President Joe Biden and Prime Minister Yoshihide Suga will meet in Washington this week as both the United States and Japan show the world that alliances are back. But despite touting the U.S.-Japan Alliance as the cornerstone of peace and security in the Indo-Pacific, both countries walk a fine line when it comes to trade. That’s why both leaders should commit to using the existing U.S.-Japan Digital Trade Agreement as a template to expand free and open digital trade among both countries’ partners and allies in the Indo-Pacific with a regional digital trade agreement.
This is a critical inflection point for the U.S.-Japan Alliance.
Both countries are climbing out of the pandemic with hopes of celebrating meaningful progress this summer – Independence Day for the United States, as Biden aspired to in his March primetime address, and the Olympic and Paralympic Games for Japan, as Suga has insisted throughout the pandemic will go on.
Both countries are emphasizing their steadfast alliance after on-again off-again tensions over the past four years, during which even former Prime Minister Abe’s aggressive courtship of President Trump could not deter tariffs and trade frictions between the 60-year-old allies.
Both countries are also seeking to assert leadership by bringing regional partners and allies into the fold of the Free and Open Indo-Pacific to balance China’s influence.
But on opening markets, the United States remains largely mum on its policy toward the CPTPP, owed to the Biden administration’s ultra-cautious approach for fear of sparking domestic turmoil over what is now a political hot-potato. And prospects for further progress on the bilateral trade deal struck with Japan under the Trump administration are slim, given any further progress would require difficult conversations at a time when the alliance wants to project unity. Japan, too, is hesitant to go further down the bilateral path, preferring instead to forge its trade agenda ahead on the multilateral stage, and is in no position to make meaningful concessions during an election year anyway.
In short, any tangibles that come of the summit meeting need to tick the boxes of strengthening the alliance and asserting leadership in the region, while sidestepping political hot-button issues like trade.
In October 2019, USTR Lighthizer and Ambassador Sugiyama signed the U.S.-Japan Digital Trade Agreement, the first of its kind for the alliance. Mirroring language included in the U.S.-Mexico-Canada Agreement (USMCA), it laid out innovative standards and protective measures for digital commerce between the two countries, reflecting the realities of today’s evolving digital economy by prohibiting discrimination against both digital products and data localization.
Stakeholders called the agreement a “model for the world.” Indeed, this agreement can and should be a model for the world – starting in Asia and led by the U.S.-Japan Alliance.
Asia is exploding with digital economic value; nowhere else in the world is riper for a rules-based system for digital trade. According to McKinsey, about half of Asia’s GDP growth between 2010 and 2020 came from the technology and innovation economy, and that is only expected to accelerate. Asia accounted for more than half of global growth in technology-company revenue and R&D expenditures and an astonishing 87% in global growth in patent filings over the past ten years. A decade ago, Asia had two unicorns and no top-ten technology firms by market capitalization; today, Asia has more than half of the globe’s internet users, four top-ten technology firms, and nearly 40% of global unicorns – and they earn that status 50% faster than Western unicorns do. The International Data Corporation (IDC) predicts that 65% of Asia’s GDP will be digitalized by 2023, accounting for $1.2 trillion in spending.
Asia will be more plugged into 5G than anywhere in the world in the coming years. Between 2014 and 2018, the 4G adoption rate in Asia went from a paltry 6.4% to almost 50% in four years. The innumerable internet-connected devices being innovated every day in the IoT universe will accelerate the 5G adoption rate well beyond that of 4G – potentially as high as 30% by 2024, by which point Asia will have over 1.14 billion subscribers, or 65% of global 5G subscriptions, according to GlobalData.
E-commerce in Asia will continue to be a force with which to be reckoned. Asia will experience 8.2% growth in e-commerce between 2020 and 2025, while its counterparts in the Americas and Europe have to live with 5.1% and 5.2% growth respectively over the same period. Market revenue in Asia from e-commerce was expected to be triple the United States’ in 2020 at $1.4 trillion. Even the numbers over just the past few months during the pandemic are staggering – in the major Southeast Asian economies of Thailand, Vietnam, the Philippines and Singapore, gross merchandise value of live-commerce increased by 306% between January and June 2020 alone, according to APAC CIO Outlook. In a recent MIT study, 70% of technology decision-makers surveyed in Asia answered that the pandemic had forced their organizations to accelerate digitalization efforts.
A regional digital trade agreement would capitalize on this phenomenal growth and fend off looming threats of digital autarky. While digital policy is undoubtedly complex, the United States and Japan can begin reaching out to partners and allies in the Indo-Pacific to develop an agreement that covers important facets of a free and open digital economy, including the free flow of data, prohibitions on customs duties on electronic transmissions, consumer protections, and government-to-government collaboration to address cybersecurity challenges, among various other measures to enable the digital economy to flourish. Of course, any agreement must be flexible to reflect the evolving realities of the digital world.
A regional digital trade agreement would align with the Osaka Track, which Prime Minister Abe launched at the G-20 in 2019, and the efforts behind Data Free Flow with Trust (DFFT), a concept he debuted at the World Economic Forum in Davos the same year.
Digital trade demands strong leadership to guide the global economy to an environment of free and fair competition. While there is no shortage of policy ideas – or debates – on digital trade, it will be up to like-minded nations to take the initiative and chart a course for the digital economy. The United States and Japan are well-positioned to do just that, starting with our partners and allies in the Indo-Pacific.
*About the authors:
- Tami Overby is a Senior Director at McLarty Associates and previously led the US Chamber of Commerce’s Asia team while also serving as President of the US Korea Business Council.
- Kai Abe McGuire is an Associate at McLarty Associates and previously worked at the Embassy of Japan in Washington, D.C., the Center for Strategic and International Studies, and the Japanese National Diet.