Toward a New International Order for the Digital Economy

The Biden administration has inherited a number of policies from the Trump administration that will shape the course of the U.S.-China relationship. Many policies, such as the tariffs imposed on Chinese goods, will remain in place as the new administration seeks to maintain some of the unilateral pressure on China that was characteristic of the previous administration. The future of other policies, such as the Trump administration’s last-ditch effort to ratchet up tensions with China by amplifying ties with Taiwan or the U.S. efforts to inhibit the operation of the World Trade Organization (WTO), remains unclear. But, divergent nomenclature with respect to the China policy aside, there exists a baseline consensus in Washington that China’s system of governance and overseas ambitions pose a strategic and economic threat to the United States and its democratic way of life. The real legacy of the Biden administration will be how it addresses next-generation international challenges. Reinvigorated U.S. leadership is needed to address challenges posed by China’s tech ambitions and their implications for the international digital economy.

New and emerging technologies have given rise to new issues that the current system of international economic law is ill equipped to address. The current international trade regime did not seriously contemplate surveillance, censorship and commercial espionage as they currently exist, whether in the negotiations toward the original General Agreement on Tariffs and Trade (GATT) or the subsequent talks on trade in services. In the current situation, however, these problems are endemic to trade with China. They can no longer be addressed on an ad hoc, discrete basis at the domestic law enforcement level, as they currently are. Instead, the United States must work with like-minded allies and partners to write new rules for and shape the direction of a new international trade regime in light of these rapidly evolving challenges.

Background on the Current System

China’s accession to the WTO in 2001 represented the optimism of WTO members in China’s ability to integrate into the system of international economic law founded at Bretton Woods. However, China’s continued failure to abide by the commitments made in its Protocol of Accession, in addition to the Chinese leadership’s willingness to engage in predatory economic practices at home and abroad, demonstrate that its political and economic models are incompatible with the current system.

The WTO has several deficiencies with respect to China. A proper evaluation of these shortcomings can provide guidance in the development of a new legal regime focused specifically on trade and procurement in information and communications technology (ICT). First, the WTO is aimed primarily at regulating trade in goods. While the General Agreement on Trade in Services (GATS) constitutes an admirable effort to liberalize trade in services, it is riddled with exceptions and enables countries to maintain significant barriers to market access. Moreover, neither the GATT nor the GATS contemplated the unique nature of software or telecommunications technologies being employed for authoritarian purposes such as censorship, surveillance and commercial espionage, which are arguably the biggest threats posed by Chinese-owned technology companies. As a result, the WTO has been inadequate as a forum to adjudicate related disputes. Second, the WTO’s general principles presume that a degree of market capitalism exists in the member states. They cannot, however, account for China’s unprecedented system of state capitalism. China is effectively able to claim good-faith implementation of its WTO commitments while covertly subsidizing major industries and using its regulatory regime to unofficially discriminate against foreign companies. The third inadequacy follows from the first two: A tech-enabled authoritarian regime that does not appear to have any genuine interest in transitioning to a more market-based system cannot be accounted for under current WTO rules.

Even so, the WTO has not been wholly unsuccessful in precipitating policy changes in China. It has, at the very least, served a channeling function that induces China to integrate into the global economy and abide by the consensus-based rules of the road. However, the current rules did not anticipate the tech-enabled authoritarian behemoth that China would ultimately become. Given that these problems largely occur in the ICT sphere, a new—and perhaps complementary—international legal regime is warranted to address them.

The SPADE Regime

The new international regime to address the aforementioned issues would be founded on the following principles, each of which would be supported by its founding members: no surveillance, no censorship and no commercial espionage. As a result, this regime would naturally have to exclude China at the outset—and perhaps indefinitely—given the realities of China’s current political and economic model. Such a body could be named the Secure and Prosperous Area for the Digital Economy (SPADE), drawing on existing language that the Biden administration appears to be employing in its Asia strategy. The regime would begin by gaining the membership of the major technologically advanced and sufficiently like-minded democratic economies—namely, the United States, Australia, Canada, the European Union, India, Israel, Japan, South Korea, Singapore, Taiwan and the United Kingdom—and proceed to develop legal standards aimed at harmonizing domestic legislation in the areas of trade, investment and procurement in ICT. The goal of such a union would be to leverage the weight of the leading technological powers to develop principles that would ultimately be adopted in domestic legislation.

The new regime’s focus on developing detailed standards derived from the three aforementioned principles and monitoring the implementation thereof would distinguish it from the WTO and address the problem of enabling member states like China to shirk their original commitments. A greater focus on standards in relation to the overall legal commitments of member states would enhance its utility in the ICT context as compared with the WTO, which itself does not set standards. Such standards could draw on those in existing free trade agreements among member states. In addition, the emphasis on standards would stem from a recognition that the aspirational principles of SPADE cannot be achieved without substantive harmonization of domestic legislation, which would serve as the primary means of combating the challenges of censorship, surveillance and commercial espionage.

The new regime would be more liberal in terms of authorizing self-help remedies. Rather than waiting until a dispute arises between two or more countries to adjudicate, SPADE would focus on proactively identifying countries in derogation of the agreed-upon standards and preemptively authorize members of the bloc to take action against such countries. This forward-looking approach and proactive system of monitoring would account for the drawbacks inherent in the WTO’s inability to provide for retroactive compensation, which has enabled China in particular to continue violating its commitments without sanction until the WTO Dispute Settlement Body arrives at a decision.

While a number of think tanks and scholars have developed related proposals, SPADE would be more ambitious in furthering comprehensive legal principles and corresponding standards. If implemented, such a regime has the potential to shape the direction of international economic law in this area and facilitate the adoption of domestic legislation that provides for effective self-help remedies.

Unlike the more limited scope in existing proposals, the treaty organization should encompass all ICT issues, not just cybersecurity, and be grounded in the three aspirational principles of no surveillance, no censorship and no commercial espionage. A mediation body within SPADE could be created to specifically address cybersecurity disputes. An additional focus would be monitoring global compliance and proactively identifying countries that would be jointly sanctioned. A neutral body akin to the one envisioned by Geoff Mulgan that shares characteristics with the International Atomic Energy Agency could serve as the independent watchdog in this regard.

The new regime must also be ambitious in terms of membership. The United States and India, for example, certainly diverge in certain aspects of digital trade. However, India is an important strategic partner and—not insignificantly—is the world’s largest democracy. To exclude India at the outset, as some of the existing proposals suggest, would constitute a colossal mistake and a missed opportunity. Although India has a less than stellar record on censorship, the Modi government has demonstrated its willingness to tackle some of the specific issues presented by China in its own domestic economy. There is enough of a shared conception vis-a-vis the challenges presented by China’s tech ambitions to build a consensus and make India a likely founding member of SPADE, even if differences on data localization, encryption and taxation require protracted negotiations. The United States could address these issues on a bilateral basis before seeking to integrate India into the SPADE talks.

Finally, SPADE should not be viewed as a less formal WTO. Viewing it as such would remedy none of the shortcomings of the WTO in digital trade and result in the same problems. As Richard Haass notes in the introduction to Robert Knake’s report on weaponizing digital trade for the Council on Foreign Relations, “requiring a global consensus as has been the case in [WTO] negotiations and previous climate talks is a recipe for failure or at most modest accomplishment.” Instead, the first order of business should be developing standards that garner enough support among each of the founding members to be adopted unanimously, and subsequently grant membership only to countries that can demonstrate the requisite commitment and implementation.

U.S. Approach in the Near Term

SPADE can serve as the end goal, but the United States can take a number of intermediate steps in the near term to make its realization more probable. The Biden administration has taken office at a critical juncture in the U.S.-China relationship, against a backdrop of a more digitally oriented economy that has proliferated as a result of the coronavirus pandemic. Furthermore, Biden has inherited a number of the Trump administration’s policies and initiatives aimed at China. As a first step, the new administration should recognize that many of these steps taken by its predecessor have been positive when it comes to defending the U.S. economy and critical infrastructure against Chinese tech ambitions. It should build a more comprehensive strategy to address them, with a reasonable degree of decoupling in the ICT sphere as a necessity in the near term.

First, the United States must maintain unilateral pressure on China. Trump’s executive orders on TikTok and Huawei were a missed opportunity, as they were drafted in a seemingly spurious manner and ultimately ended up being blocked in federal courts. Instead, the Biden administration should look to the existing legal authority it has under the recent Foreign Investment Risk Review Modernization Act (FIRRMA) to address China’s tech ambitions. FIRRMA was developed on a bipartisan basis and expanded the scope and authority of the Committee on Foreign Investment in the United States (CFIUS). Many of its provisions have implications for the U.S.-China economic relationship, as CFIUS now has the authority to review nonpassive investments in companies that deal with critical technology, critical infrastructure or “sensitive personal data of United States citizens that may be exploited in a manner that threatens national security.” FIRRMA certainly contemplated the challenges presented by Chinese software companies. Beyond this, the Commerce Department has recently promulgated a regulation that will grant the secretary authority to prohibit ICT transactions involving technology or services that have been “designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary”—including China. This serves as another powerful regulatory tool that the Biden administration could employ to secure the U.S. ICT infrastructure.

More generally, the United States should continue to make use of its wide variety of export control laws and other unilateral measures to address threats posed by Chinese tech ambitions. The U.S. invocation of such laws can also serve as a model for similar legislation that could be adopted by the founding members of SPADE. Such a multilateral effort is already called for in the Export Control Reform Act of 2018, with a particular focus on new and emerging technologies. Export control laws are the means through which the United States prevents acquisition of strategic assets by nefarious foreign actors. Historically, the focus has been on nuclear technology and other weapons of mass destruction. But with the proliferation of new technologies in the digital economy and China’s willingness to leverage them to further its strategic objectives, such laws will become an increasingly important tool in the U.S.-China relationship. Former U.S. Assistant Secretary of Commerce for Export Administration for the Bureau of Industry and Security Kevin Wolf has continued to voice support for a coordinated approach to export control regimes that advance national security and foreign policy objectives.

Lastly, within its own borders, the U.S. government must find a means of regulating its own leading technology companies. The new White House must proactively engage in dialogue with these companies to ensure that they abide by shared democratic principles so that the United States can engage in good-faith collaboration on these issues around the world. This should occur irrespective of the ongoing antitrust cases facing U.S. tech giants, which themselves could arguably demonstrate that the United States is serious about regulating its own national tech champions. Such dialogue would also assuage the concerns of the EU, which is leading the world in terms of innovative data privacy policy in the General Data Protection Regulation (GDPR). While the GDPR itself may be too burdensome to serve as a widely adoptable model in the SPADE context, it represents an important attempt to account for the threats to privacy posed by cross-border data flows and would inform the discussion on multilateral and plurilateral standard-setting for related legislation regulating data flows.

In addition to continuing to apply unilateral pressure, the Biden administration should work with allies and partners to identify shared concerns around China’s capabilities in the ICT sphere. The proposed founding members have all addressed the threats posed by such capabilities, but explicitly working with like-minded countries to identify key areas of concern could also serve to bolster the prospects for the eventual creation of the SPADE regime. Many lines of effort among like-minded countries have already proliferated in this regard. For instance, the EU has already signaled its support for such an initiative through its proposal for a new bilateral agenda largely focused on tech issues and addressing shared concerns around China’s related ambitions. The U.K. has also recently envisioned a “Democracy 10” concept, or D-10, focused on discussions around 5G technology and critical supply chains. As proposed by the Center for a New American Security, the Mercator Institute for China Studies, and the Asia-Pacific Initiative, the G-7 can also continue to serve as a forum to advance discussions on trade in the ICT sphere. All the G-7 countries are technologically advanced and democratic, making it an obvious forum to ensure buy-in among such countries in advance of the finalization of the SPADE regime. Such discussions could form a basis for the regime’s founding and help identify its primary goals prior to that.

The United States also should not shy away from existing regimes that could provide platforms to address these issues with respect to China. While the Trump administration abandoned the Trans-Pacific Partnership (TPP), and its prospects also appeared dim within the Democratic Party during the 2016 election, the Biden administration should explore the potential to rejoin the 11-member pact, now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as a means through which the rules of trade will be written in Asia. Although it is certainly not the only means, nor is it a panacea for U.S. concerns vis-a-vis China’s economic practices, the agreement contains important chapters on state-owned enterprises and e-commerce that would reinforce the potential for the adoption of high standards in these areas across a larger bloc of member states. To avoid the politically toxic effect of the original TPP, the new administration must clearly communicate the benefits of joining the CPTPP. If the White House wants to have any chance of reengaging with the newly formed trade bloc, it must ensure that doing so is politically palatable with the American public.

Conclusion

The U.S. and Chinese approaches to regulation of new and emerging technologies, or lack thereof, represent different frameworks for the digital economy. The U.S. approach envisions a largely unregulated internet that enhances economic competitiveness and facilitates communication among free and open societies. The Chinese approach sees ICT as a tool to advance political goals and ensure the longevity of illiberal and authoritarian regimes worldwide. The United States must recognize that the failure to develop an adequate response to China’s competing vision will have serious ramifications for the U.S. populace and the future of the rules-based international system.

There is no immediate answer that would provide a realistic means for China to fully integrate with the international system and become the responsible stakeholder that the United States and others once hoped it might be. This does not mean, however, that the United States is without a means of combating the nefarious aspects of China’s political and economic model. Concerns around surveillance, censorship and commercial espionage are shared throughout the world. The United States must work with allies and partners toward a system that punishes such behavior and facilitates security and prosperity in the ICT sector.