Most Favoured Nation: Digital Trade Rulez
Not actually about electric vehicle rules of origin, surprisingly
Welcome to the 94th edition of Most Favoured Nation. This week’s edition is free for all to read. If you enjoy reading Most Favoured Nation, please consider becoming a paid subscriber.
I know what you are thinking. Given the media focus this edition of MFN will definitely be about electric vehicle rules of origin. I can see why you would think that, given the fact MFN has been covering this issue for absolutely ages.
But no!
MFN sets trends, it doesn’t follow. (Lol, sorry — I’ve always wanted to say that.) Instead, we’re going to talk about digital trade rules:
One of the reasons it is hard to articulate the economic impact of digital trade rules is that they tend [similar to services trade commitments in general] to commit partner countries to continue doing things they are already doing.
For example, Article 14.3 of the new UK-Australia FTA says:
Article 14.3 Customs Duties
Neither Party shall impose customs duties on electronic transmissions, including content transmitted electronically, between a person of a Party and a person of the other Party.
For greater certainty, paragraph 1 does not preclude a Party from imposing internal taxes, fees or other charges on electronic transmissions, including content transmitted electronically, provided that those taxes, fees or charges are imposed in a manner consistent with this Agreement.
Great!
But given neither the UK nor Australia imposes any customs duties on cross-border electronic transmissions, or has any intention to do so, how do you assess the economic value?
Rather than unlocking new access, this provision provides a further safeguard against a future UK or Australian government changing its mind and deciding it does, in fact, want to tariff the hell out data entering its territory (as an aside, good luck working out how to actually do that).
So in practice, it is one of those provisions you could take for granted for years and years … until one day, it actually does something.
Anyhow, we now have a real-life example of digital trade rules actually doing something:
The EU-UK Trade and Co-operation Agreement [and lots of other agreements, but not UK-New Zealand for reasons involving the Maori1] includes the following provision, prohibiting either party from forcing companies to hand over propriety source code as a condition of market entry:
Article 207
Transfer of or access to source code
1. A Party shall not require the transfer of, or access to, the source code of software owned by a natural or legal person of the other Party.
2. For greater certainty:
(a) the general exceptions, security exceptions and prudential carve-out referred to in Article 199 apply to measures of a Party adopted or maintained in the context of a certification procedure; and
(b) paragraph 1 of this Article does not apply to the voluntary transfer of, or granting of access to, source code on a commercial basis by a natural or legal person of the other Party, such as in the context of a public procurement transaction or a freely negotiated contract.
3. Nothing in this Article shall affect:
(a) a requirement by a court or administrative tribunal, or a requirement by a competition authority pursuant to a Party's competition law to prevent or remedy a restriction or a distortion of competition;
(b) a requirement by a regulatory body pursuant to a Party's laws or regulations related to the protection of public safety with regard to users online, subject to safeguards against unauthorised disclosure;
(c) the protection and enforcement of intellectual property rights; and
(d) the right of a Party to take measures in accordance with Article III of the GPA as incorporated by Article 277 of this Agreement.
Anyhow, thanks to reporting from EURACTIV, we now know that this obligation has already had an impact in the context of the EU AI Act:
… trade policy officials requested narrowing down the provisions related to the provisions of source code to bring them in line with the EU-UK Trade Cooperation Agreement.
The trade agreement commits London and Brussels only to require the transfer of software’s source code under specific conditions, notably if a regulatory body requests it to enforce a law meant to protect public safety.
In an internal note dated 9 April 2021, the trade department thanked the digital policy department for having amended the requirements on technical documentation but asked for further changes regarding the conformity assessment of the quality management systems, specifically on the provision related to the external vetting of notified bodies – authorised independent auditors.
The trade department requested that the wording on the provision of the source code should be narrowed down, removing a reference to ‘full’ access and specifying that it would only be provided to assess the conformity of a high-risk system to avoid an excessively broad interpretation.
Similarly, the trade department requested to eliminate the reference to granting ‘full’ access to the source code for a market surveillance authority to assess whether an AI system deemed at high-risk to cause harm complies with the AI Act’s obligations.
At the same time, the trade policy officers asked that the notified body and public authority be bound by confidentiality obligations when a source code is disclosed.
All the requested changes made it into the final draft the European Commission published later that month.
So there you have it: proof of digital trade rules doing something! Hurrah.
Electric vehicles
Okay, here’s a little bit on electric vehicles. MFN fan-favourite Chad Bown released a working paper recently looking at Inflation Reduction Act, and its potential impact on EV supply chains.
As ever, Chad has made lots of charts. And charts are good. Particularly this chart:
And I like this chart because what it shows us is that … maybe … the EU doesn’t need to worry quite so much about the Inflation Reduction Act? The US is clearly trying to play catch-up … but it has quite a long way to go.
As ever, do let me know if you have any questions or comments.
Best,
Sam
As discussed previously:
While Australia has committed not to require firms to hand over their source code as a condition of market entry (Article 14.18). New Zealand, on the other hand, has not.
In practice, this probably doesn’t matter that much – New Zealand doesn’t seem to make firms do this anyway – but it is slightly odd.
Why doesn’t New Zealand, a county that is generally very pro-free trade and at the forefront of digital trade discussions, make commitments on source code? I asked around and, to my great delight, it comes down to our old friend the Treaty of Waitangi.
New Zealand includes something called The Treaty of Waitangi exception in all its trade deals. Along with other provisions, this exception allows New Zealand to discriminate in favour of the Maori and ensure that trade deal obligations can’t get in the way of any settlement or redress afforded to Maori under the Waitangi Tribunal.
And it turns out New Zealand has already had an issue when it comes to making commitments on source code and other data issues. In response to New Zealand’s membership of CPTPP, and concerns around Maori data sovereignty, a Waitangi Tribunal concluded that:
… the risk to Māori interests arising from the electronic commerce (e-commerce) provisions [ed: which include commitments on source code] are significant and that reliance on exceptions and exclusions in the CPTPP to mitigate that risk falls short of the Crown’s duty of active protection. As a result, the Tribunal found that the Crown has failed to meet the Tiriti/Treaty standard of active protection and that this failure constitutes a breach of the Tiriti/Treaty principles of partnership and active protection.
So there we are.