► The growing awareness of data’s importance for economic growth has prompted many countries, especially developed ones, to establish a free, open, and rules-based environment for digital trade. In contrast, authoritarian states, particularly China, have been pursuing digital protectionist measures for economic and national security reasons.

► While China has expressed its willingness to participate in digital trade agreements in the Indo-Pacific, domestically it has also further strengthened its digital protection regime by enacting three data-related laws: the Cyber Security Law (effective June 2017), the Data Security Law (effective September 2021), and the Personal Data Protection Law (effective November 2021).

► Japan, along with Australia, Singapore, and other like-minded countries, has consistently opposed the digital protectionist measures by China and others, and should counter China's initiative in building rules for digital trade in the Indo-Pacific. While the IPEF may find it difficult to increase its disciplinarity, the CPTPP has the potential. Therefore, Japan needs to continue to persuade the US to return to the CPTPP.

The growing awareness of data’s importance for economic growth has prompted many countries, especially developed ones, to establish a free, open, and rules-based environment for digital trade. In contrast, authoritarian states, particularly China, have been pursuing digital protectionist measures for economic and national security reasons. China has emphasized on significance of digital sovereignty and began to require companies entering the Chinese market localizing their data within the country and disclosure of source code, thereby companies entering Chinese market began to express their serious concerns about the leakage of their information. Historically, to ensure the free flows of data, mainly the World Trade Organization (WTO) have sought to formulate multilateral frameworks governing digital trade, however, currently there are few agreed multilateral frameworks upon digital trade, with a few exceptions. As a result, many countries have incorporated their digital trade rules in bilateral and regional frameworks such an approach as free trade agreement (FTA) and digital trade agreements (DTA). However, many of the early digital trade rules have tended to only focus on mutual recognition of the development of e-commerce markets and did not include disciplines that sought to ensure transparency and fairness of the cross-border data flows.

Addressing the digital protectionist measures taken by China and other data protectionist states, the US initiated establishing high-standard and binding digital trade rules which ensure the cross-border data flows, prohibit data localization requirements, and prevent forced disclosure of source code. Under such circumstances, the US succeeded in having three digital trade provisions included in the Trans-Pacific Partnership Agreement (TPP). Establishment of the strict and binding digital trade provisions in the TPP were intended not only to allow the US and its allies to take the lead in making digital trade rules, but also to contain China's initiative to take the leading position in making digital trade rules in the international community. However, despite its aspirations for high-level and binding digital trade rules, the US has been left out of the regional framework for digital trade in the Indo-Pacific by its withdrawal from the TPP under the Trump administration.

Meanwhile, China, which had been oriented toward digital protectionism, began to show a willingness to conclude digital trade agreements with other countries. First, China agreed to the Regional Comprehensive Economic Partnership (RCEP), which ensures the cross-border data flows and prevents data localization requirement that Japan sought to regulate. Moreover, China applied to join the Digital Economy Partnership Agreement (DEPA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which were initially considered difficult to join due to their high degree and bindingness of discipline. While China appears to be actively signaling its intention to participate in a digital trade agreement, it may in fact be an approach designed to better institutionalize its own digital protectionist stance. For example, RCEP is qualitatively inferior to the TPP in the liberalization of tariff barriers as well as non-tariff barriers. In particular, the rules surrounding digital trade in RCEP are less disciplined in a hard sense and contain many exceptions, which may be influenced by China's digital protectionist conditions (Fujii & Miura, 2022). This stance by the Chinese government is driven more by China's intention to promote its own digital trade rules in the Indo-Pacific rather than a proactive move by China to formulate a free, open, and rules-based digital trade rules.

While China has expressed its willingness to participate in digital trade agreements in the Indo-Pacific, domestically it has also further strengthened its digital protection regime by enacting three data-related laws: the Cyber Security Law (effective June 2017), the Data Security Law (effective September 2021), and the Personal Data Protection Law (effective November 2021). Of particular concern to the Japanese government and business sector regarding these new laws is the expansion of data localization regulations that require companies conducting certain business activities in China to locate and store the servers and the data itself necessary for those activities in China. There are also serious concerns about the rise of government access (GA), which forces companies to submit their data to government agencies. For instance, China's three data-related laws regulate the broad cross-border transfer of "critical data," including industrial data not limited to personal information, and stipulate that private companies are obligated to cooperate with government information collection activities. If a government order has a legitimate reason, such as a criminal investigation, and due process has been followed through obtaining a court warrant, it must be accepted. However, the possibility of foreign governments abusing their authority cannot be dispelled. As a result, data localization increases the amount of data held within one's own country, which in turn means expansion of approach for the GA which enhance the risk of companies.

Although the CPTPP strictly requires the prevention of data localization, China nevertheless announced its participation in the CPTPP. These Chinese moves shocked the US government and led to the advocacy of the Indo-Pacific Economic Framework (IPEF) which pillar 1 focuses on the formation of digital trade rule. The economic involvement of the United States in the Indo-Pacific through the IPEF is a welcome development, and the IPEF is expected to play an important role in the future formation of rules for digital trade in the Indo-Pacific. However, it is expected that the IPEF would face difficulties establishing high-standard and binding digital trad rules like those in the CPTPP. One of the reasons that the IPEF would face difficulties is because it includes many digital protectionism oriented developing countries. As Goodman pointed out, countries such as India, Vietnam and Indonesia over digital trade in the IPEF may feel that it is a demand rather than a proposal from the US (Goodman and Arasasingham, 2022). If the US does not provide incentives to emerging and developing countries, it may create sympathy for a China-led digital economic order and make it more difficult to establish digital trade rules to contain China in the IPEF. Moreover, the US itself is facing difficulties because of domestic constrain reflecting big-tech sector’s competition environment which led USTR’s recent decision that the US no longer supports the three digital trade provisions in the TPP.

Given the expected limitations of digital trade rulemaking in the IPEF, along with the IPEF rule formation, it is important to establish digital trade rules in the Indo-Pacific through the expansion of countries in the CPTPP, which already has high level and binding digital trade disciplines. Nevertheless, China's application to join the CPTPP should be treated with caution because China's three data-related laws do not conform to the three digital trade provisions of the CPTPP. Therefore, even if China were to negotiate accession to the CPTPP, it must avoid making concessions on the rules surrounding digital trade. While cross-border data flow is essential, ensuring trust is also crucial. Under the concept of the Data Free Flow with Trust (DFFT), it is significant to steadily proceed the formation of rules with like-minded countries that share such values as the rule of law, democracy, and guaranteed freedom of expression. Japan, along with Australia, Singapore, and other like-minded countries, has consistently opposed the digital protectionist measures by China and others, and should counter China's initiative in building rules for digital trade in the Indo-Pacific. While the IPEF may find it difficult to increase its disciplinarity, the CPTPP has the potential. Therefore, Japan needs to continue to persuade the US to return to the CPTPP.

Reference:

Goodman, Matthew P. Goodman and Aidan Arasasingham (2022) “Regional Perspectives on the Indo-Pacific Economic Framework” CSIS Brief, Center for Strategic and International Studies.

Fuji, Kojiro and Hideyuki Miura (2022) ‘Formation of International Economic Rule on Digital Trade’ in Japan Economic Foundation ed. “Toward the Construction of a Rules-Oriented International Economic System” Japan Economic Foundation (written in Japanese).