A critical missing piece of Egypt’s trade relationship with the United States is an umbrella free trade agreement. The door is open just a little bit, with a one-way limited Qualified Industrial Zones deal for Egyptian exports and a tiny amount of Egyptian goods qualifying for the U.S.’ Generalized System of Preferences (GSP) program. Now, the rise of digitally-enabled trade, such as cross-border e-commerce, is an opportunity for both countries to align their trade policies and regulations. “A digital trade pact with the [United States] could unleash the potential of what is already a fast-growing sector,” Andreyka Natalegawa, a research associate for the Southeast Asia Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C., wrote in an October paper.
That would result in faster, less costly cross-border transactions, effectively creating a free trade digital environment. “As the global internet expands and evolves, digital trade has become prominent on the global trade and economic policy agenda,” noted a paper from the Congressional Research Service in December. “Digital trade has been growing faster than traditional trade in goods and services, with the pandemic further spurring its expansion.”
But there are challenges, mainly that the World Trade Organization (WTO) doesn’t include “digital trade” in its provisions and regulations. “While no multilateral agreement on digital trade exists in the [WTO], certain … agreements cover some aspects of digital trade,” noted an OECD paper. Additionally, regulating virtual transactions “often overlaps and cuts across policy areas, such as intellectual property and national security,” further complicating digital trade agreements (DTAs).
However, governments should find ways to sign such deals, particularly with the United States, to advance their digital transformation strategies. “Digital trade represents the next frontier in economic development … and is a potential engine for significant growth,” Natalegawa stressed in the CSIS paper.
For Egypt, securing such a deal will become increasingly urgent as the government accelerates digital transformation across all parts of the economy. Javier López-González, a senior trade policy analyst at the OECD, noted in an April blog on Wilson Center, a policy forum, that countries with high internet penetration rates and multiple free trade agreements would benefit from having DTAs. They “have a greater degree of trade openness and more products to more markets,” he wrote. “Digitalization also is associated with countries drawing greater benefits from regional trade agreements.”
Pinning down digital trade
There are several definitions of “digital trade,” which makes agreeing on the provisions of DTAs tricky and open to interpretation.
The CRS paper says digital trade “includes end products, such as downloaded movies, and products and services that rely on or facilitate digital trade.” It covers streaming services and productivity tools, such as cloud data storage and email.
That differs from how the U.S. International Trade Commission (USITC) defines it. In its view, digital trade covers the “delivery of products and services over the internet by firms in any industry sector, and of associated products such as smartphones and internet-connected sectors.” It excludes online sales of physical goods that don’t connect to the internet and have a digital alternative, such as books, movies, music, and software.
The OECD, WTO, and IMF have the broadest definition, agreeing that it includes “all trade that is digitally ordered and/or digitally delivered.”
López-González said having multiple definitions should be no surprise. It is the “result of … digital transformation,” he wrote in a 2018 research paper. “Trade has become more complex, and how and which measures affect trade have also changed.” That has altered definitions of some issues, such as trade facilitation. They now “have new meaning in the digital era when more small parcels [cross] international borders and new issues such as cross-border data flows can raise new challenges.”
Despite the lack of physical barriers in the digital world, some countries impose obstacles that cripple the digital exchange of goods and services. “Protectionist policies may erect barriers and create discriminatory practices to digital trade,” said the CRS paper. That would damage trust in the digital economy, resulting in a fragmentation of the internet, which reduces economic gains.
That has been evident since 2014, wrote López-González, starting with digitally-enabled services, such as communication infrastructure and connectivity, affecting electronic payments and online payment services.
Examples of protectionist policies are in Europe and some Asian countries, which tax digital transactions within their borders. For example, France has a 3% tax on foreign companies’ digital revenues realized in the country.
Other types of obstacles are non-tariff barriers (NTB). The CRS paper noted they most likely result from “intentional or unilateral” laws and regulations restricting digital transactions. The WTO addresses some of those obstacles, including the rule of law for all companies using the digital space, ensuring regulatory transparency, and protecting local investors, noted the CRS.
However, other barriers are unique to digital transactions. The first is localization, where governments compel companies to meet specific criteria for transactions in the virtual space. “Governments often use privacy protection or national security arguments as justifications for these measures,” said the CRS.
Another obstacle is regulations that limit data flows. López-González of the OECD said it is “one of the most important issues [facing] digital trade … Data enables the coordination of international production processes through [global value chains], helping small firms reach global markets.”
Preventing free digital data movement makes it “increasingly difficult for an international trade transaction to take place without cross-border transfer of some sort,” explained López-González. It is most evident in restricting or blocking websites or parties from communicating with residents.
Forcing international companies to store information on local servers has a similar effect. Indonesia and Vietnam are cases in point. Natalegawa said those governments claim it helps protect data by keeping records within their borders. That is a rising trend, particularly in Southeast Asia. “Arguments in favor of such a ‘cyber sovereignty’ model are … finding sympathetic audiences,” said Natalegawa.
Other crippling NTB regulations include licensing fees for digital platforms. The CRS document says one example is Egypt requiring an EGP 50,000 license fee for social media platforms with 50,000 subscribers to operate legally in the country. Meanwhile, Qatar requires a license for local companies to offer phone call services via the internet. So far, only local mobile operators can legally provide that service.
Signing binding multilateral and bilateral agreements to eliminate such barriers permanently is one way of ensuring smooth digital trade. The current U.S. administration is working on such deals, particularly with developing economies that have fast internet adoption rates.
Several associations, including the U.S. Chamber of Commerce, told the Office of the U.S. Trade Representative that standardizing digital trade rules “should be a ‘critical element’ of the U.S. trade agenda,” wrote Eric Emerson, a partner at the law firm Steptoe & Johnson LLP, in an October blog.
The United States already has several digital trade agreements. The first was with Japan, signed in October 2019. It covers all online transactions between individuals or companies in both countries, including public government data. However, it doesn’t apply to government procurement services and other digital facilitations offered to local sovereign agencies, according to the Office of the U.S. Trade Representative.
In June 2021, the U.S. included digital trade tax regulations in its agreement with the G-7, which comprises the world’s seven biggest economies. It unifies large multinationals’ taxation rights and includes internet-dependent companies in the global minimum tax agreement. That unified tax floor also extends to firms that rely on digital trade in the OECD’s 130 countries.
In October, the United States successfully negotiated with several European countries, which unilaterally imposed a tax on digital transactions, to remove the tax once they sign a DTA and credit any excess amounts. A month later, America signed similar agreements with Turkey and India.
The United States is currently negotiating to include digital trade regulations in the free trade agreement with Mexico and Canada. The CRS paper said it would cover e-commerce only.
The world’s largest economy also is negotiating with China, India, Australia, South Korea and the 10 members of the Association of Southeast Asian Nations to secure DTAs. It would be “particularly impactful in Southeast Asia, where innovation in the digital space has blossomed in recent years,” said Natalegawa of CSIS in October.
Little wiggle room
DTAs could prove increasingly problematic if “governments maintain tight control over the internet and limit foreign access,” said the CRS paper, adding that policymakers and others may see it as necessary to protect domestic interests. That makes signing such deals economically, regulatorily, and politically sensitive.
Emerson believes DTA deals with the United States will most likely take cues from five existing agreements. In addition to the agreement with Japan and the digital trade chapter in the U.S.-Mexico-Canada FTA, America could take some features from the Australia-Singapore DTA, the e-commerce chapter in the Progressive Trans-Pacific Partnership, and the Digital Economic Partnership Agreement.
The first stipulation would probably be that governments can’t impose additional fees or “customs” on electronically transferred data from and to DTA member states. Additionally, those governments must not prevent content or discriminate against digitally sourced products from other treaty signatories.
Additionally, governments receiving digital products or services couldn’t legally demand the localization of incoming data or store it on local servers. They also couldn’t force foreign companies that trade digitally to share technologies and patents with DTA member states or their companies.
However, Emerson noted that none of the existing DTAs prevent local governments from subsidizing companies that digitally trade goods and services. That includes “government-supported loans, guarantees, and insurance,” he wrote. “The exclusion of such subsidy discipline from a digital trade agreement is potentially problematic … [and] would be essentially beyond correction.”
Making them work
An OECD report noted DTAs need to balance “three potentially conflicting policy goals in the internet economy.” The first is enabling the internet to become a global marketplace. The second is to boost or preserve competition between the virtual and real worlds, and, lastly, protect consumers’ data.
Unfortunately, few DTA “best practices” exist, given it is a relatively new concept in a fast-changing virtual landscape. “Rules governing digital trade are evolving as governments … experiment with different approaches and consider diverse policy priorities and objectives,” said the December CRS paper. “In some cases, policymakers may struggle to balance digital trade objectives with other legitimate policy issues.”
To ensure DTAs can be effective, López-González of the OECD warned against treating such agreements as independent from other economic aspects. “Making the most out of digitalization for trade requires thinking more carefully about how trade policy interacts with related policy domains such as innovation, infrastructure, competition, taxation, consumer production, skills and data governance,” he wrote.