Friday, 28th February 2020

Countries need a strong trade agreement to halt digital protectionism and boost productivity

Advances in technology are enabling significantly more services to be traded across borders, but this disruptive competition has led many countries to use protectionist policies to help “local champions” in the technology sector and protect small, incumbent service providers at the expense of global economic growth, according to a new analysis by the Information Technology and Innovation Foundation (ITIF). ITIF, a leading technology policy think tank, urges policymakers to establish a strong Trade in Services Agreement (TiSA) to update the rules governing services trade for the digital age and thereby boost global productivity and innovation.

“The international trade rules for services were mostly established in the mid-1990s, a world away from the Internet as we know it today,” said Nigel Cory, ITIF trade policy analyst and the report’s co-author. “Services that once had to be offered locally, such as retail, news, higher education, banking, and health care can now be accessed remotely. The technologies that make this possible create economic growth and improve people’s living standards wherever they have been allowed to flourish. But this is being put at risk as current rules do not protect modern services trade. In particular, outdated rules allow countries to effectively close themselves off to foreign competition by adopting protectionist regulations. Done right, TiSA gives us a chance to update the global services trade rules to create an environment that would significantly spur innovation and productivity.”
Cory and his co-author Stephen Ezell, ITIF’s vice president for global innovation policy, explain that digital technologies are driving a rising share of services trade in the global economy because consumers and businesses can now interact remotely. Furthermore, companies are piecing together service inputs from around the world as part of specialized production networks, much the way traditional manufactured goods have been able to operate in recent decades. Increased services trade is important because it can enable higher levels of productivity, which is the central driver of sustainable increases in living standards.
The report explains that in the face of disruptive competition, many countries are using nontariff barriers as a form of digital protectionism to support domestic companies. These restrictions include limitations on foreign investment, citizenship or residency requirements, limits on the number of firms permitted to operate in a market, requirements to enter into joint ventures, not recognizing qualifications and licenses, restrictions on foreign employees’ temporary visas and freedom of movement, and a general lack of regulatory transparency and certainty. These barriers are costly, especially for data-intensive firms, Cory and Ezell say.
The report offers a number of recommendations for negotiators to ensure that TiSA supports and protects modern services trade, both now and in the future:
  • Provide non-discriminatory and open-market and investment access to a broad range of service sectors;
  • Clarify how countries treat modern services in their market access commitments, as current trade rules use outdated definitions and classifications of service categories. To prevent this happening again, include a “future proofing” mechanism that addresses how members treat new types of services;
  • Require TiSA members to extend any market-access concessions made in future bilateral and regional trade deals to members of TiSA;
  • Include new rules to support and protect e-commerce and the free flow of data, including rules to prohibit barriers to the free flow of data by all service sectors in the agreement;
  • Establish a benchmark of regulatory best practices and a process to use this as part of a test to identify which regulations are motivated by legitimate public-policy goals and which are purely protectionist; and
  • Improve regulatory transparency by ensuring that trade-related rules and regulations are made through a clear, accessible, and participatory process.
“A focus on trade in services has long taken a backseat to goods trade, despite the fact that services account for around 70 percent of the global economy,” said Ezell. “So now we are at an inflection point: TiSA is an opportunity to liberalize the kind of trade that represents the very heartbeat of the modern global economy. Conversely, if negotiators cannot craft a high-standard agreement, many countries will give in to the temptation to erect barriers to technology-enabled services trade, which would be to the detriment of global growth.”
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