The balancing act of Brexit and digital trade

As the UK leaves the EU it risks a potential ‘digital cliff-edge’. How it navigates its way through global tensions around digital trade rules will orientate the shape of the economy for years to come

Recent weeks have seen the news of the government looking to rush through new data protection laws in the UK, trumpeted in the press as supporting a new range of data and online rights. To the armchair follower, it might seem a surprise that at a time of high political demands that the government is focussed on data protection rules. It is even more surprising given that the government has been largely immune to the voices of digital consumers in areas such as online tracking and digital encryption.

The truth is that these new data protection laws are being pushed through as an integral part of the UK’s negotiations on Brexit. The government is urgently trying to equalise its data rules with the EU in order to reduce the very real risk of a ‘digital cliff-edge’ which would lead to dramatic declines in data flows on day one of Brexit.

The digital cliff-edge is just one of many challenges that the UK faces in negotiations of digital trade rules, which often make up one-quarter to one-fifth of the text of modern trade deals. In leaving the EU, the UK will have to negotiate a path marked by strong political tensions between the EU, the US and emerging nations.

In May 2018, the General Data Protection Regulations (GDPR) will come into force in the EU. These rules, have been shaped by Germany and France who are becoming increasingly interventionist in shaping the digital sector to protect consumers, support EU firms and prevent US digital monopolies. The GDPR will install much stronger demands in terms of securing personal data online, and stronger digital consumer rights with massive fines for firms breaking these rules (up to 4% of global turnover).

A key aspect of the GDPR rules is that flows of personal data into countries outside the EU will only be permitted where countries or firms are approved as “adequate” by the Commission. Essentially, this means that any firms dealing in EU data, wherever they are in the world, will be obliged to follow the strict demands of the GDPR if they want to trade in the EU.

As a recent House of Lords Select Committee report outlines, as the UK leaves the EU, it is imperative the UK is deemed an ‘adequate’ country in terms of the GDPR. The fallout of this not happening is that every firm in the UK who wanted to engage with EU users online would need to individually go through a complex compliance processes. This would involve substantial red-tape and have huge effects on data flows coming into the UK.  By adopting the GDPR, the government is making a political calculation that this will support a favourable judgement of adequacy, reducing the risks of a digital cliff-edge.

Beyond Europe, digital trade is likely to be an important part of any UK-US free-trade deal. The more interventionist agenda on digital trade in the EU is seen as a problem for leading tech firms in the US such as Google and Facebook. As these US digital leaders look globally for growth, their motivation is to minimise any interventions in data flows to ensure their business models are viable. With US tech firms becoming effective in influencing US policy, digital trade is now a core part of the trade agenda. A key prong of this agenda is that the US seeks to enforce free flows of data within the rules of regional trade deals (as seen in the TPP and the TTIP).

If similar digital free trade rules are promoted within a new UK-US trade deal they pose potential tensions in the UK. They are liable to be problematic in key sectors in the UK with strong public linkages such as health, pharmaceuticals and military who may baulk at rules that prevent more strategic shaping of their sector in the future. Moreover, such rules would effectively reduce the UK’s power in regulating digital monopolies as firms such as Google and Uber become dominant in their respective sectors. When the UK was part of the EU, the EU-bloc successful resisted the insertion of such rules as part of TTIP negotiations, but it is less clear if this would be possible for the UK negotiating with the US on its own.

The wildcard in digital trade relates to the UK striking free trade deals with emerging nations. In a number of emerging nations such as China, India, Brazil and Nigeria digital firms and e-commerce markets have been more strongly protected by national governments. Preferential treatment of local digital firms, rules preventing foreign storage of data, and forcing international firms to locate and keep data locally are examples of such protections.

UK trade negotiations will need to consider digital rules as an essential part of gaining access to markets and firms in emerging nations. This will be a challenge, but a possible direction is that the UK trades-off improved access against sharing its cutting edge digital knowledge that many emerging nations are seeking out. Joint R&D, university partnerships and strategic firms with emerging nations in areas such as AI, digital industrialisation and transport are likely, but this will need to be done without surrendering control of key national resources.

As digital technology becomes key in all sectors, digital trade is a key foundation of the UK’s post-Brexit economic development. But, as should be clear, the UK confronts a range of different directions around digital trade in the EU, US and emerging nations. To negotiate a suitable path will push the skills of UK negotiators, who have no record in negotiating around digital trade.

Given the political necessity for successful trade deals, the UK will most likely take a pragmatic position negotiating and positioning themselves on a deal-by-deal basis on digital trade. This, however, is not without its risks. In the wrong hands, a pragmatic strategy could easily result in contradictory demands on firms and policy makers across different regions. With a lack of debate in this area, there is also a strong risk of capture by influential digital firms who have the ear of government. ­

Greater debate and clarification on the direction of digital rules, is absolutely essential in ensuring that post-Brexit digital trade is coherent and inclusive.

This piece draws on research with Shamel Azmeh (Bath) and Jaime Echavarri (Sheffield) exploring the digital trade agenda and trade deals. Recent working papers: ‘TPP and the Digital Trade Agenda and ‘Digital Latecomer Economies and National Internet Policy’