FACT: U.S. Internet policy is suddenly uncertain.

THE NUMBERS: U.S. export growth, 2012-2022*-

Energy	176%
Information & “potentially digitally-enabled” services:	59%
All goods and services:	34%
Agriculture	34%
Manufactured goods:	19%
Other (non-digitally deliverable) services	-10%

*Sources: WTO for all goods and apparel; UN Food and Agricultural Organization for fish; Stockholm International Peace Research Institute (SIPRI) for arms sales. SIPRI data covers known transfers of “major conventional weapons.”

WHAT THEY MEAN:

A cryptic late-October comment from the American delegation to the World Trade Organization in Geneva quietly withdraws a set of long-held U.S. “digital trade” policy goals — and in doing so raises questions about whether the U.S.’ traditional “open internet,” “pro-consumer,” “internet freedom,” and “public-interest regulation” approach has changed. The brief and impressively opaque comment:

“Many countries, including the United States, are examining their approaches to data and source code, and the impact of trade rules in these areas. In order to provide enough policy space for those debates to unfold, the United States has removed its support for proposals that might prejudice or hinder those domestic policy considerations. The JSI [“Joint Statement Initiative”, the WTO’s name for the relevant discussion] continues to be an important initiative and the United States intends to remain an active participant in those talks.”

How to interpret this? Background first on the big picture, then the “data and source code” in trade policy more specifically; and finally, lacking anything more to go on than the three-sentence comment above, some questions about what this actually means:

1.  Larger context: “Digital trade” issues are part of a larger U.S. policy pretty consistently pursued since the launch of the World Wide Web, meant to encourage the preservation and future development of an open, universal Internet, with a foundation in user rights and liberty, impartial public-interest regulation, and due process. Several digital trade issues get mentioned, for example, in the “Declaration for the Future of the Internet,” posted in August 2022 by the U.S. and 64 other Internet- and speech-friendly countries in the Western Hemisphere, Europe, Asia, Africa, and the Pacific and still up on the White House and State Department websites. This is a 3-page set of principles and goals for next-generation Internet governance, which along with promoting universal access, privacy, consumer protection, common programs to fight electoral disinformation and online bigotry, and other valuable ideas involves commitments to “ensure that government and relevant authorities’ access to personal data is based in law”, “promote our work to realize the benefits of data free flows with trust,” and “refrain from blocking or degrading access to lawful content, services, and applications.” These are, incidentally, contested ideas which have opponents: other governments, inter alia and perhaps most prominently China’s, envision a quite different future with more rights for surveillance and service interruption, less multistakeholder-ism, and fewer limits on government rights to limit access, data transfers, and privacy.

2.  Nature of issues: The now-‘paused’ “data and source code” proposals refers to four topics, which the U.S. until last month had been discussing with 76 other WTO members in a venue called the “Joint Statement Initiative on Electronic Commerce.” They include (a) cross-border flows of digital data in the course of business, shopping, gaming, email, etc.; (b) guidelines for the circumstances in which governments can require local storage of data and when they shouldn’t; (c) cases when governments can direct businesses to disclose their software codes; and (d) ensuring that trade rules don’t discriminate against digital products.

If one were to look for an analogy in “trade policies for goods” like cars or wine, a useful though not exact comparison would be to “trade facilitation” and agreements on Customs procedures.  Typical U.S. trade agreements require Customs agencies to provide online access to import and export forms, accommodate express delivery shipments, and ensure that other governments don’t use different inspection procedures for containers carried by different shipping lines or cars delivered to different ports. These sorts of rules reduce costs and delays, help toys and flowers move through airports and seaports rapidly and easily, encourage the countries and businesses that make or grow them to compete on quality and price as opposed to hidden policy favoritism, and help port officers focus on law enforcement and public health inspections. In the same way, rules encouraging free flows of data, or discouraging mandatory in-country storage and server construction, help make legitimate services trade — say, email connections, exchange of architectural planning, news and entertainment streams, etc. — easier and cheaper while helping government officials focus their work on cyber-security violations, spam prevention, and other threats.

3.  Economics and trade flows: Digitally delivered services arriving via submarine cable or satellite — software, entertainment, computer technologies, professional stuff such as architecture, new earners like telemedicine and distance education — have a plausible claim to be the fastest-growing form of trade. In the U.S. case, they totaled $720 billion in 2022. By various metrics this was (a) up about 60% in the past decade, roughly twice the growth rate of overall U.S. exports; (b) a quarter of the $3 trillion in total U.S. exports in 2022, and a few hundred billion dollars more than the $380 billion for energy and $195 billion for agriculture, (c) easily the largest digital export figure for any country in the world, and (d) a thirtieth of the U.S.’ $26 trillion GDP. More subtly, digital data flows underpin lots of high-end manufacturing sales.  Examples include cars that notify owners of the need for brake repair or oil change; medical devices providing diagnoses and filling prescriptions for rural clinics, agricultural machinery planting rice when the weather is right, etc. So by whatever measurement, digital trade flows support a large and highly remunerative part of the American economy and it’s quite logical for the government to care about them.

4.  Current Agreements and Rules: The U.S. “digital trade” ideas are not actually experimental, but are live parts of several currently active U.S. agreements as well as the WTO’s incomplete “Joint Statement” discussions. These are Chapter 15 of the U.S.-Korea FTA, which “entered into force” as the jargon puts it in 2012; Chapter 19 of the “U.S.-Mexico-Canada Agreement” which revised the North American Free Trade Agreement in 2020; and a 19-page U.S.-Japan digital trade agreement signed in 2019. Their substance:

(a) People and businesses in participating countries have the right to move data across borders freely (e.g. for an online shopper ordering a set of toothbrushes, or an auto manufacturer whose car corresponds digitally with the home office to request software updates or notify police about an accident), with an exception for any government action “necessary to achieve a legitimate public policy objective” (e.g. anti-spam, cyber-security, protection against disinformation campaigns, etc.).

(b) Government power to require companies to turn over software code to agencies (or, often more the point, to local competing firms) is limited to public-policy regulation and good-faith investigations as opposed to arbitrary and/or discriminatory rules.

(c) Governments can’t be required to store data and build servers within a country, so as to reduce costs (and along with this, the power consumption and consequent carbon emissions) of constructing redundant servers and data centers in numerous countries.

5.  What’s going on? What, finally, does the withdrawal of these ideas at the WTO mean?  The three-sentence statement quoted above doesn’t explain. So rather than speculating, we offer a few questions that pretty badly need an answer:

* Does the administration want “policy space,” so as to be able to limit Americans’ data flows or require exposure of source codes for reasons that go beyond “measure[s] needed to achieve a legitimate public policy objective.”  If so, what sort of things are they thinking about, and what law would authorize it?

* If the data and source code ideas are out of favor at the WTO, are the USMCA, Korea-FTA, and U.S.-Japan Digital Agreement provisions now insufficient? If so, is the administration thinking about changes to them?

* Or is the concern more about foreign governments’ “policy space”?  If so, what are these governments hoping to do that Mexico and Canada (and Japan and Korea) are managing to do without?

* And how do any of these concerns relate to the larger hopes for the next-generation digital world — access and technical interoperability, innovation and economic growth arising from future rises in data flow, public-interest regulation, user privacy, and liberty — set out in the Declaration for the Future of the Internet?

Answers awaited, here and in lots of other places.

FURTHER READING

The Declaration for the Future of the Internet.

The WTO’s Joint Statement Initiative on e-commerce.

The U.S. Trade Representative Office’s brief statement.

Highly displeased response from Sen. Ron Wyden (D-Ore. and Finance Committee Chair).

And similar reaction from Digital Trade Caucus Chairs Suzanne DelBene (D-Wash.) and Darin LaHood (R-Ill.).

Current agreements:

USMCA text (see Chapter 19, “Digital Trade”).

U.S.-Japan digital trade agreement text.

Korea-U.S. Free Trade Agreement, see Chapter 15 on “Electronic Commerce.”

And some PPI background on Internet and digital trade policy: 

Gresser on digital trade policy.

Chief Economist Mandel on regulation of digital platforms.

And Technology Policy Analyst Malena Dailey on transatlantic data flows.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: Military spending was 2.3% of world GDP last year.

THE NUMBERS: World exports, 2022*-

All goods     $24,000 billion
Clothes            $315 billion
Fish                  $151 billion
Arms transfers   $32 billion

*Sources: WTO for all goods and apparel; UN Food and Agricultural Organization for fish; Stockholm International Peace Research Institute (SIPRI) for arms sales. SIPRI data covers known transfers of “major conventional weapons.”

WHAT THEY MEAN:

What place does the military hold in the world economy?  Statistical snapshots from 2022 on world military spending and arms trade, and then three cautions about the data:

World defense spending at modern-history lows: A widely-used calculation by the Stockholm International Peace Research Institute (SIPRI) finds world military spending — procurement, pay, military construction, and so on — at about $2.24 trillion in 2022.  According to the International Monetary Fund, world GDP was $100.15 trillion that year. So SIPRI’s figure suggests that about 2.2% of world income went to military budgets, and a World Bank table for the same year yields a very close 2.3% of world GDP.

This figure captures the policies governments set down in 2021, just before the Russian invasion of Ukraine, and by historical standards, it is very low. Tallies from earlier decades report military spending rates above 6% of world GDP in the 1960s; in a range from 3.8% to 4.5% in the 1970s and 1980s; and varying since 2000 in a narrow band between 2.2% and 2.6%.  As two points of comparison: (a) about 11% of world GDP goes to health (or 6% of world GDP if one counts only public spending), and 4.2% to education; and (b) in labor terms, the CIA’s World Factbook estimates that about 20 million men and women are in uniform around the world which would be  0.5% of the world’s 3.5 billion workers. To look more specifically at the U.S., American military spending was about 3.5% of GDP in 2022 (by the World Bank’s table), which is above the worldwide average but far below the 11% the U.S. Defense Department reports for the Korean War years in the early 1950s and the 5% levels of the later Cold War.

Arms trade small relative to civilian trade:  SIPRI’s parallel “arms transfer” count reports about $32 billion worth of arms deliveries in 2022. Their count covers deliveries of “major conventional weapons” — tanks, planes, missiles, submarines, artillery, etc. — and includes sales of both new and used kits, licensed production, and deliveries of significant components as well as complete systems. Like the world’s combined military budget as a share of GDP, the arms transfer total is a lot of money but small when measured against civilian trade. The WTO’s most recent annual trade statistics report puts “goods trade” in general at $24 trillion in 2022, which would make SIPRI’s $32 billion in arms transfers about 0.1% of the total. Or, to look at particular products, the WTO’s places clothing exports at $313 billion — ten times SIPRI’s arms transfer figure — and automotive trade at a much larger $1.37 trillion, while the U.N. Food and Agricultural Organization’s estimate of fish and seafood exports was $151 billion.

Nor does military trade look very large for individual countries. By country, SIPRI’s top exporters in 2022 were the U.S. at $14.5 billion, France at $3.0 billion, Russia at $2.8 billion, and China at $2.0 billion. This would be about 1% of the U.S.’ $2.1 trillion in goods exports, 0.5% of French and Russian exports (though a higher 3% of Russian manufacturing trade), and 0.1% of Chinese exports. On the import side, military shares of trade can be quite high for the largest purchasers — Qatar, the largest buyer on the SIPRI list, spent $3.3 billion on weapons or 15% of its overall $28 billion in imports, and military goods accounted for 2% and 7% of imports for fourth place Saudi Arabia and fifth place Kuwait — but outside the Persian Gulf is rarely a very large part of national import bills.

Tentative Conclusion: The public data and estimates, then, suggest that as of 2022 the world’s military economy was a relatively small part of the larger global economy; military spending a modest though not tiny part of national budgets; and military trade a very small part of international trade. Three cautions, though:

Caution (1): Secrecy: In many countries, some sections of national defense budgets and arms sales aren’t thought suitable for publishing, and are thus missing from the totals.  So figures for military spending and trade, strictly defined, are reasonable “lowest-case estimates” rather than very firm data.

Caution (2): Definitions: The military economy is not separate from the civilian economy, but merges with it along the edges. Definitions of what is “military” and what is “civilian” are thus a bit arbitrary.  In military trade, for example, is the right approach SIPRI’s decision to count weapons only? Would it be better to add “dual-capable” trucks, chips, fuel, rifles, and satellites too? Repair, training, software updates, replacement parts, and maintenance?  Or should everything a military service buys be considered “arms trade”?

As an important example, the U.S. Defense Department’s 2023 policy paper observes that for both of these reasons, China’s “actual military-related spending could be 1.1 to 2 times higher than stated in its official [$209 billion] budget.” This would suggest a figure approaching $400 billion and somewhere between 2% and 3.2% of Chinese GDP, in contrast to the World Bank table’s 1.6%. (And some private estimates go higher.) Or to choose a case close to home, the State Department’s Political-Military Affairs branch, which oversees official U.S. arms sales policy, uses a broader definition than SIPRI’s to report “new sales” of U.S. weapons at about $55 billion a year, which would imply considerably higher global as well as American arms sales.

Caution (3): Changing times: The defense budgets and arms transfers of 2022 are those decided upon in 2021, just before Russia’s attack on Ukraine. Whatever the definitions one chooses, and however much they publish, governments are making this year’s budgets and sales in a world grown more dangerous, and their numbers will presumably be larger.

                 

FURTHER READING

SIPRI’s arms trade totals by country.

And their military spending database.

U.S. policy:

Secretary of Defense Lloyd Austin, presenting an $842 billion request for next year’s defense budget to the Armed Services Committees, notes (a) a “pacing challenge” from rising military spending and capability in China; (b) an “acute threat” to Europe and global security posed by Russia’s invasion of Ukraine; and (c) structural programs including pay raises for enlisted personnel, research and development, and more.

The Commerce Department’s Bureau of Industry and Security oversees export controls.

And the State Department’s Arms Sales and Defense page.

Spending: 

A World Bank table of military spending/GDP makes Latin America and the Pacific Islands the regions with the least ambitious military budgets, at an average of 1.0% for each region. The Arab states’ spending level is highest at 5.0%. The sample below drops two outliers at the very top — Eritrea’s 20.5% of GDP as of 2003, and Libya’s 15.5% as of 2014 — along with embattled Ukraine’s 33.5%. (Also note, the Bank doesn’t venture a guess for North Korea.) Apart from these anomalies, military spending/GDP ratios around the world in 2022 topped out at Saudi Arabia’s 7.4% and Qatar’s 7.0%, and drift downward to the 0.2% levels for Laos, Mauritius, and Ireland, and Haiti’s lowest-in-the-world 0.1%. Here’s a sample list indicating the range.

Saudi Arabia	7.4%
Qatar	7.0%
Oman	5.2%
Israel	4.5%
Russia	4.1%
U.S.	3.5%
Cuba	2.9%
Singapore	2.8%
South Korea	2.7%
Pakistan	2.6%
Lithuania	2.5%
WORLD	2.3%
Vietnam	2.3%
United Kingdom	2.2%
France	1.9%
China*	1.6%
Norway	1.6%
Spain	1.5%
New Zealand	1.2%
Thailand	1.2%
Brazil	1.1%
Switzerland	0.8%
Indonesia	0.7%
South Africa	0.7%
Argentina	0.4%
Ireland	0.2%
Haiti	0.1%

* Official published Chinese budget.  At the high end of DoD’s range, the Chinese military share of GDP share would be 3.2%, about the same as that of the United States.

And some perspectives on China’s military spending: 

SIPRI’s $240 billion in 2019.

DoD’s view (p. 142) has 1.1 to 2.0 times higher than the public budget, for a range between $220 billion and $420 billion.

And the American Enterprise Institute, citing Alaska Sen. Dan Sullivan, guesses $700 billion.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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