A US retreat from TPP: What does services trade tell us?

During last weekend’s summit meeting of Asia-Pacific leaders in Peru, President Obama made the case that failure to sign on to TPP would “undermine our position across the region”. It would mean that if the US would not sign on the trade agreement, China would assert more leadership in the Asia-Pacific and opening a way to negotiate trade rules.

Trade patterns between countries underpin the economic diplomacy behind any potential trade agreement. That too for the TPP. If we focus on one area in which most TPP members have an interest for future trade, namely services, that concern of changing trade leadership may be true.

The picture below shows the so-called Trade Complementarity Index (TCI) for both the US and China with regards to all TPP members (excluding US). This index provides us with an idea how much the exports and imports of the US and China separately match with other TPP members’ needs, or are complementary. A high index means a good “fit” in terms of trade relations and indicates a great potential for a trade agreement between members. 

Note that this picture tells us the trade complementarity of cross-border trade in services or what others have called “digital deliverable services”, which are services that are traded over the Internet. Incidentally, TPP has the standard when it comes to the cross-border flow of data, a factor that reinforces trade in digital services.

The pattern that arises is that initially the gap between the US’s and China’s trade match with other TPP partners in services trade narrowed. However, since 2008 it has widened pointing out that the US has found better trade complementarity with other TPP members. Around that time the US entered the trade talks.

Whether the widening gap is really due to US involvement remains to be seen, but what clearly stands out is that at some point China was as much a good fit for trading services with these TPP partners as the US was.

Yet, already before the US jumped in the negotiation talks, China’s services trade complementarity diminished in the region. This downward trend seems to be of a longer nature, which may be due to China’s regulations in the digital economy over these years. If that’s the case, it puts a serious question whether China can lead the region in terms of services trade, an item the Chinese government is eager to capitalize on.

On the one hand, therefore, in a scenario that the US won’t ratify the trade pact, nothing tells us that this pattern could return. This would reinforce China’s role in the region regarding services trade that can be traded over the internet and indeed may therefore assert its influence to set the rules in this area.

On the other hand, Chinese decline of the trade pattern in digital delivered services is no good recipe to underpin China’s potential future role in the region. If China was serious about fortifying these trade relations, it should start thinking about some of its digital regulatory policies that enable digital services trade. 

How should the EU Article 29 Working Party look like?

As traditional trade measures at the border such as tariffs have come down and as more items in the economy have become tradable, policy reform has focused on dismantling trade barriers that are “behind-the-border”. 

These measures span a wider variety of goods and services on which traditionally only domestic regulators had a quasi-monopoly on to develop and advice policy. Over time, as these behind-the-border measures inhibit trade, regulators need to strike a balance with trade negotiators.

This is also true for “trade in data” or the cross-border flow of data. Data has become an item that crosses borders many times and which form an item in trade agreements these days such as in TPP. 

This is also true for the EU where the Privacy Shield has been developed, which is a framework that provides companies on both sides of the Atlantic a mechanism to comply with EU data protection requirement when transferring personal data from the EU to the US in support of transatlantic trade. 

Before the European Commission could adopt the shield, the Article 29 Working Party committee or the data protection authority, which is in fact not the regulator, but a platform that provides general expert advice on data protection matters and advised the Commission by giving an opinion on the proposal. This is a good thing as certain rights need to be protected in light of an item that becomes increasingly an economic one. 

It’s a classic example where policy makers need to strike a fine balance between an economic need (commerce) and a noneconomic goal (right of privacy). The point for this platform, which is composed of National Data Protection Authorities from each member state, the European Data Protection Supervisor and the European Commission, is to provide an opinion that would entail a removal of overly burdensome and restrictive regulations in attempt no efficiency is lost and yet secure the concern of data subject. 

However, the issue here is the configuration of the Working Party committee itself. Since the Working Party committee will ideally need to strike this balance between commerce and societal benefits, one would expect that their membership composition would be distributed accordingly. 

This is not the case however. Far from it as a matter of fact. The platform has in total 30 members (excluding one member from the European Commission). One from each member state plus a supervisor and an assistant supervisor. By checking each member’s background, the figure below presents the composition of the committee members by professional background. 

What strikes me is that a large majority of its members have a noneconomic background. The fact that most members are lawyers comes as no surprise and no reason for worry as the platform advises on European Community law. However, there are only two members with an economic background and a third one with a business background. Other educated professions that were included ranges from policeman to journalist. 

In age where the issue of data becomes an essential ingredient for economic activity, data subjects need protection. Yet, reaching the fine line between economic and noneconomic concerns starts in my view with a balanced composition of expertise and skills of those who provide expert advice upon policy.