For as long as the United States has had a digital economy, the nation’s trade negotiators have fought tirelessly to combat foreign policies that would impede American innovators’ ability to compete in the global market. In an unprecedented move, the Office of the United States Trade Representative (USTR) decided to withdraw U.S. support from our own digital trade priorities at the World Trade Organization (WTO). The stated reason for this withdrawal is to “provide enough policy space” for debate on regulations directed specifically at the digital economy. In other words, USTR is trying to draw down support for U.S. tech-driven industries in order to make way for foreign governments to harshly regulate large American tech companies. In practice, USTR’s decision will weaken the ability of U.S. small business innovators to grow and create new American jobs. Further, the credibility and negotiating position of the U.S. government in international fora like the WTO, and in bilateral negotiations with trading partners, will be permanently undercut.

There are several reasons, among others, that this decision will harm small companies like App Association members, which we elaborate on more in our National Trade Estimate filing for 2024.

Data Localization and Cross-Border Data Flows. Since the beginning of the internet, governments around the world have sought to require any company doing virtual business within a given jurisdiction to store any associated data physically within that jurisdiction’s borders. Pushing back against data localization is one of the priorities USTR is abandoning at WTO. Specifically, some countries have adopted or are considering requirements for American companies to buy or rent data centers inside the host country. Unfortunately, these kinds of policies are attractive to some foreign nations because they mandate that American companies spend money locally; they operate to subject affected data to local laws (including for surveillance); and they create a barrier to entry mainly for American firms. Unfortunately, while larger companies can pay their way through this barrier, smaller companies are often unable to shoulder the additional costs of data localization, deepening resource disadvantages for smaller competitors in the app economy.

Source Code Transfer. Another of the priorities USTR is walking away from is combatting efforts by some countries, especially China, to require companies doing business in a given country to provide highly sensitive and valuable source code to that country’s government. With the United States walking away from this priority, China is now free to advance its interest in requiring foreign companies to give it access to their source code. Again, smaller companies are unlikely to be able to combat such a requirement effectively and the risk that a foreign government would steal it rather than honoring any promise to put it in “escrow” would be greater given that smaller companies are less able to fight back. Trade secrets and intellectual property are the bulwark smaller companies in tech-driven sectors have against more well-resourced competition.

Misapplication of Competition Laws to New and Emerging Tech Markets. As we discuss further in our white paper on this issue, frameworks like the Digital Markets Act (DMA) could diminish the online marketplaces our member companies use. This is in part because open access requirements in the DMA (and similar proposals and policies across other important markets) would introduce new security and privacy vulnerabilities, which disproportionately harm small app company prospects. But the open access mandates would also hamstring American competitors, opening significant market opportunities for rival companies owned by Chinese firms that would not be subject to the regulatory framework.

The long-standing commitment the United States has honored to combat harmful policies overseas is one on which smaller companies have relied implicitly. Even the smallest App Association members are global firms in part because USTR and other American trade negotiators have successfully kept overseas markets open. As recently as June 2023, USTR reiterated that the United States opposes policies that force technology transfer, unjustifiable or arbitrary application of regulations, and similar discriminatory trade practices. USTR’s decision in this case is anomalous and runs counter to the Biden Administration’s overall position on digital trade, including its opposition to Digital Service Taxes (DST) and proposals to require American digital service providers to pay for telecommunications network infrastructure deployment.

As we testified in Congress in 2017, “[a]n ever-growing number of American jobs depend on digital trade, while the interests that support digital protectionism are becoming more influential. We have much work to do to protect the vitality and dynamism of the digital economy . . ..” Fast forward to now, and it is clear that digital protectionism continues to proliferate, making U.S. support for small business’ interests in free and fair trade even more important. Fortunately, there is still an opportunity to do so, in part because USTR’s decision did not leverage the interagency consultation process. The Administration should reconsider USTR’s withdrawal with the benefit of input from other relevant parts of the federal government and, in the meantime, clarify that it will continue to advocate for long-held digital trade priorities.