The Yomiuri Shimbun via AP Images
Japanese Prime Minister Fumio Kishida, President Joe Biden, and Indian Prime Minister Narendra Modi attend an opening event for the Indo-Pacific Economic Framework, May 23, 2022, in Tokyo.
During his trip this week to Tokyo, President Biden announced the start of negotiations on the Indo-Pacific Economic Framework (IPEF), a new agreement with 12 countries in the region. Biden argued that the deal would help “ensur[e] a free and open Indo-Pacific that will deliver greater prosperity and greater opportunity for all of our children.”
Despite Biden’s lofty rhetoric, many of the details need to be filled in. But the most significant consequence of the IPEF could be that U.S. technology companies will be better able to extract data from billions of people in the Indo-Pacific region. One of the deal’s principal aims is to make it harder for governments to regulate American technology companies by auditing their source code and the data they collect. Biden’s announcement this week signals that the U.S. will use every carrot and stick in its arsenal to coerce low- and middle-income countries with non-tariff barriers on digital trade.
The effort comes at a time when a bipartisan coalition in Congress is close to getting tech platform regulation passed that would ban self-preferencing and reform app store gatekeeping. While Big Tech fights the new rules, its rearguard action to cement protections in international agreements could limit the ability of countries to regulate any aspect of digital life, forestalling the nascent effort in Washington.
Corruption Straight From the Source
The IPEF aims to prevent countries from requiring tech companies to share their source code—the computer programs that underlie their products—as a precondition of market access. Biden began his speech introducing the IPEF by imploring countries to respect Big Tech’s intellectual-property rights: “Let’s start with new rules governing trade in digital goods and services so companies don’t have to hand over the proprietary technology to do business in a country.”
Ironclad intellectual-property protections are essential to Big Tech’s bottom line, because they make it more difficult for other countries to regulate tech platforms. For instance, anti-monopoly regulators need access to source code from a company like Amazon in order to establish whether it has plagiarized its recommendation algorithm from a competitor, or if it is illegally preferencing its own products on its platforms. Data protection authorities often cannot assess whether a company is compliant with local privacy laws if the company will not share the algorithms it uses to collect sensitive personal information. Cybersecurity enforcement agencies similarly find that “without access, it is impossible to audit [companies’] software to find out what the problem is should something go wrong.”
The most infamous example of the dangers of allowing companies to hide their source code is the 2015 Volkswagen emissions scandal. In that case, VW’s deceitful software allowed its cars to pollute 40 times more than the legal limit. The scheme went unnoticed for a decade and was revealed only after a team of researchers showed that VW’s software was underreporting vehicles’ actual emissions.
Biden’s suggestion that Big Tech’s stranglehold on source code should come before privacy rights in the Indo-Pacific is backed by a concerted lobbying push. Microsoft said in its submission to the Commerce Department’s rulemaking process that the “protection of intellectual property and source code” should be a key priority of the IPEF, which was seconded by Intel and technology industry associations.
Fortunately for tech companies, they were preaching to the choir: Commerce Secretary Gina Raimondo, known as “tech’s favorite Biden official,” will be the IPEF’s lead negotiator. Perhaps Raimondo’s most salient experience preparing her for these negotiations is her role in lobbying against the European Union’s sweeping new antitrust rules. Thierry Breton, the EU’s internal markets commissioner, was “astonished” by the brazenness of Raimondo’s “extra lobbying” on behalf of Big Tech. U.S. Trade Representative Katherine Tai will lead negotiations on the trade pillar of the IPEF, which includes digital trade issues; although she is far more progressive than Raimondo, she similarly opposes requirements that U.S. companies share their source code.
Raimondo is on track to exercise disproportionate control over the terms of the IPEF. At a Senate Finance Committee hearing on the framework, Sen. Elizabeth Warren told Tai she is worried that “higher standards [for competition and workers’ rights] will only be included in the trade pillar that you are responsible for negotiating. Secretary Raimondo will be responsible for negotiating the three other pillars, and when she listed her priorities, labor standards and competition were absent.” Warren added, “I am concerned that her approach will boost profits for giant corporations … that should be a nonstarter in our negotiations.”
Relocating the Indo-Pacific’s Data to the United States
The IPEF also aims to prohibit data localization rules, which require data that is generated in a particular country to be stored or processed there. The White House’s statement on Monday noted that the IPEF “will pursue high-standard rules of the road in the digital economy, including standards on cross-border data flows and data localization.” In short, this means that the IPEF will mirror the U.S.-Mexico-Canada Agreement and the U.S.-Japan Digital Trade Agreement by banning data localization rules. Raimondo and Tai have supported this prohibition in the past.
Unsurprisingly, Big Tech is behind the move. The Computer & Communications Industry Association—a major lobbying organization for large tech companies including Amazon, Apple, Facebook, and Google—stated in its comments to the Commerce Department that the IPEF “should prohibit governments from imposing data localization or local presence requirements on data controllers or processors.” The U.S. Chamber of Commerce endorsed the same provision, making the spurious claim that big business opposes data localization rules because they “deprive American workers” of the economic benefits of increased digital trade.
On the contrary, multinational technology companies oppose data localization because it reduces their profits. These firms operate in nearly every country, so it is far cheaper to operate massive data centers in a handful of countries as opposed to smaller localized data centers. Additionally, data that is stored locally can be audited by local regulators, enabling them to enact stronger restrictions on Big Tech. This is why 70 percent of Google and Meta’s data centers are in the U.S., compared with just 7 percent in Asia.
Data localization can, on the other hand, have significant benefits for low- and middle-income countries. In March 2022, Amazon Web Services announced it would build ten local data centers in the Asia-Pacific, spurred by Indonesia’s requirement for onshore data processing. These local data centers will increase internet speeds in the region, because data will not have to be transferred to storage facilities halfway around the world. Data localization rules have attracted billions of dollars of investment to Indonesia, with Google, Facebook, and Microsoft as well as Chinese firms like Alibaba and Tencent announcing the construction of new data centers in the country. Spending on data centers in Southeast Asia has quadrupled since 2019, creating a “wave of Asia data centers.”
The IPEF could prevent much of the region from benefitting from this economic boom—if governments cooperate, that is. Indonesia and Vietnam have already indicated that they will not participate in any portion of the IPEF that bans data localization, and India and Thailand may follow suit.
Gridlock to the Rescue
The conceit of the Indo-Pacific Economic Framework is that it has become a vessel for the Biden administration’s “digital trade deal” in Asia, which had been long delayed by White House infighting. In October 2021, the Prospect’s Robert Kuttner called the previous deal “a dubious Asian digital trade deal … [that] would mainly improve access for American companies to other Asian markets.” The administration was divided between national-security officials, who believed that helping Big Tech would boost American competitiveness with China, and trade officials like Tai, who stalled the deal because it was insufficiently “worker-oriented.”
The compromise that ultimately pushed the digital agreement forward appears to be that it would be included within a larger agreement, the IPEF, and that Tai would be in charge of digital trade negotiations. However, this bargain has failed to prevent the IPEF from strengthening Big Tech because Tai still supports curbing both data localization and disclosures of source code. While digital platform regulation is being hotly contested in Washington, Biden’s trip to Tokyo to announce the IPEF could tie America’s hands by instituting trade measures that prevent policymakers from enacting strong regulations on Big Tech.
On Sunday, Raimondo argued that the IPEF “marks an important turning point in restoring U.S. economic leadership in the region and presenting Indo-Pacific countries an alternative to China’s approach to these critical issues.” In reality, countries are likely to continue importing telecommunications equipment from China, as long as companies like Huawei continue selling goods with the same quality as their competitors for half the price. In the same vein, China will remain the runaway leader in solar panels, electric vehicles, and high-capacity batteries as long as it charges much lower prices for these technologies and controls the vast majority of the raw materials necessary to manufacture them. Smarter industrial policy could better balance these export industries, but the IPEF does not address this, instead offering weak incentives to Asian nations.
Since the Biden administration lacks congressional support for the deal, it is likely to enact much of the IPEF through executive action (as the Prospect’s Day One Agenda suggested it could prior to Biden’s inauguration). As a result, the U.S. has somewhat limited leverage in negotiations. America will not be able to meet the main demand of other countries—tariff reductions to increase access to the U.S. market—and will be limited to offering weaker trade facilitation measures. If fewer countries adopt the digital provisions of the trade deal, Big Tech’s efforts to undercut non-tariff barriers in the Indo-Pacific could fall short. But if the Biden administration succeeds in its plan to implement the Indo-Pacific Economic Framework, Big Tech will be the deal’s biggest beneficiary.
