China Center International Economic Exchange Research Report
No. 40 （Total No. 1124）
August 17, 2021
A Perspective on the U.S. Proposed Indo-Pacific Digital Economy
and Trade Agreement
Edward Zeng
June 2021
The COVID-19 pandemic has inflicted a massive impact on the global economy and trade; however, it has simultaneously accelerated the development of digital economy in various countries. As the global economy continues to digitize, the formulation of comprehensive, high-level digital economy and trade agreements has become an urgent matter facing the world's major economies. The digital economy is a crucial battleground for future competition and rivalry between China and the United States. Recent media reports suggest that the United States is in the process of drafting a multilateral digital economy and trade agreement that covers India and the Pacific region. The return of the United States to the Asia-Pacific through the vehicle of a digital trade agreement demands significant attention and consideration. This article will interpret the intentions behind the United States' efforts to promote a digital economy and trade agreement and its potential impact on China, and make recommendtions on China’s responsive strategies.
I. The purpose of the United States proposing the Indo-Pacific digital trade agreement
The United States' intention in pushing an Indo-Pacific digital trade agreement at this juncture primarily revolves around three key points:
(I) Counter and contain China. The United States is drafting the digital trade agreement with the intention of countering and containing China. Since taking office, President Biden has adopted an extremely tough stance towards China. The launching of a digital economy and trade agreement is aimed at isolating China in the Asia-Pacific region and using this opportunity to create a multinational alliance to restrain and counter China's development, especially its rapid rising in digital economy and trade development in the Asia-Pacific region.
(II) Return to the Asia-Pacific region. The United States is re-embracing multilateralism and, through ideological demarcations and alliances, seeking to contain and exert pressure on China in various fields and regions in the Asia-Pacific. The Asia-Pacific region is the core strategic area for the United States in its confrontation with China. The decision to withdraw from the Trans-Pacific Partnership （TPP） during the Trump era significantly diminished American influence in the Asia-Pacific region. The United States urgently needs a point of re-entry into the Asia-Pacific to regain influence and compensate for the setbacks it faced in the region during the Trump era. Currently, the political cost for the United States to revive the TPP or directly join the Comprehensive and Progressive Agreements for Trans-Pacific Partnership (CPTPP) is prohibitively high. In contrast, an emerging digital trade agreement comes with a relatively lower cost and allows the United States to demonstrate leadership more easily. By reaching an agreement in the specific field of digital economy, the trust of CPTPP member countries in the United States can be restored, laying the foundation for the United States to rejoin the CPTPP.
(III) Seize the initiative in digital trade rules. The United States intends to use the digital trade agreement to seize the initiative in shaping future developments in this field. With economic development, digital trade will increasingly occupy a larger share of global trade. As a global leader in the Internet sector, the United States aims to exercise leadership through digital trade agreements, shaping rules that favor its interests. This not only stands to bring significant benefits to its companies in the global digital economy but also serves to restrain countries with the potential to challenge U.S. dominance in the Internet sector. In recent years, the Asia-Pacific region has witnessed rapid development in digital economy, becoming a crucial arena for competition among multinational Internet companies. If the United States seizes the initiative and collaborates with Asia-Pacific nations to sign a digital trade agreement, China will lose first mover advantage not only in the Asia-Pacific arena but also on a global stage.
II. Assessment of the direction of the negotiations for an Indo-Pacific Digital trade agreement
(I) The negotiation will result in a digital trade agreement with American characteristecs. In the formulation of digital economy and trade rules, China, the United States, and Europe have their respective demands. China advocates strengthening digital security and regulation, and the European Union leans towards enhancing the protection of privacy, intellectual property rights and consumer rights, while the United States emphasizes the free flow of cross-border data. Based on current information, the U.S.-led digital trade agreements may include rules related to cross-border data flow, digital privacy, and the use of artificial intelligence in Asia. These rules are likely to exhibit distinct American characteristics. During the Obama administration, the United States had already taken a strong lead in shaping the first set of digital trade rules. For instance, the Trans-Pacific Partnership (TPP) included a significant number of digital economy and trade rules that reflected American influence. The digital trade chapter within the TPP also served as a source of inspiration and reference for many subsequent agreementss. In the later stage of the Trump administration, the United States consecutively signed the United States-Mexico-Canada Agreements (USMCA) and the dedicated United States-Japan Digital Trade Agreements (UJDTA), both of which included digital trade chapters. In summary, American-style digital trade agreements exhibit the following characteristics: zero tariffs, data freedom, opposition to data localization, and significantly reducing government regulation and oversight. The terms of an Indo-Pacific digital trade agreement are also likely to draw inspiration from USMCA and UJDTA.
(II) The United States seeks to include as many so-called allies in the Indo-Pacific region as possible. According to reports, countries currently expressing interest in joining include Australia, Canada, Chile, Japan, Malaysia, and Singapore. Moreover, it is highly likely that other CPTPP members such as Mexico, Peru, Vietnam, and Brunei will also join. India has become an important pawn for the United States in countering China, and it is highly likely that India will also be included in this digital trade system. An Indo-Pacific digital trade agreement primarily aims to open up to the United States' relevant allies in the Asia-Pacific region while excluding China. In essence, this is an attempt by the United States to establish a digital alliance in the Indo-Pacific to limit China's influence. This approach bears some similarity to the U.S. government's export control in advanced technology fields.
(III) Analysis of the three paths for the United States to promote an Indo-Pacific digital trade agreement. Currently, the Asia-Pacific region has established several digital trade agreements. In June 2020, Singapore signed the highly influential Digital Economy Partnership Agreements (DEPA) with Chile and New Zealand, and in December, it signed the Singapore-Australia Digital Economy Agreements (SADEA). In June 2021, Singapore initiated negotiations for a digital economy and trade agreement with the United Kingdom. Among these agreements, DEPA stands out as a leader and has garnered close attention from many countries. Nations such as South Korea, Canada, and Vietnam have all expressed their interest in joining. Currently, none of China, the United States, and Europe has participated in multilateral digital economy and trade agreements in the Asia-Pacific region. DEPA has temporarily filled this void. DEPA adopts a modular negotiation model, allowing prospective members to join by satisfying certain provisions of DEPA. This significantly simplifies the process for new member countries to join. The United States has three paths in promoting the Indo-Pacific digital trade agreements: The first path involves the United States taking a new initiative, starting fresh digital trade negotiations in collaboration with its Asia-Pacific allies. The second path is akin to the TPP formation route, with the United States joining the DEPA led by Singapore. This path would gradually evolve to be centered around the United States, minimizing，to the greatest extent possible， the political cost that might be associated with its involvement. The third path is a combination of the first two and is the most likely one for the United States to pursue. It involves direct negotiations with the United States at the core, while using DEPA as a framework and foundation. This path would entail expanding upon the existing DEPA framework by incorporating or modifying certain provisions to align with U.S. needs. Specifically, the first path involves a more complex negotiation process, with the need to balance the interests of all parties, making it a lengthy negotiation process with a high political cost. It would be challenging for the United States to swiftly establish a digital trade agreement favorable to its interests in the short term through this path. As for the second path, directly joining DEPA would position the United States relatively unfavorably in the negotiations, as the aftermath of the U.S. withdrawal from the TPP still leads to mistrust from many countries towards the United States. The third path circumvents the main issues of the first two paths and takes the advantages of DEPA. It enhances negotiation efficiency, reduces the negotiation timeline, and demonstrates the United States' leadership and determination to return to the Asia-Pacific region.
III. Challenges and impact from China’s perspective
Once the U.S. proposed Indo-Pacific digital trade agreement is put into reality, it will pose challenges to China on multiple fronts.
(I) It will exert restraint to a certain extent on the global expansion of China's digital economy. Currently, the global digital economy is growing rapidly, and both China and the United States are digital economy giants, with China holding a comparative advantage in many aspects. The United States also places significant importance on the development of the digital economy and does not wish to be overtaken by China in this field. Digital trade rules will have a profound impact on the future economy. Whoever holds the power to establish digital trade rules will essentially dominate its future development. Once an Indo-Pacific digital trade agreement is reached, it will serve as a model for digital trade in the Indo-Pacific region and may restrict Chinese digital companies’ expansion in this area and even globally.
(II) It will have a significant adverse impact on China's development in the Asia-Pacific region. The proposed Indo-Pacific digital trade agreement implies a clear exclusive nature and attempts to create an alliance to counter China in the field of digital economy. According to some reports, the Biden administration hopes that this agreement, along with the "Indo-Pacific Strategy," can become one of the two pillars supporting the United States in countering China in the Indo-Pacific region. If this agreement is successfully signed, the United States is very likely to leverage it to conduct cooperation in other areas such as carbon tariffs, healthcare, supply chains, and high-end technology. Eventually, it may even join the CPTPP to form a more comprehensive economic alliance in the Asia-Pacific region. This will exert significant pressure on China's development in the Asia-Pacific region and impose substantial limitations on China's influence in the area.
(III) It presents significant challenge to China's participation in the formulation of global digital economy governance rules. Currently, there is no consensus framework in the digital trade domain, and major economies are competing to establish digital trade rules that serve their own interests. China, as an emerging power of digital economy, is also actively participating in the formulation of global digital rules to better safeguard its long-term interests in its digital economy development. As the first multilateral digital trade agreement led by major powers, an Indo-Pacific digital trade agreement will influence the future formulation of international rules on key issues such as models, taxation, privacy, and security. If successful, the United States will actively extend the core rules of the Indo-Pacific digital trade agreement to digital trade negotiations with other economies and even the formulation of WTO digital trade rules. This will allow the United States to dominate future development in this area. While China will be put in an disadvantaged position in its efforts to formulate future digital trade rules in favore of its own interests.
IV. Recommended countermeasures
To address the potential threats posed by the Indo-Pacific digital trade agreement proposed by the United States, it is important to strengthen monitoring and research efforts, as well as to make adequate preparations and contingency plans. The main recommendations are as follows:
(I) Support countries to negotiate new digital trade deals within the framework of the WTO. Currently, it is crucial to uphold the orderly development of international trade through the global multilateral trade system. Support should be provided for countries to engage in negotiating new digital trade deals within the framework of WTO, seeking broad consensus to promote high-quality global trade development. Support should be extended to WTO in maintaining its central role in addressing cross-border data flows. Rules governing cross-border data flows should be established based on risk considerations, encouraging innovation and fair taxation. Additionally, rules should be created based on safeguarding cybersecurity for data localization. Concerns of individual countries regarding market access for digital products and services should be respected；digital intellectual property should be reasonably protected; and efforts should be made to facilitate digital trade.
(II) Strengthen negotiations on digital trade agreements with countries in the Asia-Pacific region. On one hand, China should strenghthen cooperation with the countries in the Asia-Pacific region in digital trade, support its Internet companies in expanding their businesses in the region, and further its engagement with these countries in digital economy. On the other hand, it is essential to engage in digital trade negotiations with key countries in the region. For example, negotiations can be initiated with countries such as Japan, South Korea, and Singapore. Additionally, efforts should be made to upgrade digital trade rules within the Regional Comprehensive Economic Partnership (RCEP) framework. The successful conclusion or upgrading of these digital trade rules will, to some extent, offset the negative impact of the U.S. proposed Indo-Pacific digital trade agreement on China.
(III) Strengthen cooperation with the European Union in the formulation of digital economy and trade rules
The European Union plays a significant role in the formulation of digital trade rules, and China should enhance communication and cooperation with the EU in this field. The EU and the U.S. have significant differences in several areas of digital economy, including government regulation, privacy protection, consumer rights, as well as how to address the monopoly issue of multinational Internet companies. In recent years, the EU has imposed fines on Google and taxed Facebook, which is detrimental to the development of American Internet companies and its digital economy model. There is a possibility of reaching consensus between the EU and China on certain issues, such as government regulation and antitrust measures. Especially in the current situation, in which the Comprehensive Agreements on Investment (CAI) is stalled, China can engage in negotiations with the EU in the field of digital trade, aiming to reach a China-EU digital trade agreement as soon as possible.
(IV) Deepen digital trade cooperation among all parties on the Belt and Road platform
China can collaborate with the countries participating in the Belt and Road Initiative to explore and ultimately introduce modular digital trade agreements on the Belt and Road platform. This will increase China's influence in the formulation of WTO digital trade rules, deepen the implementation of the Belt and Road strategy, and thus facilitate the introduction of solutions to digital trade issues with Chinese characteristics on the international stage.