SIIA Testifies Before ITC on Global Digital Trade

WASHINGTON, April 4 -- The U.S. International Trade Commission issued the text of the following testimony by Carl Schonander, senior director for the International Public Policy, Software and Information Industry

Association, at a hearing entitled, "Global Digital Trade I: Market Opportunities and Key Foreign Trade Restrictions":

"Commissioners, I am Carl Schonander, Senior Director for International Public Policy for the Software & Information Industry Association (SUA). Thank you for the opportunity to share our views on global digital trade with respect to market opportunities and foreign trade restrictions.

"The Software & Information Industry Association (SUA) is the principal trade association for the software and digital information industries. The more than 800 software companies, data and analytics firms, information service companies, and digital publishers that make up our membership serve nearly every segment of society including business, education, government, healthcare and consumers. As leaders in the global market for software and information products and services, they are drivers of innovation and economic strength - software alone contributes $425 billion to the U.S. economy and directly employs 2.5 million workers and supports millions of other jobs.1 For more information, please visit the SUA Policy Home Page. In my testimony today, I would like to make the following points. First, cross- border data flows are exceptionally important not just to the technology industry, but also to the global economy as a whole. Next, developments in new business to- business and business-to-consumer digitally deliverable products and services such as the Internet of Things present a rich emerging environment with tremendous opportunity for jobs and growth. Not only are these new and emerging technologies full of possibility, but the trade of existing digital goods and services continues to grow. Finally, regulations such as data localization have been and will continue to be a burden on companies and economies as a whole as they have been shown to create additional costs that cause companies to divert resources to comply with these regulations thereby stymying innovation.

"Emergence of the Internet of Things (loT) Relating to B2B Technologies

"Today, recent digital developments in the Internet of Things (IoT) present profound opportunities for economic growth. SIIA defines the IoT as ubiquitous connectivity where people do not just interact with devices, but devices also interact directly with each other. In early 2016, SIIA released a white paper on the IoT where we go into this in more detail.2 IoT technology is estimated to have an economic benefit of $4 to $11 trillion by the year 2025.3

"This benefit spreads across a breadth of sectors with its largest impact on the industrial and manufacturing sectors where business-to-business applications will account for a majority of this value. In the energy sector, estimated economic gains range from $22 billion in 2020 to $14.2 trillion in 2030.4 In the manufacturing sector, the estimated gains range from $900 billion and $2.3 trillion by the year 2025.5 In the agricultural sector, the benefit is estimated to be approximately $100 billion by the year 2025.6 Finally, in the healthcare sector, the benefit is estimated to be between roughly $1.1 trillion to $2.5 trillion by the year 2025.7

"Sensors allow for predictive maintenance, energy management, platform security, logistics, compliance and risk management, and analytics. Such analytics allow the optimization of conditions to reduce waste and cut costs. They can decrease equipment wear and tear and increase worker safety. IoT technologies can help determine when the best time to harvest crops would be. They can help manage smart grids for renewable energy sources. Wearables can detect serious illnesses and monitor the medical needs of elderly persons who live alone. Autonomous cars can increase driver safety and decrease the frequency and severity of accidents.

"Perhaps most importantly, developing countries have the greatest opportunity for IoT benefits where again, business-to-business applications also account for much of this value. It is estimated that by 2025, approximately 38% of the annual growth of the IoT will come from the developing world.8 This process is enabled through the growth of mobile technology and mobile broadband which can help all IoT technologies in this sphere to improve urban planning, irrigation, farming, healthcare, and resource management.

"In order to realize IOT's full benefits, data has to flow. As a practical matter, this means that interoperability mechanisms for personal information data flows are needed because it is often challenging to distinguish between personal and nonpersonal data. As one interviewee told the Swedish Board of Trade, '... privacy always gets into the process somewhere.' 9

"SIIA hosted an event in Washington, D.C. with the Congressional High Tech Caucus and the Congressional Internet of Things Caucus to discuss the influence of IoT technologies on the future of the global economy. This event featured industry leaders in the IoT space as well as policy experts who discussed the following recommendations given the fact that IoT is an emerging technology and is still fairly new. These recommendations can also be found in SIIA's white paper:10

* Do not seek an overarching IoT Policy Framework; existing laws have functioned effectively and provide substantial consumer protection.

* Privacy rights for the IoT should be based on risk and societal benefits, such as public health, national security, economic growth, and the environment.

* Encourage best practices for privacy and cybersecurity; industry best practices and self-regulatory codes of conduct provide more flexibility to evolve and adapt over time.

* Promote technology neutrality and avoid technology mandates, which are especially important given IoT's complex ecosystem.

* Standards should be open and industry-led so that they can they combine a wide range of data sets across myriad analytics environments and applications.

* Policies for embedded software should allow manufacturers to provide by contract for product integrity to ensure that the product functions as intended, which is often critically important for consumer safety.

"Developments in the Provision of B2C Digital Products and Services

"Business-to-Consumer digital products amount to a significant portion of digital commerce. Social Media usage continues to be high. On-Demand Audio and Video streaming services are also growing. According to a study by the Pew Research Center, Facebook has been the most popular social media platform among users. Roughly 79% of all adult internet users use Facebook.11 68% of all adult internet users in the United States use Facebook.12 These numbers are trending upward.

"If we take a further look at the frequency of consumption, this number is also high. 76% of Facebook users use the site daily.1 3 The next frequently consumed platforms are Instagram at 51 % and Twitter at 42%.14 However, to get a broader scope at the frequency of usage, it's important to note that 56% of online adults use more than one platform.15

"The growth of on-demand audio and visual content services is also important to note. A Deloitte study shows that digital audio and video services will account for 89% of consumer internet data traffic by 2018.16 In the first half of 2014, it is estimated that Netfiix accounted for 34% of data flowing to consumers in peak time. Globally, audiovisual traffic is on pace to reach 82%o of all internet traffic by 2018.17 Much of the revenue from social media platforms stems from online advertising. According to the Interactive Advertising Bureau, U.S. online advertising revenue reached a total of $59.6 billion in 2015, the last full year that is documented.18

"Not only are digital sales for retailing high, but these sales are also growing in other industries compared to physical sales of the same products.19 According to a 2014 Report by UNCTAD, digital music sales totaled $6.9 billion in 2014 which accounted for the same proportion as physical sales of music.20 E-Commerce of retail totaled $393.8 billion as of 2014 according to reports from the U.S. Census Bureau.21 The online sales of video games now account for a greater proportion of total video game sales than the physical sale of games.22 On-Demand television and digitally-delivered films account for the largest proportion of home entertainment spending in the United States. Finally, e-books account for 10% of the publishing market in the U.S. and the U.K.23

"UNCTAD then published a report in 2016 which noted that business-to-consumer e-Commerce in 2013 totaled $1.2 trillion with the largest market being China.24 SIIA held a March 14, 2017 event in Geneva on Data Flows and Development where UNCTAD gave updated figures to these statistics. UNCTAD estimates that Internet of Things value-added services will grow from around $50 billion in 2012 to about $120 billion in 2018.25 They also estimate that the 2017 global market value of the cloud computing industry ranges from $107 billion to $127 billion.26

"The CEO of ICANN, Goran Marby, pointed out recently that the next billion Internet users (most in the developing world) will likely gain access through their mobile telephones.27 Zach Marks from Tala, a California-based SME, explained at the Geneva event that his company could not provide the financial services it provides to small borrowers in Kenya and other developing countries without access to competitively priced cloud computing services, which rely on crossborder data flows. The World Bank found that between 2011 and 2014, 700 million people became financial account holders, many at mobile money serviceproviders.28 The World Bank would like to reduce the number of unbanked even further by 2020. If this is going to happen, mobile telephony will be key and cross-border data flows are absolutely essential.

"Policymakers should also be aware that traditional market access barriers to digital trade exist in many sectors affecting information industries. For example, the audiovisual industry remains subject to quota restrictions in numerous important markets. China severely curbs foreign participation in its pay television marketplace through a series of FDI and signal retransmission limitations, as well as content quotas. The EU Audiovisual Media Services Directive imposes discriminatory content quotas on pay-tv platforms, which are supplemented in many cases by national laws. Brazil and Canada also have pay television quotas. These discriminatory quotas limit consumers' access to legitimate content and should be included in policymakers' efforts to deepen legitimate digital trade.

"Market Information for Digitally-Deliverable Products and Services

"UNCTAD also released data for online shoppers and revenue. The country with the largest number of online shoppers is China with approximately 361 million.29 These online shoppers make up 56% of all internet users in China. Next, the United States has approximately 167 million online shoppers which makes up approximately 79% of all its internet users. The United Kingdom has approximately 36 million online shoppers who account for roughly 85% of all its internet users. The sales for these transactions amount to $453 billion in China, $298 billion in the U.S., and $171 billion in the United Kingdom.30

"Cross-border e-commerce data is difficult to find and account for. However, the Ecommerce Foundation, estimates that 309 million online shoppers purchased from foreign websites. This accounted for $328 billion.3 1 In China, the U.S., the U.K., Germany, Australia, and Brazil, UNCTAD estimates that that $105 billion was spent on cross-border business-to-consumer trade with 94 million shoppers using websites from overseas.32

"The Commerce Department's Bureau of Economic Analysis did an assessment of international trade in business services, communications services, royalty and licensing flows, and financial services where digital technologies were thought to hold a critical role in facilitating trade.33 This assessment found that trade in 'digitally-enabled services' grew from 45% of all trade in services in 1998 to 61% in 2010 which rose at a rate of 9% per year whereas other services grew at 3% per year.

"In 2015, the Commerce Department provided updated numbers on digital trade.34

* The United States exported $399.7 billion in digitally-deliverable services. This represented about 56 percent of U.S. services exports and about 17 percent of total U.S. goods and services exports.

* The United States imported $240.8 billion in digitally-deliverable services. This represented 50 percent of U.S. services imports and about 8 percent of total U.S. goods and services imports.

* The United States had a digitally-deliverable services trade surplus of $ 158.9 billion.

"The Brookings Institution also published a report on cross-border data flows. It showed that in 2011, U.S. foreign affiliates in Europe delivered $312 billion in digitally-deliverable services and European affiliates in the U.S. provided approximately $215 billion in digitally deliverable services.35

"The Importance of Digital Technologies and Cross-Border Data Flows

"SIIA has been a strong proponent of cross-border data flows. As SIIA has said previously, open digital trade is critical to the U.S. tech industry. A 2014 report by SIIA showed that about 12% of American software production is exported.36 This amounted to $57 billion in 2012. Since 2006, the exports of software and related services have grown by at least 9% each year. Software exports are important to job creation. Between 1990 and 2014, there was an increase in software employment by 1.7 million jobs.

"SIIA has noted in previous testimony that digital flows and trade benefit both exporting and importing countries in the following ways:37

* Domestic productivity increases when firms are able to import the best computing and information services at the lowest prices.

* Online information services, Internet-based services, and computer services supply strategically important inputs for all sectors, goods, and services.

* A country that wants to excel in the provision of banking and financial services, education, tourism, construction, and healthcare services needs to allow its businesses and citizens to obtain the best possible inputs from information and computer service providers regardless of location.

* Worldwide suppliers of online and computer services provide the spur of competition to ensure that all service sectors excel. These suppliers help domestic exporting and manufacturing companies.

* Having a seamless flow of information and a flexible location of servers leads to increased price competition, better quality, and wider choice for consumers.

* Lower prices and a wider availability of information services and computer services lead to greater product and process innovation throughout a domestic economy.

* Lowering digital barriers would provide producers, investors, workers, and users with a clear idea of the rules of the game, thereby encouraging long term investment and commitment to local markets.

"In the Brookings Institution report on cross-border data flows between the U.S. and the European Union, data flows between the U.S. and the EU are the highest in the world, ahead of flows between the U.S. and Asia and flows between the U.S. and Latin America. The report also found the following:38

* In 2012, the United States exported $140.6 billion in digitally-deliverable services to the European Union. That same year, the EU exported to the U.S. $106.7 billion worth of digitally-deliverable services.

* The U.S. and the EU are globally competitive exporters of digitally deliverable services. In 2012, the EU trade surplus with the world in this category was $168 billion. The U.S. trade surplus was $150 billion.

* Almost 40% of data flows between the U.S. and EU are generated by commercial and research needs and these uses account for a majority of the growth in transatlantic traffic.

* The potential for data growth is strong as the Internet of Things increasingly grows. Given the EU's $125 billion trade surplus with the U.S. in goods, data flows originating from Europe will likely increase

"Open data flows are important to all sectors of the economy, not just to the 'digital' sector. Increasingly, there is no meaningful distinction between the digital and non-digital sectors of the economy. According to a study by the McKinsey Global Institute, the Internet accounts for 34% of the GDP of the 13 countries listed in the report. In the developing countries studied in the report, the Internet accounted for 21% of GDP growth over a five-year period.39 Most of this positive economic impact occurred outside of the tech sector with 75% of the benefits going to companies in more traditional industries. In these sectors, 2.6 jobs were created for each job lost due to technology-related efficiencies.

"The International Trade Commission also conducted two studies on digital trade. These studies showed that 'digitally-enabled services' grew from $282.1 billion in 2007 to $356.1 billion in 2011 where exports exceeded imports every year.40 They also showed that digital trade improves productivity and reduces trade costs. This means that digital trade increased U.S. GDP by up to $710.7 billion (4.8%) and increased employment by up to 2.4 million full time workers.41

"Finally, the Swedish Board of Trade study titled, 'No Transfer, No Production,' shows that data is an integral part of global value chains which underpins the production of goods. According to this study, data flows are essential not only to the tech sector, but they are also critical for manufacturers to coordinate production; conduct R&D and testing; supply chain management; manage actual production, including the increasingly prevalent robotics part of manufacturing; and once products are sold, they can run and monitor those products.42

"Regulatory and Policy Measures that Impede Digital Trade

"Given the great importance of free-flowing data to not just the U.S. economy, but the global economy as well, it is very important that these flows continue uninterrupted. One such hindrance to these data flows is the implementation of data localization mandates.

"An ECIPE report showed that a loss of open data flows reduced the GDP of multiple countries. This study estimated that data localization measures reduced the GDP of Brazil by 0.2%, of China by 1.1%, of the EU by 0.4%, of India by 0.1 %, of Indonesia by 0.5%, of Korea by 0.4%, of Vietnam by 1.7%, and of Russia by 0.27%.43 This same report showed that the economic losses by the citizens amount to up to $63 billion for China and $193 billion for the EU.

"In China, the PRC Telecommunications Regulation of 2000 requires all data collected inside China to be stored on Chinese servers. This affects U.S. businesses as well. Hewlett Packard, Qualcomm, and Uber had to give up more than 50% of their businesses in China to Chinese companies. Otherwise, they would have to pay antitrust fines of more than $1 billion.4 4

"In Russia, Federal Law No. 242-FZ requires all information pertaining to Russian citizens should be stored on servers located within Russia. Because of this regulation, Google had to move servers to Russian data centers.45 EBay had to weigh the costs of moving servers versus overall benefit of doing business in Russia. Linkedln is unable to operate in Russia because of this data localization requirement.

"In South Korea, mapping data must be kept inside the country as a result a law it passed which cited the National Security Act of 1947 that was passed in the United States. Because of this act, Alphabet Inc, the parent company of Google, is not able to build mapping services in Korea. This is a hindrance because most of the South Korean population (more than 50%) do not use Google Maps which is more advanced than local Korean mapping services.46

"In Turkey, the Banking Regulation and Supervising Industry instituted a policy so companies are required to establish local IT centers in Turkey. Due to this regulation, some businesses, like PayPal, were forced to shut down service in Turkey.47

"In Indonesia, Government Regulation 82 and Draft Regulations from the Ministry of Communications and Information Technology (MCIT) include provisions that require every electronic system provider for public services to have a data center and disaster recovery center inside Indonesia.48 Due to these regulations, many companies, including Facebook, Google, and Yahoo, are obligated to pay to build data centers in the country. These costs can exceed hundreds of millions of dollars for individual companies.49

"Needless to say, such regulations, like those imposed in the countries studied in the ECIPE report, are very costly to businesses and impede innovation. The April 2016 UNCTAD report on data protection regulations and international data flows made the following assessments:50

* For many countries that are considering forced data localization laws, local companies would be required to pay 20-60% more for their computing needs than i f they could go outside the country's borders.

* If services trade and cross-border data flows are seriously disrupted between the EU and the U.S., the negative impact on EU GDP could reach -0.8% to - 1.3%.

"SIIA also recently published a resource paper on data flows and development where we assessed the business problems faced by firms and countries when restrictions are imposed. The resource paper showed that data transfer restrictions create barriers to innovation for local companies.51 According to the Brazilian company Techpolis, it would be 42% more expensive to establish a data center in Brazil rather than in the United States. The SIIA resource paper assessed that since local companies have to invest more to comply with such regulations, it becomes difficult for smaller firms to invest in research in development, participate in global value chains, and export to foreign markets.52 SIIA also underscores in this context the critical importance of respecting intellectual property rights. Patents, copyrights, trademarks, and trade secrets are used by all of our members. They are critical elements of making it possible to develop new and different business models that benefit consumers, workers, and companies. It is important for our trading partners to enforce all the commitments they have undertaken, including with respect to intellectual property rights. It is also critically important for countries not to distort ostensibly pro-market laws in ways that have the effect of devaluing intellectual property rights. China's use of its Anti-Monopoly law is an example of a law that effectively undermines the value of patents because it enables regulators to compel patent holders to license technology on vague competition grounds. For more information on SIIA's concerns with respect to intellectual property rights in China, see the September 23, 2016 United States Information Technology Office (USITO) submission to the U.S. Government Interagency Trade Policy Staff Committee on China's compliance with its World Trade Organization accession commitments.

"Conclusion

"The 21st Century global economy will feature many unanticipated technologies given the accelerated nature of innovation. Such an environment will require countries and governments to take a broad look at the landscape so as not to enact policies that have the potential to stifle innovation and thereby stifle economic growth. With the rise of IoT technologies, existing regimes should be examined to be sure that regulations will provide for an adapting technological environment.

"SIIA has no doubt that the promotion of trade of digitally-enabled goods and services will be essential in the 21s t Century global economy. Cross-border data flows are an integral part of this. Numerous studies have been done on the importance of cross-border data flows, and SIIA has written and spoken extensively on this. It is critical that these flows remain open and uninterrupted. They should be taken into consideration by the United States when talking about international trade and brokering future trade deals.

"As such, it is important that countries consider how policies, which may be enacted with positive intent for their citizenries, will have an adverse effect on innovation. Data localization laws, for instance, continue to be a barrier for innovation, trade, and economic growth. With much of the growth coming from developing nations, it is paramount that such barriers be taken into consideration since these regulations will not only impact digital sectors, but they will impact the entire global economy."