Japan’s Role and Strategy in the Formation of Digital Trade Rules in the Indo-Pacific

Despite the growing awareness of the importance of data for economic growth, there are currently few agreed-on multilateral rules for digital trade. As a result, digital trade rules have been adopted plurilaterally or bilaterally through free trade agreements (FTAs) or digital economy agreements. Initially, it was the United States that was proactive in establishing rules on digital trade in order to better regulate digital products and reduce digital protectionism—especially from China.[1] The United States put significant effort into establishing the Trans-Pacific Partnership (TPP) and through negotiations succeeded in introducing three key principles for digital trade: (1) ensuring the free flow of data across borders, (2) preventing data localization, and (3) preventing forced disclosure of proprietary source code. However, with the U.S. withdrawal from the TPP during the Trump administration, the country lost its position as a leading driver of digital trade rule formation.

Japan is currently a leader in digital trade rulemaking. First, Japan has established numerous bilateral and plurilateral digital trade agreements. It has secured the three aforementioned digital trade principles in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and has concluded the EU-Japan Economic Partnership Agreement (EPA), leading to recognition of Japan as a jurisdiction with an adequate level of personal data protection under the European Union’s General Data Protection Regulation. The Japan-U.S. Digital Trade Agreement and the Japan-UK EPA enshrine new digital trade rules, covering issues such as algorithms. Additionally, the Regional Comprehensive Economic Partnership (RCEP)—despite its loose and inadequate rules compared to the CPTPP and other agreements—brings Japan into direct conversations with China regarding digital regulations.

Second, Japan is taking the initiative not only in bilateral and plurilateral digital trade rulemaking but also in multilateral frameworks. It has advocated for its Data Free Flow with Trust (DFFT) concept at the G-20 and is leading the World Trade Organization (WTO) Joint Statement Initiative on e-commerce negotiations as a co-convener.[2]

Third, Japan has often led discussions of digital issues among like-minded countries. For example, when the multilateral economic order was shaken under the Trump administration, Japan held a trilateral trade ministerial meeting with the United States and the EU, where it stressed the importance of forming digital trade rules. Japan has also taken an active role in discussions at the Organisation for Economic Co-operation and Development (OECD) on issues such as government access.

While Japan was playing an active role in shaping the rules for digital trade, the United States’ involvement in the Asia-Pacific economic order was absent for several years following the country’s withdrawal from the TPP. But under the Biden administration, the United States has sought to establish a new digital trade framework in the Indo-Pacific region with like-minded countries like Japan and Australia.

In light of these developments, this commentary examines the reasons behind the different approaches to digital trade. It argues that Japan, as a pioneer in this domain, should strive to formulate rules for digital trade in the Indo-Pacific in order to restrain China from establishing itself at the forefront of digital trade governance in the region.

UNEVEN PATH TOWARD DFFT

While the free flow of data enhances productivity and innovation, legal frameworks for protecting privacy and data, intellectual property rights, and national security must be established to ensure trust. As a result, there are now several competing data governance approaches across the international community. The EU’s approach places the individual’s right to the protection of personal data at its core. By contrast, the United States has no unified federal approach to privacy but instead an array of state-level and sectoral rules.[3] China, meanwhile, emphasizes data as a strategic asset of the state, allowing broad government surveillance of personal data. In addition, China and other emerging Asian countries are taking digital protectionist or digital authoritarian measures to promote their information technology industries or for national security reasons.

Different perspectives on privacy protection by the United States, the EU, and China lead to different perspectives on free cross-border data transfers. These factors led to the emergence of parallel blocs in the WTO’s multilateral digital trade rulemaking process. In order to overcome those differences, former Japanese prime minister Shinzo Abe used the occasion of Japan’s G-20 presidency to put his concept of DFFT on the global agenda. Despite Abe’s efforts, however, India, Indonesia, and South Africa, which are G-20 members, rejected participating in the declaration. In addition, the ambiguity of the meaning of “trust” has given each country room to interpret the concept differently, in line with its own preferences and interests. The inability of DFFT to become the core of a strong, high-discipline multilateral framework suggests that other approaches are necessary for Japan.

THE EMERGENCE OF NEW APPROACHES: THE DIGITAL ECONOMY PARTNERSHIP AGREEMENT

Though multilateral negotiations have stalled, the motives for Japan, the United States, and other developed countries to adopt digital trade rules have not changed. The primary reason developed countries want high digital trade discipline is because of the consensus of the United States and like-minded countries—with China in mind—on the need to eliminate or reduce digital protectionist or digital authoritarian market-distorting data governance policies. In which international forums, then, should the United States and Japan pursue this high degree of discipline in digital trade? As noted earlier, the formation of multilateral rules has seen divisions not only between developed and developing countries but also between the United States and the EU. Under such circumstances, regional agreements that include high digital trade discipline, such as the CPTPP, have emerged; however, U.S. participation in the CPTPP is unlikely at the moment due to domestic political conditions.

Against this backdrop, the Digital Economy Partnership Agreement (DEPA) is currently attracting interest in the United States and other Indo-Pacific countries. For instance, some U.S. trade policy experts have been actively advocating for participating in DEPA.[4] Moreover, Canada and South Korea have both expressed interest in joining the agreement. DEPA is a wide-ranging agreement on digital economy issues that was initiated by Chile, New Zealand, and Singapore and signed in June 2020, entering into force for New Zealand and Singapore in January 2021. It builds on the e-commerce chapters of existing FTAs, such as the CPTPP, by adding enhanced commitments to facilitating digital trade and multiparty cooperation on a range of advanced technologies. DEPA takes a modular approach, and its modules are intended to be building blocks. It has sixteen modules covering a range of digital issues, such as treatment of digital products, data issues, digital identities, innovation and digital economy, small and medium-sized enterprise cooperation, transparency, and dispute settlement.

However, there are several issues with DEPA. First, although the agreement is said to be highly disciplined, it in fact still falls short of the CPTPP. For instance, it does not include any provisions on source code.[5] Second, it lacks many binding rules, instead focusing more on cooperation. Many of the commitments in DEPA are simply to affirm existing obligations, share best practices, begin discussions, and establish frameworks for future cooperation. Therefore, the agreement would not pose any major implementation challenges for China, despite the country’s authoritarian approach to data governance. These weaknesses help explain China’s surprising decision to apply for membership.

By choosing to participate in DEPA in the midst of China’s application for membership, Japan would send the wrong message not only to China but also to the Indo-Pacific region. This decision could be perceived as an acceptance of the agreement’s inadequate standards and insufficiently tight discipline. Therefore, Japan should consider its participation in DEPA cautiously at this time.

THE INDO-PACIFIC ECONOMIC FRAMEWORK AS A DIGITAL TRADE FRAMEWORK IN THE INDO-PACIFIC

At the 2022 East Asia Summit, President Joe Biden reaffirmed the enduring U.S. commitment to the Indo-Pacific and announced that the United States will explore with partners the development of the Indo-Pacific Economic Framework (IPEF). The framework will define shared objectives around trade facilitation, standards for the digital economy and technology, supply chain resiliency, decarbonization and clean energy, infrastructure, worker standards, and other areas of shared interest. It is important that the United States proposed the IPEF in order to prevent China from establishing an Indo-Pacific economic order at a moment when China has applied to join both the CPTPP and DEPA. Japan should actively participate in the IPEF and work with the United States to facilitate cooperative responses to China’s market-distorting practices.

However, it is questionable whether the IPEF can establish rules for digital trade that retain the same high degree of discipline as the three digital trade principles in the CPTPP. The Biden administration is pursuing a framework that does not take the form of a trade agreement with binding rules. The reason for pursuing a nonbinding framework is that it does not require congressional approval, making it relatively easy to reach a domestic consensus in the United States. In addition to ongoing U.S. domestic distaste for FTAs, this is partly due to the fact that the presidential Trade Promotion Authority (TPA) expired in July 2021. Thus, if an FTA is to be pursued, the Biden administration must first obtain TPA, which it claims is difficult under the current circumstances.

While it is understandable that the United States has chosen a nonbinding approach to the IPEF in light of its domestic situation, it may be less effective than the CPTPP, which, as a treaty, is legally binding. Moreover, participating countries may not engage seriously in the IPEF without incentives such as better access to the U.S. market and binding digital trade rules. Emerging economies have seen a particular increase in data regulations as they strive to protect their domestically produced data, which contributed to India declining to participate in the trade pillar of the IPEF.[6] As a result, the IPEF may not be the best catalyst for digital trade rulemaking among Indo-Pacific economies, especially given that it does not include commitments on market access and brings few benefits to developing countries. Nonetheless, the IPEF still could be a useful alternative approach.

THE NEED FOR JAPANESE INITIATIVE

As mentioned above, the United States is unlikely to return to the CPTPP because of domestic political conditions. However, one of the motivations for the United States to actively promote the TPP in the first place was the agreement’s strategic importance in containing China’s digital protectionist measures. The CPTPP has that potential, so Japan needs to continue working to persuade the United States to return to the CPTPP.

With uncertain U.S. leadership, China’s economic rise, and a power vacuum in the Indo-Pacific region, Japan needs to take initiative to formulate rules not only in the Indo-Pacific but also in multilateral frameworks through its promotion of DFFT. When states restrict the free flow of data, they reduce access to data, lowering economic growth, productivity, and innovation—not just within their own borders but globally. Moreover, when a government places limitations on which firms can participate in digital networks, it reduces the overall size of the network, which raises costs. With the introduction of protectionist measures for digital trade in emerging countries such as China, it is necessary to develop rules that prevent companies from being disadvantaged in the countries in which they are operating and expanding. In order to protect the interests of business and promote economic growth, multilateral and plurilateral rules regarding digital trade, which is different from the traditional trade of goods and services, are needed.

Japan, which has one of the world’s most advanced sets of rules for digital trade and is a co-convener of the WTO Joint Statement Initiative on e-commerce, should strive to work with other middle powers like Australia and Singapore that share the same position. Together, they can achieve greater impact in shaping the rules-based international order by playing a leading role in discussions about the IPEF.

Hideyuki Miura is Associate Professor of International Relations in the Faculty of Social Sciences at Kyorin University. Prior to taking up his position, he was a senior fellow in the Global Institute for Asian Regional Integration at Waseda University and a research associate at the Asian Development Bank Institute. He was also a junior visiting research fellow at the Japan Institute of International Affairs. His current research interests include trade policy, especially focusing on digital trade and economic security in the Asia-Pacific and Indo-Pacific region.

Endnotes

[1] The U.S.-Jordan FTA established the first e-commerce chapter in 2000. Since then, a growing number of FTAs have incorporated specific provisions related to digital trade. The differing approaches to data governance and data protectionist measures by China and other emerging economies have consequently posed a challenge to the international community, particularly developed countries like the United States.

[2] Besides Japan, Australia and Singapore are also co-conveners.

[3] State laws exist to protect individual privacy more generally, notably the California Consumer Privacy Act and the recently enacted Virginia Consumer Data Protection Act.

[4] See Wendy Cutler, “Testimony of Wendy Cutler: Strategic Importance of Digital Economic Engagement in the Indo-Pacific,” Washington International Trade Association, January 19, 2022, https://www.wita.org/blogs/importance-economic-engagement; and Matthew Goodman, “DEPA and the Path Back to TPP,” Center for Strategic and International Studies, Commentary, July 15, 2021, https://www.csis.org/analysis/depa-and-path-back-tpp.

[5] Ensuring the protection of source code can promote trust, investment, and innovation in a company and stimulate economic growth through inward investment. On the other hand, source code disclosure requirements can also be a major obstacle to doing business by risking the leakage of valuable information and discouraging investment.

[6] According to the Digital Trade Restrictive Index published by the European Institute for International Political Economy, China has the strictest domestic regulations, followed by Russia, India, Indonesia, and Vietnam. Regulations have been tightened in India, following the example set by China. See Martina Francesca Ferracane, Hosuk Lee-Makiyama, and Erik van der Marel, “Digital Trade Restrictive Index,” European Center for International Political Economy, 2018, https://ecipe.org/wp-content/uploads/2018/05/DTRI_FINAL.pdf.