IBM Comments on U.S. Review of Trade Agreements

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Washington, D.C. – IBM (NYSE: IBM) today submitted comments to the United States Federal Register in response to a request for input to inform the Trump Administration’s review of trade agreements. While the review focuses on “violations and abuses” of existing trade agreements, IBM’s comments focus on ways that forward-thinking trade policy has benefitted the U.S. economy, and opened new markets to American innovations.

The company’s full comments are as follows, or you can download them here (PDF, 1.6MB).

Introduction

IBM’s long-standing motto, established by its founder.

IBM appreciates the opportunity to provide comments to the Federal Register Notice regarding the “Administration’s Reviews and Report to the President on Trade Agreement Violations and Abuses.” IBM has had a long and productive working relationship with the Executive Branch in developing a trade agenda that supports innovation, economic growth and job creation in the United States.

IBM is a global technology and innovation company headquartered in Armonk, New York. It is the largest technology and consulting employer in the world, with 380,000 employees serving clients in 175 countries. IBM’s expertise is in the intersection of technology and business, providing cognitive computing and cloud-based solutions that are changing the way the world works.

IBM is an international business.  From our founding, IBM’s growth and success has depended on the ability to bring innovations to new markets.  Today, more than two-thirds of IBM’s revenues come from outside the United States, while more than half of our $5.4 billion in annual R&D investment is here at home.  In 2015, IBM exported approximately $12 billion in goods and services, including $5 billion in software, from the U.S. to clients around the world.  Open markets and trade, facilitated by the United States’ free trade agreements, are essential to IBM’s success – and to the success of our U.S.-based employees and clients.

Big Data and Artificial Intelligence

Today, the global technology industry stands at a critical inflection point, the ramifications of which will impact companies and consumers in all sectors of the U.S. economy.  This is being driven by the intersection of big data and machine learning, or Artificial Intelligence (AI), which is transforming the way individuals, governments and companies interact and do business.  In the United States, this transformation is providing new opportunities for individuals and companies of all sizes—particularly SMES—to export to foreign markets in ways that would have been impossible two decades ago.

Put simply, the world is awash in unprecedented amounts of data, which are growing exponentially. Every digital process and social media exchange produces it. Systems, sensors and mobile devices transmit it. Big data is arriving from multiple sources at an astounding velocity, volume and variety. Every 48 hours, human beings create the equivalent of all the data generated through human history up to 2003.[1]  And only 20 percent of this data is currently searchable.  The remaining 80 percent, known as “dark data,” is unstructured information from the web and is increasingly coming from the Internet of Things as the world becomes more instrumented, interconnected and intelligent.  In 2015, for example, there were an estimated one trillion connected objects and devices generating data.[2]

Computers can process unstructured data, store it, secure it and move it around, but traditional programmable computers cannot understand it.  AI, coupled with new and powerful analytics tools, are allowing companies, governments and consumers to understand and harness this vast amount of data in new and innovative ways.

IBM is leading the way with its Watson Cognitive technology.  Watson can understand massive and constantly growing amounts of data, reason and extract insights, continually learn and then interact with people naturally. This ability provides our clients unparalleled ability to make smarter, informed decisions.  Unlike early forays into AI—efforts to mimic humans—cognitive systems such as IBM’s Watson are specifically designed to augment human intelligence, to work side-by-side with human experts as tools for enhanced decision-making. The sheer volume of data being generated by the world is creating a form of cognitive overload for professionals and consumers alike, and these systems excel at harnessing and making that data useful.  This need is especially pressing in data-intensive domains such as healthcare, finance, insurance and education, as well as emerging areas such as Blockchain and the Internet of Things.

The Digital Economy

This revolution has been made possible by the stunning growth in computing power and the spread of the internet. In 1994, less than one percent of the world’s population had access to the internet.  Today, that figure is close to fifty percent, with over 3.5 billion internet users worldwide.[3]  That number is expected to rise to 5 billion by 2020.[4]

According to TeleGeography, a consulting firm that keeps track of international data flows, demand for international bandwidth increased at a compound annual rate of 49% between 2008 and 2012.  Over the same period, global trade in goods and services, adjusted for inflation, only rose at an average rate of 2.4%.[5]  The Business Roundtable reports that there was an 18-fold increase in online cross-border data flows between 2005-2012 and, by 2025, these data flows are projected to increase a further eightfold.[6]

Those countries that can harness the internet for the good of its citizens will experience greater economic growth, productivity gains, innovation and job creation.  The Business Roundtable found that economies that are more connected to cross border data flows experience up to 40 percent higher GDP growth than those that are less connected.[7]

American technology companies are global leaders in this transformative era.  According to Forbes, in 2017, fifteen of the 25 largest tech companies in the world are American, including eight out of the top ten.[8]  The 2017 BarndZ report found that eight of the top ten most valuable global brands were American technology or technology-related companies.[9]

America’s strong comparative advantage is based on the growth in internet-based business models and digital trade – the ability of businesses and individuals to deliver products and services online and to manage their global business operations by moving data freely around the world.  According to the U.S. Department of Commerce’s Economics & Statistics Administration, in 2014, the U.S. exported $385.1 billion in digitally-enabled services, constituting 54.2 percent of total U.S. services exports.  Imports of digitally-enabled services stood at $230.9 billion, giving the United States a trade surplus of $154.2 billion.[10]  The U.S. International Trade Commission (USITC) found that, between 2007 and 2011, the combined effects of increased productivity and lower trade costs of digital trade have increased U.S. gross domestic product (GDP) by 3.4 – 4.8 percent ($517.1−$710.7 billion).[11]

The benefits to the U.S. economy accrue to companies of all sizes and across all sectors.  The U.S. Chamber of Commerce found that small- and medium-sized enterprises that rely on internet-services experience 22% greater revenue growth than companies that do not.[12]  And McKinsey estimates that approximately 75 percent of the value added by data flows on the Internet accrues to “traditional” industries, especially via increases in global growth, productivity, and employment.  These findings were confirmed in the 2017 Report “How Cloud Computing Enables Modern Manufacturing,” which details how cloud applications are transforming the American manufacturing sector.  In 2015, U.S. manufacturers spent $124 billion on IT services, double the level in 2009.   As the report notes, this investment “should better equip U.S. firms not only to compete with global manufacturing rivals in existing markets, but also to rethink the purpose and processes of manufacturing as well as to invent entirely new products and manufacturing services.”[13]

IBM Leadership in the Digital Transformation

IBM is a playing a leading role in this global digital transformation.  We provide cognitive solutions to clients in every sector to harness data, improve products, target customers, increase productivity and streamline operations.  For example:

  • IBM is partnering with oil and gas companies to use Watson Cognitive technology to analyze thousands of pipeline sensors, and monitor cracks, vibrations, overheating and other factors, allowing engineers to predict pipeline failures as early as six days in advance.
  • In the past, farmers in established growing regions traditionally relied on static climate datasets collected by existing government, city or airport weather stations. Now, with a global network of distributed weather stations in the field, and with hyper-local forecasts from The Weather Company, IBM is providing real-time data and highly precise predictive models that enable growers to make more accurate decisions on how to manage their time, resources and costs.
  • Oil exploration and drilling companies are using the IBM cloud to run sophisticated oil reservoir simulations that help them better understand how complex oil and gas fields might behave under different development scenarios. With insights from hundreds of models, petroleum engineers and geoscientists can optimize drilling decisions to reduce costs and increase production-shaping how billions of dollars may be spent on large oil fields.
  • Radiologists review dozens of medical images for every patient they see, often hundreds in a day. IBM’s Watson never gets eyestrain or momentarily distracted and has been trained by researchers to rapidly analyze huge numbers of images and rank them for potential anomalies.  Radiologists can then focus on the ones that matter and apply their expertise more quickly.  Watson can also retrieve similar images from other cases for comparison to help doctors confirm or refine their diagnoses.

IBM is also leading innovation in Blockchain.  There are clear applications in financial services – where Blockchain could be used to accelerate the settlement of transactions by boosting efficiency and cutting out red tape. Manufacturers could use Blockchain-enabled systems to manage their supplier networks, ensuring all component providers have an accurate list of required parts combined with clear shipping schedules and automatically logged departure and delivery records.  Blockchain will help facilitate U.S. exports by simplifying supply chains and creating greater certainty in cross-border transactions.  But U.S. companies can only utilize Blockchain if data is allowed to flow freely and fairly across borders.

IBM’s own growth, and the success of our clients, therefore, depends on data-driven innovation, fueled by an open and secure internet.  And with 95 percent of the world’s consumers living outside of the United States, our success depends on our ability to compete freely and fairly in overseas markets.  This is only possible with the free flow of data.

Barriers to Digital Trade

Despite the growth of the internet and the tremendous benefits that accrue to countries that embrace the digital economy, many governments are erecting barriers that undermine our ability to compete on a level playing field.  These digital trade barriers come in many forms, including restrictions on cross-border data flows, requirements to establish local data centers and computing infrastructure as a condition of operation, import restrictions, requirements to reveal source code and algorithms and mandatory technology transfer requirements.

In some instances, these restrictions are driven by legitimate public policy concerns related to privacy, data protection, and government access to data.  All too often, however, these policies restrict American market access and provide local companies unfair advantages. The United States is home to the world’s leaders in technology and innovation and the creation of internet-enabled business models across all sectors, so the United States has the most to lose from the growth of digital trade barriers.

The USITC found that data flow restrictions could reduce U.S. GDP by 0.1 – 0.36 percent. In contrast, USITC estimated that by removing barriers to digital trade, U.S. GDP could increase by 0.1 – 0.3 percent, or $16.7 to $42.1 billion.  Wages in digitally intensive sectors could rise by 0.7 to 1.4 percent.[14]

These restrictions also threaten to exacerbate America’s trade deficit.  The United States enjoys broad trade surpluses in services that are critical to the overall health of the economy.  A 2017 USITC report notes that in 2015, the United States supplied $690.1 billion, or 15 percent, of global cross-border commercial service’s exports.[15]  These U.S. trade surpluses will be put at risk if digital trade barriers continue to proliferate.

There is also compelling evidence that governments that impose digital trade restrictions cause enormous harm to their own economies. The European Centre for International Political Economy, for example, examined the impact that data localization polices had on the broader economy in select countries.  It estimated that recently enacted or proposed data localization rules and legislation would have a significant and severe impact on GDP in Brazil (-0.2%), China (-1.1%), EU (-0.4%), India (-0.1%), Indonesia (-0.5%), Korea (-0.4%) and

Vietnam (-1.7%).  The report found that if these governments implemented data localization provisions that applied across all sectors of the economy, the impact would be even more severe:  Brazil (-0.8%), the EU (-1.1%), India (-0.8%), Indonesia (-0.7%), Korea (-1.1%).[16]

Despite the overwhelming evidence of the benefits of digital trade, the number of restrictions faced by American companies has grown exponentially:

[17]

Modernizing Trade Agreements

Trade agreements, therefore, are more important than ever to ensure America’s global competitiveness.  As the Administration reviews past trade agreements and considers new ones, it is essential that digital trade disciplines are a centerpiece of any negotiating objectives.  IBM is encouraged by recent comments by Commerce Secretary Ross and U.S. Trade Representative Lighthizer underscoring the opportunity for digital trade and its importance in creating jobs and economic growth in the United States.  We are also pleased that the Administration included cross-border data flows and data localization in its negotiating objectives for modernizing the North American Free Trade Agreement.

As noted above, digital trade is not just a priority for the tech sector.  All businesses that operate globally across all industries – from banks, to airlines, to manufacturers – rely on the free flow of data. The ability to use the internet to reach customers in markets around the world is especially important for small- and medium-sized enterprises that would otherwise miss out on these opportunities.

Unfortunately, many existing trade agreements do not include adequate protections for digital trade.  While the WTO General Agreement on Trade in Services includes commitments on cross-border services, it does not explicitly mention data flows and can be undermined by restrictions imposed for purported purposes of protecting privacy or other regulatory purposes.  Moreover, many of our bilateral FTAs were negotiated before the growth of the internet.  More recent FTAs, such as the U.S.-Korea FTA, only include non-binding language related to digital trade.

The Trans Pacific Partnership (TPP) did contain ground-breaking digital trade provisions, including the elimination of digital trade barriers and expanded market access for American digitally-enabled services and products.  But U.S. withdrawal from TPP has meant we have ceded leadership on digital trade, and the vacuum could be filled by countries that are far more restrictive in their approach to data and the internet.

The European Union, for example, has resisted including robust digital trade provisions in any of its bilateral or multilateral trade agreements.  The EU’s opposition to the free flow of data helped stall the plurilateral Trade in Services Agreement (TiSA) negotiations in 2016.  And the recently announced EU-Japan FTA, despite Japan’s best efforts, includes no provisions protecting cross-border data flows due to the EU’s insistence on overbroad exceptions.  China is also aggressively negotiating regional and bilateral trade agreements that do not include digital trade provisions.  The RCEP negotiations, designed to counter the TPP, lacks any meaningful provisions that would open up China’s services market to foreign companies.

Despite the U.S. withdrawal from the TPP, IBM encourages the Administration to use the e-Commerce chapter of the agreement as the new baseline for future trade negotiations.  NAFTA modernization, for example, provides an important opportunity to develop “TPP+” disciplines on digital trade.  This is a realistic objective given that Canada and Mexico have already agreed to the baseline e-commerce language in TPP.

Future potential bilateral trade agreements—including with Japan and the United Kingdom— provide important opportunities to work with like-minded countries to build upon the TPP digital trade disciplines and create a new, global standard. Such an approach would also put increased pressure on the European Union to get serious about digital trade in the Transatlantic Trade and Investment Partnership (TTIP) and TiSA negotiations.

We urge the Administration to follow Congressional guidance on digital trade outlined in the 2015 Congressional Trade Priorities and Accountability Act.  In addition, IBM strongly recommends that all future agreements include provisions reflecting the following principles:

  1. Enable Cross-Border Data Flows: Companies and consumers must be able to move data as they see fit. Many countries have enacted rules that put a chokehold on the free flow of information, which stifles competition and disadvantages American companies in all sectors.  Trade agreements must combat these discriminatory and protectionist barriers with specific provisions designed to protect the legitimate movement of data across borders.  Any exceptions to cross-border data flows should be permitted only if they are necessary to achieve a legitimate public policy objective and are not disguised restrictions on trade.
  2. Prevent Localization Barriers: Companies that rely on cloud computing and the delivery of Internet-based products and services should not need to build physical infrastructure and expensive data centers in every country they seek to serve. However, many countries have tried to enforce such requirements, which add unnecessary costs and burdens on providers and customers alike. Trade agreements must include binding protections against these forced localization barriers.  Any exceptions should be permitted only if they are necessary to achieve a legitimate public policy objective and are not disguised restrictions on trade. 
  3. Bar Forced Technology Transfers: Countries should not make market access contingent on forced transfers of technology. U.S. trade agreements should include rules prohibiting parties from requiring companies to transfer their technology, production processes, or other proprietary information as a condition of market entry
  4. Protect Critical Source Code: U.S. innovators should not have to hand over their source code or proprietary algorithms to their competitors or a regulator that will then pass them along to a State-owned enterprise. Trade agreements must ensure that companies do not have to share source code, or trade secrets, or substitute local technology into their products and services in order to access new markets.
  5. Prohibit Digital Customs Duties: Trade agreements should include a complete prohibition on customs duties for digital products. This will ensure that customs duties do not impede the flow of music, video, software, and games so our creators, artists, and entrepreneurs get a fair shake.
  6. Secure Basic Non-Discrimination Principles: Trade agreements should ensure that digital products originating from one country cannot be put at a competitive disadvantage in any party’s market. Fundamental non-discrimination principles are at the core of the global trading system for goods and services, and this principle should apply to digital products as well.
  7. Ensure Technology Choice: Innovative companies should be able to utilize the technology that works best and suits their needs.  Trade agreements should include technology choice provisions to ensure that companies are not required to purchase and utilize local technology, instead of technology of their own choosing.
  8. Foster Innovative Encryption Products: Encryption is an important tool to address protections of privacy and security in the digital ecosystem. Trade agreements should include a provision that protects innovation in encryption products to meet consumer and business demand for product features that protect security and privacy while allowing law enforcement access to communications consistent with applicable law.
  9. Secure Robust Market Access Commitments on Investment & Cross-Border Services: Trade agreements must contain strong investment and cross-border services commitments, including for services delivered digitally. Cross-border services commitments are increasingly important with advances in technology, since more and more services can be delivered via the Internet.
  10. Ensure Market Access for New Services: New and innovative digital products and services should be protected in trade agreements against future discrimination. By design, protections for services and investment continue to apply as markets change and innovative technologies emerge, unless a specific, negotiated exception applies.

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Contact

Michael DiPaula-Coyle
IBM Government & Regulatory Affairs
202-551-9438
mdipaula-coyle@us.ibm.com

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FOOTNOTES:

[1] Ginni Rometty, Competitive Advantage in an Era of Innovation, The Lisbon Council, July 12, 2013

[2] The Business Roundtable, Putting Data to Work: Maximizing the Value of Information in an Interconnected World, 2015

[3] United Nations, International Telecommunications Union.  Time series of International ICT Data: http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx

[4] US Chamber of Commerce, Business without Borders: The Importance of Cross-Border Data Transfers to Global Transparency, 2014

[5] Progressive Policy Institute, Data Trade and Growth, 2014

[6] BRT, Putting Data to Work

[7] BRT, Putting Data to Work

[8] https://www.forbes.com/sites/kristinstoller/2017/05/24/the-worlds-largest-tech-companies-2017-apple-and-samsung-lead-facebook-rises/#2e0bc235d140

[9] http://brandz.com/admin/uploads/files/BZ_Global_2017_Report.pdf

[10] http://www.esa.doc.gov/economic-briefings/new-bea-estimates-international-trade-digitally-enabled-services

[11] USITC, Digital Trade in the U.S. and Global Economies, Part 2, 2014

[12] US Chamber, Business without Borders

[13] Stephen Ezell and Bret Swanson, How Cloud Computing Enables Modern Manufacturing, AEI & ITIF, 2017, p. 7

[14] USITC, Digital Trade in the U.S. and Global Economies, Part 2

[15] USITC, Recent Trends in U.S. Services Trade, 2017 Annual Report

[16] ECIPE, The Costs of Data Localization:  A Friendly Fire on Economic Recovery, 2014

[17]http://ecipe.org//app/uploads/2017/07/ECIPE-for-METI-JETRO-3.pdf

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