Trade pacts in an age of data flows

We live in a different world of trade compared to even two decades ago. Trade in services has become much more important and the value of cross-border exchange of data and data-related digital services (which include intangibles such as streaming of electronic media) has increased exponentially. Indeed, the underlying value represented by cross border exchange of data is only just coming into trade discussions. As an example, imagine the commercial value of consumer preference data of millions of Indian credit-card holders being processed and used by an entity in, say, Malaysia to provide digital services in the Indian market.

Trade agreements, therefore, have stopped revolving around tariffs or even traditional non-tariff barriers, but around exchange of information and institutions that protect cross-border data flows and ensure credibility of information exchanged between the regulators of trading partners.

How do these changing landscapes of trade influence the design of trade agreements? Let us first consider the more mundane world of trade in tangible goods and the key concerns of governments around the world. The main concerns revolve around under-invoicing to avoid or reduce customs tax obligation, dumping, abuse of Free Trade Agreement (FTA) privileges, and compliance with product, environmental, labour and ethical standards.

Ensuring compliance

Compliance in all these areas are becoming data-driven through networks that ensure credibility of the information being exchanged between regulators. For example, the need for effective application of customs tariffs on goods at the border is putting increasing emphasis on validating the value and volume of transaction by integrating the data from customs of both (or more countries) involved, as well as banks and other financial intermediaries through secure networks such as blockchains. This might also require the central banks and fintech regulators of the trade partners having to enter into formal data reporting agreements with each other.

To use another example, prevention of abuse of FTAs can only be achieved when countries can signal the validity of agreed upon rules of origin (ROO) requirements, and exchange this information in a secure manner that prevents manipulation. Once again, the role of credible information exchange between the ROO certifying agencies of both countries become central to the solution.

Being able to grapple with the rising tide of technical and other non-tariff related requirements — whether they are product standards or environmental and labour regulations — is to find the most efficient way to comply with these regimes.

Thus, trade agreements are increasingly focussing on the means to enable their businesses signal their compliance with such requirements at the lowest cost possible.

Such solutions are once again dependent on developing cooperation between agencies in one or more countries with a focus on credibility of the actors involved and rules-based exchange of verifiable data.

An example of this would be the acceptability of a digitally signed product standard certificate by regulator in one country to the regulator in another based on the due process and trust established between them.

The cross-border trade in intangible services is defined by cross-border exchange of data. Therefore, the criticality of having institutions that allow the secure cross-border transmission of data (and its use for transactional or analytical purposes) is obvious.

Take the example of back-office IT and IT-enabled services or the emerging areas of data analytics and cloud-based services. Since sensitive data of individuals and businesses are crossing borders, it becomes imperative to have properly defined rules-based systems to guarantee the privacy and safety of that data.

There have been cases of employees in Indian back-office operations misusing financial data of US customers for illegal material gain. As the complexity and kind of data being exchanged increases, the potential areas of concern also increase manifold.

The current impasse in the EU-India trade negotiations on the EU granting India ‘Data Secure’ status once again points to the importance of developing credible institutional mechanisms that allow countries to trust each other with the data of their commercial entities and individuals.

Given the sheer value that can be commercially unlocked from data, rules around the movement of such data across borders for commercial purposes would underpin trade deals of the future.

However, it is not just about secure transmission. Trading partners would have to credibly signal their willingness and competence in addressing any misuse of data once it has crossed borders into their jurisdiction. For example, ensuring punishment for offenders and imposition of compensatory fines and penalties.

Addressing grievances

This is the whole new world of addressing consumer grievances cross-border. What happens when someone buys the services of an accountant or math tutor online across the border and there is non-performance by the service provider? How does the customer sitting in one country get compensated for consumer fraud related to online or digitally delivered services based in another country?

What about standards in services? National certification regimes can signal the quality of a chartered accountant, doctor or engineer or the soundness of a financial services provider to a domestic audience. But entirely new regimes would have to be negotiated that can acknowledge professional or business competence and credibly signal them to consumers and regulators in another country.

Finally, countries will increasingly start to find ways to tax even ‘intangible’ movement of services and data across borders. In order to ensure that such taxation is not arbitrary, it would require cooperation on measurement of volume and value of such intangible cross-border exchange of digitised services, and exchange of information between trading partners that is verifiable and trusted by both sides.

A key policy question for the incoming government is whether India is ready for such type of advanced trade negotiations. An honest answer has to be no.

The existing trade negotiating and policy-making machinery is geared towards the traditional issues of tariffs and market access. India is institutionally unprepared for negotiations that require a whole array of agencies that specialise in regulating cross-border data flows or develop networks of credibility with their counterparts to demonstrate quality and trust.

This must be a priority for the new government to ensure India has a robust response in the fast-changing landscape of international trade and an effective voice at the high-table.

The writer is a logistics and international trade specialist

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