Photographer: Simon Dawson/Bloomberg

The Dilemma of Digital Free Trade

A lot of international trade takes place over the Internet, where digital goods and services are bought and sold across national borders. But international trade policy is still catching up. The Trans-Pacific Partnership, the 12-nation agreement the Obama administration hopes to complete this year, will contain new types of rules governing digital commerce in a bid to ensure governments don’t block bits and bytes the way they’ve slowed down trade of physical goods with tariffs.

At the heart of those rules is an effort by the U.S. to persuade countries to do away with laws requiring data be stored on local servers. Leading that push is Robert Holleyman, a deputy U.S. trade representative and former software industry lobbyist. It’s his job to head off the kinds of measures that make moving data harder and more expensive. Laws forcing data storage within national boundaries interfere with economies of scale, he says, much the same way that requiring automakers to use only domestically sourced parts would raise the price of a car. The continued growth of cloud-computing services from the likes of Amazon.com and Google will depend on having a multinational set of clients underwriting staggering capital expenditures. “We’re trying to make sure that the costs of building and maintaining large data centers can be shared across borders,” Holleyman says.

South Korea and the U.S. already got a taste of the trouble that can pop up without explicit rules about data flows. The two countries’ 2012 free-trade deal exhorted both sides in vague terms to avoid impeding data flows. They soon found themselves at odds over whether, under a new South Korean privacy law, U.S. insurers and banks could transfer data out of the country. Both sides have kept the peace through regular meetings to ensure the law doesn’t hurt business, an unwieldy solution underscoring the need for clear rules.

For now, the U.S. spends much of its time countering the notion that local is necessarily better, or more private. Australia, part of the Pacific trade deal, requires that some health data be stored on in-country servers for privacy reasons. In 2013, the Office of the Australian Information Commissioner found that 79 percent of people thought that offshoring private data was a misuse of their information. Holleyman’s solution: The trade deal should emphasize consumer protection, regardless of geography. “Privacy can flow with the data,” he says.

Embracing digital free trade has helped fortify support among companies that otherwise might not fight for the approval of trade deals. Over the past decade, IBM has shifted its focus from hardware to IT services that involve, say, handling data in Missouri or Louisiana that originated with clients in Latin America and Asia. If IBM is no longer moving hunks of silicon across borders, then it needn’t fret about duties on them. That’s why IBM is in the trenches, urging Congress to give President Obama the authority to bring back the Pacific trade deal. “If this were only an agreement about tariffs, we would not care,” says Chris Padilla, the company’s top lobbyist in Washington.

Traditional manufacturers, too, depend on the free flow of bits and bytes in a way that’s seldom obvious. Data from Deere & Co.’s iconic green tractors pipe information from sensors that help optimize performance based on weather and other factors. Boeing planes can generate hundreds of terabytes of data in a single flight, information that helps ground crews around the world minimize downtime and extend an engine’s life. Says Brad Jensen, a professor of business at Georgetown University: “The need for the free flow of data is incredibly pervasive.”

The bottom line: A new trade deal might help sustain the growth of cloud-computing services from the likes of Amazon.com and Google.

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