withdrawing from a limited part of the GPA, regarding procurement of Covid-related meds, in which case there’s no hurry. What a way to run American trade policy. We guess that should be no surprise by now.
Today’s main piece is how the EU, in thrall to inward-looking ideas about digital sovereignty, continues to absent itself from the global governance of cross-border data flows. In Tit for tat, David O’Sullivan, esteemed former head of the EU trade directorate, answers three questions, while our chart of the day looks at how Japan has lessons for the rest of the world.
The data that Brussels prefers to stay at home
The EU may not have its own army, nor a big enough pile of cash it can use to prop up or bring down foreign regimes. But it is nonetheless convinced that it is a global power through the influence of its product regulations, which often get adopted around the world.
For old-economy products it has a point. The so-called Brussels Effect, which we rarely stop going on about, is powerful for cars, chemicals and food hygiene. Producers worldwide follow rules written in the EU.
The EU seems confident this will extend to the digital economy, with the General Data Protection Regulation providing a global model for privacy. Certainly, regimes inspired by GDPR have been implemented in a lot of countries. But Brussels has some serious weaknesses as a digital rulemaker. Tech governance isn’t just about domestic regulation: it’s also about cross-border data flows. Possessed by mistaken beliefs about the threat to privacy, the EU remains allergic even properly to discussing that issue in trade talks.
Other governments rely on ad hoc data transfer deals with the EU through “adequacy” findings. But those are fragile and prone to aggressive litigation at the European Court of Justice, as the architects of the US Safe Harbor and Privacy Shield agreements can tell you.
Unhelpfully, the EU is focusing inwards rather than outwards and continually threatens to make disruptive moves. The latest iteration is the proposed Data Governance Act, which the European Commission’s top officials will consider this week. The final model has been fought over fiercely, with an intense battle between the instinctive regulators (internal market commissioner Thierry Breton) and the liberalisers (Margrethe Vestager and Valdis Dombrovskis, respectively commissioners for competition and trade).
Early leaked versions made trade folks blanch. They contained a form of data localisation requiring information collected by public authorities to be kept within the EU. Even more dramatically they created an “establishment requirement” that required companies handling data also to be based within EU borders. Both would have taken digital protectionism to new heights: every lawyer we spoke to thinks they clearly violated WTO rules on services trade.
As it happens, a fierce defensive action by the trade directorate and its allies have softened the provisions considerably. According to our soundings, it seems that by the end of last week, the latest iteration had made the controls on movement of public data more flexible and precise, creating narrowly defined categories of sensitive information that would be subject to restrictions. Meanwhile, the establishment rule had been reduced only to a requirement to have legal representation inside the EU.
But it’s still notable that there is a strong impetus in the EU to veer towards “data sovereignty” and the use of digital information as a form of domestic industrial policy rather than focusing on cross-border information flow.
Meanwhile, much of the rest of the world is going the other way. The Apec (Asia-Pacific Economic Cooperation) grouping of economies, the pointlessness of whose summits was traditionally satirised with the nickname A Perfect Excuse to Chat, has done something substantive for once. It’s evolving a “Cross-Border Privacy Rules System”, a government-backed certification scheme to allow qualifying companies to move data internationally.
Unlike the GDPR, the Apec system is flexible, risk-based and voluntary. Sabina Ciofu, head of EU and trade policy at the TechUK business association in Brussels, calls it “in effect a competing system to GDPR”.
Apec economies are also putting together deeper and binding data flow agreements among themselves, including a New Zealand-Singapore-Chile deal. Australia and Japan are also spinning webs of data agreements, including one in the recent Japan bilateral trade deal with the UK — provoking much boasting in London that it had outflanked Brussels. And here’s the important thing: as Japan shows, it’s perfectly possible to combine these agreements with a domestic data protection regime that the EU considers as equivalent to GDPR and certifies by an adequacy finding (to be fair that’s a bit trickier for Britain, given its proximity to the EU).
Data flow is one of the most pressing issues of globalisation, and there’s lots of talk about it right now. There are, for example, intriguing ideas kicking about to create a plurilateral for data flows that could incorporate the EU, US, Japan and smaller countries such as Canada.
Yet still the EU continues to look at tweaking its internal market rather than facing out. A fragile and uncertain cross-border trade regime and yet a refusal to contemplate binding international laws: this isn’t the attitude that made the EU the global rulemaker for cars and chemicals. At this rate, the biggest threat to the Brussels Effect for the digital economy will be Brussels itself.
As the world’s developed economies struggle to recover from the economic impact of the pandemic, they face ultra-low interest rates and low growth. Japan has been coping with these trends for several decades and has lessons for the rest of the world. This is the first in a series of articles that will appear this week.
Tit for tat
David O’Sullivan, senior counsellor at the law firm Steptoe, previously head of the EU’s trade directorate and then its ambassador to Washington, joins us to answer three questions.
What does the EU have to do to rebuild the transatlantic trade relationship under a Biden administration?
The past four years have done great damage. The election of Joe Biden will bring a welcome course correction, but we cannot ignore the zeitgeist. There is a sense of fatigue in the US body politic with the country’s global trade role, combined with a sense that there needs to be more focus on domestic problems. This means finding common projects where we can collaborate, such as climate change, the setting of global standards, eliminating industrial tariffs, developing a common approach to China and revitalising the WTO. We will also need some (necessarily limited) movement on agriculture to address the pervasive American sense that we treat them unfairly (which is not true).
Will disputes like the negotiation of a final settlement over Airbus-Boeing, or the digital services tax, derail transatlantic co-operation?
The transatlantic corridor is the single most important trade and investment corridor in the world and will be for decades to come. Where there is much economic interaction, there will inevitably be some friction. We will not eliminate that. But we need to manage the tensions better and draw some of the poison out of the system. Solving the Airbus-Boeing row is a priority because only China gains from the present stand-off. Energising the OECD work could help defuse the digital sales tax issue. Regulation of the big tech platforms will be controversial but there is growing unease about their behaviour also in the US. Dropping US tariffs on steel and aluminium would also help.
What’s changed most in EU trade policy since you were at the directorate?
The single biggest change is the shift from the multilateral to the bilateral or regional approach. The failure to agree a new multilateral deal in the WTO was a major setback for which we are all still paying the price. The EU reluctantly fell back on bilateral trade deals as a second-best option and is now at the centre of the largest network of free trade agreements ever seen, including the granting of unprecedented access to our markets for the least developed countries. Europe has thus been the greatest driver of trade liberalisation in recent years. The EU, nonetheless, remains firmly committed to resuscitating the role of the WTO.
Will China double the size of its economy by 2035, as President Xi Jinping proposed at a Communist party conference three weeks ago? To do so, the Chinese economy must grow annually by just over 4.7 per cent on average for the next 15 years. It grew 6.1 per cent last year, and by 6.7 per cent annually over the previous five years. In that context, 4.7 per cent a year seems quite manageable. But while the calculations may seem straightforward, there are economic and demographic constraints that are not.
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