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DIGITAL TRADE AND REGULATIONIN AN AGE OF DISRUPTIONPeter F. Cowhey and Jonathan D. Aronson*

ABSTRACT ............................................................................................... 8
I. DIGITAL DNA AND INNOVATION...................................................... 13
A. The Information and Production Disruption ........................ 13
B. Implications of Digital Platform Clusters ............................. 17
II. KEY GOVERNANCE CHALLENGES ................................................... 23
III. CREATING A TRUSTED DIGITAL ENVIRONMENT ............................ 28
Table 1: Twelve Important Privacy Principles .......................... 34
CONCLUSION ......................................................................................... 36
ABSTRACT1
The Trump Administration stated that its trade policy would focus on
trade in goods, prioritizing U.S. production over the overall competiveness of
U.S. multinational firms. It objects to regulation and instead will concentrateon unfair behavior by U.S. trading partners, especially currency manipulation,
tax system manipulation, and rigging markets by hidden protectionism. But,
as goods markets become more information and communication technology* Peter Cowhey is Dean and Qualcomm Professor Communication and Technology Policy at
Global Policy and Strategy Uniersity of California, San Diego. He was Senior Counselor at theUnited States Trade Representative in 2009-2010.
Jonathan Aronson is Professor at the Annenberg School for Communication and Journalism at
the University of Southern California and also Professor of International Relations at USC.
1This paper draws materially from our new book, Digital DNA: Disruption and theChallenges for Global Governance (New York: Oxford University Press, 2017). PETER F.
COWHEY & JONATHAN D. ARONSON, DIGITAL DNA: DISRUPTION AND THE CHALLENGES FORGLOBAL GOVERNANCE (2017).

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9(ICT) intensive, higher value added and higher wages will rely on thetechnology for sustainable advantages. American negotiators and theirinternational counterparts will face a series of challenges. U.S. leadership willcontinue to rest on America’s “soft power” advantage: U.S. leadership in ICT
architecture. We suggest ways in which a policy platform for quasiconvergence of national policies, facilitated by trade agreements, inconjunction with more detailed decisions, facilitated by trade agreements andmulti-stakeholder organizations (MSOs), respectively, could help create atrusted digital environment in which the United States and others could thrive.
The 2016 presidential election featured heated attacks on existing trade
policy. Both Hillary Clinton and Donald Trump rejected the Trans-PacificPartnership (TPP) trade agreement.2 Trump went beyond rejecting the TPP
with his calls to dismantle the North American Free Trade Agreement(NAFTA) and even to reconsider the merits of the World Trade Organization(WTO).3 Although President Trump’s Administration (“Administration”)
remains strong on rhetorical flourishes to overhaul trade policy, few details
over programmatic strategy and choices have surfaced. 4
Nonetheless, there seem to be four guiding premises. First, theAdministration is focused on the trade in goods and perhaps commodities(blue collar strongholds). In particular, it is intent on increasing U.S.
production of goods and jobs tied to steel, coal, and other heavy industry
sectors. It is quite willing to use presidential jawboning to push for added
investment in American manufacturing plants and claims that it may alter
tariffs and taxes to provide big financial incentives for U.S. production. 5 The
corollary to this premise is that the Administration has paid scant attention to
trade in services, even though said trade is approaching 40 percent of all U.S.
2

Editorial, The Rage Against Trade, N.Y. TIMES (Aug. 6, 2016),
https://www.nytimes.com/2016/08/07/opinion/sunday/the-rage-against-trade.html[https://perma.cc/B9UB-WMEA].
3
Chad P. Brown, What Is NAFTA, and What Would Happen to U.S. Trade Without It?,
WASH. POST (Feb. 15, 2017), https://www.washingtonpost.com/news/monkeycage/wp/2017/02/15/what-is-nafta-and-what-would-happen-to-u-s-trade-withoutit/?utm_term=.9ed064d6463f [https://perma.cc/7XTA-LEWE]; Damian Paletta & Ana
Swanson, Trump Suggests Ignoring World Trade Organization in Major Trade Policy Shift,
WASH.
POST
(Mar.
1,
2017),
https://www.washingtonpost.com/news/wonk/wp/2017/03/01/trump-may-ignore-wto-inmajor-shift-of-u-s-trade-policy/?utm_term=.d8f5f108574d [https://perma.cc/BG3K-B57M].
4
See the full trade agenda and report at OFFICE OF THE U.S. TRADE REPRESENTATIVE, 2017
TRADE
POLICYAGENDAAND
2016
ANNUALREPORT(2017),
https://ustr.gov/sites/default/files/files/reports/2017/AnnualReport/AnnualReport2017.pdf.
5This includes revisions in rules of origin for manufactured goods.

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trade and generates most American employment.6 Second, the White Houseseems particularly focused on three claims about unfair trade conduct—
currency manipulation by other countries to lower their cost of exports, tax
systems that discriminate against U.S. imports, and assorted claims of hidden
trade discrimination against U.S. goods.7 Third, the Administration has said
it will vigorously contest the WTO appellate system and reserve the right touse unilateral sanctions if necessary.8 Fourth, the Trump rhetoric on tradeoften seems agnostic about the welfare of America’s multinational firms thatchannel the majority of U.S. exports within their intra-firm global operations.
Yet a great deal of U.S. international commercial policy focuses on seeking
more consistency in national regulations so that U.S. multinationals canoperate in a global marketplace with regulations that are not wildly askew
from their U.S. home base.
Elements of the Trump approach won support from every priorpresidential administration.9
In both Democrat and Republicanadministrations, exchange rates were always on the U.S. economic agenda, as
were efforts to challenge hidden “barriers behind the borders,” regulatory
practices that effectively discriminate against U.S. goods.10 It is theextraordinary magnitude of the hinted policy responses—such as thedismantling of NAFTA, imposing measures on exchange rates that might
backfire on U.S. economic interests, or bypassing WTO dispute resolution—that deeply worry veterans of trade policy. 11

6Quarterly International Trade Statistics: Trade in Goods and Services, ORG. FOR ECON.
CO-OPERATION&
DEV.,
https://data.oecd.org/trade/trade-in-goods-and-services.htm[https://perma.cc/TS47-UBFV].
7
OFFICE OF THE U.S. TRADE REPRESENTATIVE, supra note 4.
8
Manfred Elsig, Mark Pollack & Gregory Shaffer, Trump Is Fighting an Open War on
Trade. His Stealth War on Trade May Be Even More Important., WASH. POST (Sept. 27, 2017),
https://www.washingtonpost.com/news/monkey-cage/wp/2017/09/27/trump-is-fighting-anopen-war-on-trade-his-stealth-war-on-trade-may-be-even-moreimportant/?utm_term=.54ebf15fd6a9 [https://perma.cc/5R47-M228].
9Peter F. Cowhey, Crafting Trade Strategy in the Great Recession: The Obama
Administration and the Changing Political Economy of the United States, in POLITICS IN NEW
HARD TIMES: THE GREAT RECESSION IN COMPARATIVE PERSPECTIVE (Miles Kahler & David
Lake eds., 2013) (reviewing the political economy and policy analysis that informed the Obama
trade strategy in its first term).
10
Azim M. Sadikov, Border and Behind-the-Border Trade Barriers and Country Exports(Int’l Monetary Fund, Working Paper No. 07/292, 2007).
11
Amidst reported disputes over NAFTA among White House staff, President Trump’s
Administration’s (“Administration”) initial policy paper fell far short of dismantling NAFTA. See
Binyamin Appelbaum, President’s Growing Trade Gap: A Gulf Between Talk and Action, N.Y.

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Rather than analyze the full sweep of the possible Trump trade agenda,
this paper focuses on one key priority: the effort to promote “good” U.S. jobs
by upending U.S. trade policy. We do not attempt to resolve the broad debate
over the impact of trade on U.S. manufacturing. 12 Instead, we advance one
claim: digital technology is critical to the sustainable success of U.S.
manufacturing that must provide higher value added and be more productive
than most of its international counterparts if it is to pay wages commensuratewith U.S. living standards. 13 A comparative advantage of U.S. firms is thatthey operate in a rapidly evolving digital infrastructure that is built around thetechnical architectures and deep talent pools of American information
technology (IT) firms.14 Although this infrastructure, like the architecture of
the Internet, benefits all countries, it also provides a home field advantage for
U.S. manufacturers. Similarly, Germany boosts its global firms throughpolicies that nurture deep “Mittlestand” manufacturing specialists which inturn boost Germany’s global firms.15
Understanding the link of digital technology to the success of
TIMES (Mar. 31, 2017), https://www.nytimes.com/2017/03/31/us/politics/trump-tradeagreements-actions.html [https://perma.cc/E5D6-VPGB]; Julie Hirschfeld Davis & Alan
Rappeport, After Calling Nafta, ‘Worst Trade Deal,’ Trump Appears to Soften Stance, N.Y.
TIMES (Mar. 30, 2017), https://www.nytimes.com/2017/03/30/business/nafta-trade-dealtrump.html [https://perma.cc/G6GC-SQUT].
12
See generally Daron Acemoglu et al., Return of the Solow Paradox? IT, Productivity and
Employment in US Manufacturing, 104 AM. ECON. REV. 394 (2014).
13
See Michael Mandel & Bret Swanson, The Coming Productivity Boom: Transforming thePhysical Economy with Information, TECH. CEO COUNCIL 1 (Mar. 2017),
http://www.techceocouncil.org/clientuploads/reports/TCC%20Productivity%20Boom%20FIN
AL.pdf [https://perma.cc/B2LL-DMUZ]; James Manyika et al., Digital Globalization: The
New
Era
of
GlobalFlows,MCKINSEY GLOBAL INST.
(Feb.
2016),
http://www.mckinsey.com/business-functions/digitalmckinsey/our-insights/digitalglobalization-the-new-era-of-global-flows [https://perma.cc/M8LX-V6AB].
14
Digital technologies can bolster all economies. However, the United States is particularly
data intensive in its economy, including in its manufacturing, even when compared to anadvanced country like Germany. This gives the U.S. special motivation to engage in a digital
agenda. See Paul Hofheinz & Michael Mandel, Bridging the Data Gap: How Digital
Innovation Can Drive Growth and Create Jobs, PROGRESSIVE POL’Y INST. (2014),
http://www.progressivepolicy.org/wpcontent/uploads/2014/04/LISBON_COUNCIL_PPI_Bri
dging_the_Data_Gap.pdf [https://perma.cc/FHD6-RTQH].
15
Mittelsand manufacturers in Germany and other German-speaking countries like Austriaand Switzerland are the equivalent of what are referred to as small and medium-sizedenterprises in English-speaking countries. Most often they are led by “owner-entrepreneurialfamilies” (Unternehmerfamilien). Bernd Venohr, Jeffrey Fear & Alessa Witt, Best of German
Mittelstand:
The
World
MarketLeaders(Aug.
24,2015),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2724609 [https://perma.cc/8P4Z-KGX5].

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manufacturing or commodities requires a survey of how innovation is
evolving. Digital technologies are increasingly critical to every facet of theworld economy. These technologies are the “digital DNA” which unleash
dazzling changes in the information, communication, and production
capabilities that are transforming how the world works. This information andproduction disruption (IPD), which is discussed in detail below, is rapidlychanging the dynamics of firms, how markets perform, and the potential forstronger economic growth and social prosperity.16 The IPD is altering
national and global patterns of innovation—defined here as thecommercialization of new knowledge—that are central to global growth andprosperity. 17
We call the emerging regional patterns for innovation “digital platform
clusters.” These clusters extend the dynamics associated with digitalplatforms (often associated with giant information companies like Google andMicrosoft) to smaller specialized technology firms and firms in more
traditional, yet as important, industries.18 The sustainable success ofindustries close to the heart of the economic agenda of the Administration—such as automobiles, other heavy manufacturing, and commodity markets—
depends heavily on how the IPD evolves on a global scale.
The digital DNA of the new innovation model, built on digital platform
clusters, entails distinctively global forces.19 For example, global interactions
allow information feedback cycles to speed up the production of initial productdesigns and continuously refine them to cater to specialized market segments.
As a result, the prospects for digital platform clusters to generate robust
innovation depend in part on sound global economic governance.20 These
governance choices include traditional issues of market access andcompetition, but they also require building a trusted digital environment thatcovers cybersecurity and digital privacy—two hot button concerns for
successful national policies everywhere.
Many of the most attractive features of the now discarded TPP addressed
the challenges of crafting smart policy governance for a new generation of

16

See COWHEY & ARONSON, supra note 1, at 23–48.
ROBERT D. ATKINSON & STEPHEN J. EZELL, INNOVATION ECONOMICS: THE RACE FOR
GLOBAL ADVANTAGE (2012).
18
See, e.g., NICHOLAS CARR, THE BIG SWITCH: REWIRING THE WORLD, FROM EDISON TO
GOOGLE (2008).
19
See COWHEY & ARONSON, supra note 1, at 3–22, which discusses new innovation models.
20
Id. at 33–36.
17

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digital technologies.21 These measures alone would not have created a soundfoundation for the global digital industry, but they included many promising
starting points. This Article sketches how a new synthesis of trade andregulatory policy could create this foundation, even after the Administration’s
withdrawal from TPP.
This Article’s argument develops in three parts. Part I explains how thenext generation of digital technology is changing innovation and theimplications it has for economic growth, including traditional industries. Part
II identifies key policy challenges that would enable this transformation where
neither new tariff initiatives nor taxes suffice to resolve. Part III outlines anapproach to constructing a trusted digital environment at the intersection of
trade and regulatory policy to advance national policy coordination that iscompatible with fair trade and allows for vigorous innovation and growth.
This Article emphasizes the use of non-governmental multi-stakeholder
organizations (MSOs) to keep regulation less cumbersome and more “bottomup” than approaches that rely on traditional government agencies.22
I. DIGITAL DNA AND INNOVATION
A. The Information and Production Disruption
The information disruption has five drivers. First, the “cheap revolution”
adds to information value because networked IT is nearly everywhere andincredibly cheap, even compared to 2000. 23 Cloud computing and ubiquitous(especially mobile) broadband are also becoming pervasive at least in
wealthier countries. The predicted end of the stunning price/performance
21
See Trans-Pacific Partnership Agreement c. 13–14, Feb. 4, 2016 [hereinafter TPP]; seealso Can the TPP Launch a New Era of Governance for Digital Commerce?, COUNCIL ON
FOREIGN REL. (July 28, 2015), https://www.cfr.org/blog/can-tpp-launch-new-era-governancedigital-commerce [perma.cc/8K9Y-SDA4].
22
Multi-stakeholder organizations (MSOs) bring together government, business, civilsociety, research institutions, and other non-government organizations to help craft governanceor policy-making efforts.
23
Rich Klitgard of Forbes first coined the phrase, “cheap revolution.” We expanded on thecheap revolution in PETER F. COWHEY & JONATHAN D. ARONSON, TRANSFORMING GLOBALINFORMATION AND COMMUNICATION MARKETS (William J. Drake & Ernest J. Wilson III eds.,
2009). The cost of 1 million transistors (a standard measure of computing power) was $527 in
1990, $1 in 2004, and $.05 in 2012. The cost of storage of a gigabyte of data dropped from$569 in 1992, to $1 in 2002, and to $.02 in 2012. The bandwidth cost to transmit 1000 megabits
per second plunged from $1,245 in 1999, to $100 in 2009, and to $16 in 2013. Mary Meeker,
Internet Trends 2014 – Code Conference, KLEINER, PERKINS, CAUFIELD, BYERS (May 31, 2017),
http://www.kpcb.com/internet-trends [https://perma.cc/EL7H-MYM7].

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progress for semiconductors, embodied in Moore’s law, may eventuallymaterialize, but other forms of improved performance in IT are already taking
hold. 24 Second, the rise of the Internet of Things reinforces this trend. The
Internet of Things is the interrelated system of observational capabilities (e.g.,sensors), networked information, big data analysis, and the infusion of IT
functions into an expanding range of terminals that will vastly outnumber
computers and smartphones.25 For example, the evolution of drones iscreating an inexpensive general-purpose platform for easily customized
sensing and observation systems tied to novel analytic applications.26 The
third driver is the growth of Big Data, accelerated by the explosion of machinelearning (whereby machines improve their analytic algorithms on their own)
and the conversion of this learning into applications abetted by elements ofartificial intelligence programs.27 The fourth driver is the continued rise of“modular”—standardized, easy to use—IT interfaces. Like Lego blocks,
these modular interfaces make it much easier to “mix and match” digitalbuilding blocks to help spread information and add value.28 A fifth, andcomplementary, driver is the expansion of open-source software codes29 thatstartups can fold into their own IT creations, which lower the cost and increase
the speed of innovation. For example, it is estimated that ICT startup costs(hardware, software, and personnel) dropped by 70 to 80 percent between
2000 and 2012, making it easier to aggregate and organize capital using

24

See,
e.g.,
More
from
Moore,ECONOMIST(Sept.
5,2015),
http://www.economist.com/news/technology-quarterly/21662644-chipmaking-moores-lawmay-be-running-out-steam-chip-costs-will-continue [https://perma.cc/9K4P-T3AK].
The
power of transistors doubles every 18 months even as their prices fall sharply.
25
See Karen Rose et al., The Internet of Things: An Overview, INTERNET SOC’Y 4 (Oct.
2015), https://cdn.prod.internetsociety.org/wp-content/uploads/2017/08/ISOC-IoT-Overview20151221-en.pdf [https://perma.cc/AM3F-E9X7].
26
FlytBase, Airware, Skycatch, and PrecisionHawk are examples of drone platforms.
27
See Darryl K. Taft, One-Third of Big Data Developers Use Machine Learning: Study,
EWEEK (July 6, 2016), http://www.eweek.com/developer/one-third-of-big-data-developersuse-machine-learning-study.html [perma.cc/66WJ-UNGA].
28“Containers” are the newest metaphor for packing complex software code into building
blocks that can be slipped in and out of different service applications. See Quentin Hardy,
Docker, a Software Start-Up Sees a Future in Containers of Code, N.Y. TIMES (Jan. 13, 2015),
https://www.nytimes.com/2015/01/13/business/a-small-software-company-sees-a-future-incontainers-of-code.html [https://perma.cc/KC9A-U5HV]. For the history of modularity, see
COWHEY & ARONSON, supra note 23.
29
Open source software relies on source code that everyone can inspect, modify, andenhance. Source code is the code that computer programmers manipulate to change how asoftware program or application works.

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15alternative models.30 This occurred even as the IT value added of many
categories of products rose. 31
The production disruption complements the information disruption andshares some overlapping drivers of digital technology. The major drivers are
additive manufacturing (popularly called 3D (three-dimensional) printing),
robotics, and new “smart” materials combined with sensors. Collectively,
these changes are sometimes described as “advanced manufacturing,” whichalter the speed and cost of product development and scale economies. 32
Germany and China, for example, launched major programs to anchor
innovation around these capabilities. 33
Today, 3D printers and other new production tools change the dynamics
of specialized products. Making new product prototypes and producing
specialized orders with short production runs is becoming routine. Striking
examples include the National Aeronautics and Space Administration’s(“NASA”) ability to email a wrench to the international space station, where
it was printed on a 3D printer, 34 and a Danish company’s efforts to print a 49foot bridge in one shot instead of printing it in prefabricated sections andassembling it later.35 3D printers are already producing biological products,
including prototypes of artificial livers. 36 Moreover, additive manufacturing
is improving rapidly, facilitating the customization of parts of traditional30
For an illustration of these falling costs, see Karen A. Frenkel, Crowdsourced in the
U.S.A.,BLOOMBERG
BUSINESSWEEK
(June
29,
2012,
10:55
AM),
https://www.bloomberg.com/news/articles/2012-06-29/crowdsourced-in-the-u-s-a[https://perma.cc/6ZYW-DYV8].
31
Id.
32
See Olivier L. de Weck & Darci Reed, Trends in Advanced Manufacturing Technology
Innovation, in PRODUCTION IN THE INNOVATION ECONOMY 235, 235–241 (Richard M. Locke &Rachel L. Wellhausen eds., 2014).
33
See Scott Kennedy, Made in China 2025, CTR. FOR STRATEGIC & INT’L STUD.: CRITICALQUESTIONS(June1,2015),
http://csis.org/publication/made-china-2025[https://perma.cc/9U8R-D833].
34
Janet Fang, NASA Just Emailed a Wrench to the International Space Station, IFLSCIENCE
(Dec.
19,
2014),
http://www.iflscience.com/space/how-nasa-emailed-wrench-space[https://perma.cc/E2UK-PAT6].
35
A
Bridgetothe
Future,ECONOMIST(Sep.
3,2015),
http://www.economist.com/news/technology-quarterly/21662647-civil-engineering-3dprinting-technologies-are-being-adapted-use [https://perma.cc/2ES5-MYTK].
36
Janet Fang, 3D Printed Device Detoxifies Blood Like a Liver, IFLSCIENCE (May 17,2014), http://www.iflscience.com/health-and-medicine/3d-printed-device-detoxifies- bloodliver/ [https://perma.cc/ELX6-972R].

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manufactured products. 37 Feetz, a startup shoe manufacturer in Tennessee,began selling customized shoes in 2016 using digital images of the foot andadditive printing to generate the product. 38
Additive manufacturing is more than small-scale production. For
example, General Electric (GE) uses additive manufacturing to produce jet
nozzles for a new line of engines for smaller jets, like the Boeing 737.39 GE
does this because advanced manufacturing prioritizes the combination ofmultiple components into a single manufactured piece (“parts consolidation”).
Traditional manufacturing techniques required multiple parts to form theshape of a nozzle, whereas a 3D printer could produce the nozzle as a single
piece, thereby saving on both materials and labor costs. The role of printerswill likely continue to expand as technology advances—by involving lasers,
new printers can use an expanding array of metal oxides. 40
As robots become smaller, cheaper, smarter, and more mobile, robotics
reinforces disruptive production possibilities for large economies of scale, 41
as well as for smaller “batch” operations. 42 Moreover, robots are evolving to37
This is also happening at the household level. Press Release, Hewlett Packard, HP Unveils
Future of 3D Printing and Immersive Computing as Part of Blended Reality Vision (Oct. 29,2014),
availableat
http://www8.hp.com/pr/es/hp-news/pressrelease.html?id=1556805#.Wkgxh1Q-eRs [https://perma.cc/SRW5-2TJ7].
38
FEETZ, https://feetz.com/ [https://perma.cc/8L9X-4DYP]; see also J.D. Harrison, SXSWStart-Up Snapshot: Shoes Built by iPhones and 3D Printers, WASH. POST (Mar. 16, 2015),
https://www.washingtonpost.com/news/on-small-business/wp/2015/03/16/sxsw-start-upsnapshot-shoes-built-by-iphones-and-3d-printers/?utm_term=.a80a6d034d7e[https://perma.cc/U5SL-GT8S].
39
Tomas Kellner, Jet Engine with 3D-Printed Parts Powers Next-Gen Boeing 737 MAX for
the First Time, GE REP. (Feb. 2, 2016), https://www.ge.com/reports/jet-engine-with-3dprinted-parts-powers-next-gen-boeing-737-max-for-the-first-time/ [https://perma.cc/F7AQCC2H].
40
We thank David Michael for his insights. On DARPA’s initiative in this space, see Brian
Krassenstein, DARPA to Propel 3D Printing Manufacturing by Improving the Understandingof the Processes and Materials Involved, 3D PRINT (May 31, 2015),
https://3dprint.com/69674/darpa-3d-printing/ [https://perma.cc/NB8A-ZVDD].
41
Tesla robots, for example, use IT to multitask in ways that other manufacturers cannot
match. See Tech Talker, Tesla’s Highly Scalable Model, SEEKING ALPHA (Oct. 28, 2014),
https://seekingalpha.com/article/2604485-teslas-highly-scalable-model[https://perma.cc/2EKV-EGHB].
42
See generally ERIK BRYNJOLFSSON & ANDREW MCAFEE, THE SECOND MACHINE AGE:
WORK, PROGRESS, AND PROSPERITY IN A TIME OF BRILLIANT TECHNOLOGIES (2014); JEREMYRIFKIN, THE ZERO MARGINAL COST SOCIETY (2014); ALEC ROSS, THE INDUSTRIES OF THE
FUTURE 15–43 (2016); A Third Industrial Revolution, ECONOMIST (Apr, 21, 2012),
http://www.economist.com/node/21552901 [https://perma.cc/M8EA-CQUY].

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become platforms where multiple specialized applications and manipulators,
from independent firms, can be performed by the same robot.43
The synthesis of new materials in response to product design goals,
including whole new classes of synthetic materials such as bioengineered silk,
is also transforming production. 44 “Smart materials,” such as piezocomposite
materials used in actuators and sensors, are already the basis for sensors that
activate automobile airbags in a crash. 45 Many new materials will include
networked monitoring sensors to report, for example, deficiencies in the
manufacturing process. Similarly, self-regulating, or “homeostatic,” nanomaterials and nano robots may have the capacity to regulate glucose or carbon
dioxide levels in the bloodstream. 46
Production tools complement the digital information array. For example,
new “shared facilities incubators” that have popped up ubiquitously feature
production workshops (“maker spaces”).47 Their infrastructure ranges from
3D printers to robotics, as part of new “design districts” for entrepreneurs
experimenting with the full range of IPD capabilities.
B. Implications of Digital Platform Clusters
The IPD opens the way to an evolution of the current dominant model for
innovation in the United States and elsewhere. Innovation is the product of asystem where the relationships among inputs, the environment, and planned

43

Lamont Wood, Service Robots: The Next Big Productivity Platform, PWC (Sept. 8, 2016),
http://usblogs.pwc.com/emerging-technology/service-robots-the-next-big-productivityplatform/ [http://perma.cc/36NP-3FF8].
44
See De Weck & Reed, supra note 32, at 254; Brad Stone, A Bay Area Startup Spins LabGrown
Silk,
BLOOMBERG
BUSINESSWEEK(June
3,2015),
https://www.bloomberg.com/news/articles/2015-06-03/a-bay-area-startup-spins-lab-grownsilk [https://perma.cc/E2T8-ZXEY].
45
Auto manufacturers believe a combination of smart materials and information systems
will soon allow cars to adapt dynamically to changing conditions, such as sunlight, heat, speed,
and wind. Qualcomm, How New Cars Will Adapt to Our Tech-Immersed Lives, QUARTZ (Dec.
23,2017),
https://qz.com/415517/how-new-cars-will-adapt-to-our-tech-immersed-lives/[https://perma.cc/9ULE-JMKX].
46
On the growth of nanorobotic systems to support nanomanufacturing that may change
lithography, see Michael Berger, A Nanorobotics Platform for Nanomanufacturing,
NANOWERK (Oct. 28, 2014), http://www.nanowerk.com/spotlight/spotid=37884.php[https://perma.cc/M3AS-R6LC].
47
Drew Hendricks, 5 Creative Ways Business Incubators Are Helping Their Startups
Succeed, FORBES (Jan. 23, 2015), https://www.forbes.com/sites/drewhendricks/2015/01/23/5creative-ways-business-incubators-are-helping-their-startups-succeed/#2f801ae17659[https://perma.cc/KKE2-8RKU].

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output mesh in typical patterns of interaction. Performance trade-offs exist in
every organizational form, as the American experience since 1945 shows.48
The economics of agglomeration of skilled workers, social institutions to
network them, shared assets (whether universities or skilled machine shops),
and appropriate financial systems and government policies are quite wellunderstood but their specific makeup shifts. Hence, the way innovation isorganized changes periodically as the environment for innovation evolves andthe characteristics of technological possibilities shift. In addition, over timebusiness models that mesh innovation with commerce will evolve. Indeed, an
enduring part of U.S. leadership in innovation was the significant degree thatits market system, including its governance system, could accommodate
radical shifts in business models. American commercial innovation after 1945
initially relied heavily on vertically integrated companies that did everythingfrom basic research through production, marketing, and service. The Japanesechallenge of the 1970s and 1980s forced changes in the establishedcommercial innovation model. The revamped approach, anchored by the
Silicon Valley model, relied on specialized startups, venture capital, and theuse of global production chains. This newer model focused more on ventures
tied to information and communication technology as well as biotechnology.
Vertical integration did not disappear but even the largest old-guard firms
infused their operations with elements of the new models.49
Today, the IPD is inducing a further evolution of the Silicon Valley
model. Emerging digital platform clusters are more geographically extensive
than the Silicon Valley model, in part because they are transforming older
traditional markets into sectors whose value added is driven by the IPD. 50
Significantly, supplementing ICT with new production technology opens
paths to growth that rely on traditional clusters built on incremental innovationand organized around mechanical and material inputs (such as improvements

48
This discussion draws on Dan Breznitz & Peter Cowhey, America’s Two Systems of
Innovation: Innovation for Production in Fostering U.S. Growth, 7 INNOVATIONS 127 (2012).
On the economics of innovation and clusters, see Gerald Carlino & William R. Kerr,
Agglomeration and Innovation 14–26 (Nat’l Bureau of Econ. Research, Working Paper No.
20367, 2014), http://www.nber.org/papers/w20367.pdf. Richard Baldwin has linked thisliterature to changes in global production networks. RICHARD E. BALDWIN, THE GREATCONVERGENCE: INFORMATION TECHNOLOGY AND THE NEW GLOBALIZATION (2016).
49
See COWHEY & ARONSON, supra note 1, at 3–22.
50
2017 State of Entrepreneurship Address, KAUFFMAN FOUND. (Feb. 26, 2017),
http://www.kauffman.org/what-we-do/resources/state-of-entrepreneurship-addresses/2017state-of-entrepreneurship-address [https://perma.cc/D6UZ-ZY2B].

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19in automobile brakes).51 New types of regional startup clusters that cover amore diverse range of industries, expertise, and locations are also emerging.52
These digital platform clusters provide “a gateway between consumers
and many diverse applications well beyond the specific product or service that
constitutes the platform itself.” 53 Underlying the platform are digital tools,
such as a software operating systems and common capabilities provided todiverse pools of customers and related product suppliers, that vary in theircomplexity and cost to duplicate. The tools can be continuously updated
because they are digitally intensive and rely on user feedback (often on a
global scale) and other information drivers that are part of the information
disruption. The online store—exemplified by Amazon and Apple—is one
such tool. It serves as a digital transaction facility that rests on a complex
digital infrastructure that evolved through significant experimentation. 54 The
store opens new ways to organize global markets for both specialized
information applications and physical goods, such as a German platform for
global trading in German steel products. 55 Digital tools also enable newforms of financing. For example, the advent of crowdsourcing first required
networking and transaction costs to fall. Crowdsourced project funding is lessgeographically biased than traditional venture capital funding. 56
51“[B]y 2020 cars will apply the brakes even if the driver has the gas pedal floored. The
rapid increase in sensor technology will force a shift in priority, giving the car final say.” Karl
Brauer, Top 10 Advanced Car Technologies by 2020, FORBES (Jan. 19, 2015, 4:00 AM),https://www.forbes.com/sites/kbrauer/2015/01/19/top-10-advanced-car-technologies-by2020/#6d74ce3f6705 [https://perma.cc/CNL2-KNKX].
52
Examples even in traditional sectors like agriculture are abundant. For example, winnersof Iowa’s AgriTech accelerator 2017 class of startups included Hintech, which developed acornstalk remover and crusher for use by farmers who practice no-till farming; Phenomics Labs,
which builds portable growing labs with inexpensive data-collection sensors and cameras thattest experiments; FarrPro, a provider of efficient, effective piglet hearting solutions; and Rabbit
Tractors, which produces miniature farm equipment. Laurie Bedord, Iowa AgriTech
Accelerator Chooses Class of 2017, SUCCESSFUL FARMING (July 27, 2017),
http://www.agriculture.com/technology/iowa-agritech-accelerator-chooses-class-of-2017[https://perma.cc/Z3YX-CHUA].
53This definition of a platform is from Howard A. Shelanski, Information, Innovation, andCompetition Policy for the Internet, 161 U. PA. L. REV. 1663, 1664–1706 (2013). See also
GEOFFREY G. PARKER, MARSHALL W. VAN ALSTYNE & SANGEET PAUL CHOUDARY, PLATFORM
REVOLUTION: HOW NETWORKED MARKETS ARE TRANSFORMING THE
ECONOMY—AND HOW TO MAKE THEM WORK (2016).
54
See generally BRAD STONE, THE EVERYTHING STORE: JEFF BEZOS AND THE AGE OFAMAZON (2013).
55
See KLÖCKNER & CO, http://www.kloeckner.com/en/ [https://perma.cc/3Y8F-LYFK].
56
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There are at least four important implications of the emergence of theseplatforms:
1. Market disruption due to digital ubiquity and diversity: Theintermingling of traditional goods with information enabled by new services
and new production technologies disrupts traditional markets. The growing
strategic—and value-added—role of information means that some markets are
increasingly acting like IT markets, and sustained competitiveness at thehigher end requires continuous digital innovation. More complicateddivisions of labor and value are emerging, not just a few dominant digitalsolutions. Companies as different as Qualcomm and Monsanto show how
the distinctions between high-tech and other industries, such as agriculture andheavy manufacturing, continue to narrow.57
Major manufactured goods have started to rely on ICT and services with
networked effects to maintain market shares and drastically redefine or create
new end markets. 58 This is a variant on a well-worn strategy—Gillette, forexample, makes money on razor blades, not razors. 59 In this spirit, to create
smarter building management, IBM created real-time sensor and data analysis
systems to manage climate control for existing large commercial buildings.60
Similarly, GE is investing heavily in Predix, its cloud-based Platform-as-aService platform for the industrial Internet of Things.61 GE believes that
sensors and big data analysis will allow them to predict problems in equipment
infrastructures, thus creating a market for services that reduce maintenancecomplemented by growing pools of “angel investor” funds. JOSHUA LERNER, THE
ARCHITECTURE OF INNOVATION: THE ECONOMICS OF CREATIVE ORGANIZATIONS 68 (2012);
Ethan Mollick, The Dynamics of Crowdfunding: Determinants of Success and Failure, 29 J.
BUS. VENTURING 1, 1–16 (2014). Block chain technology may further lower the cost andincrease the network effects of crowdsourced models.
57
See COWHEY & ARONSON, supra note 1, at 49–70.
58
See generally THE THIRD GLOBALIZATION: CAN WEALTHY NATIONS STAY RICH IN THE
TWENTY-FIRST CENTURY? (Dan Breznitz & John Zysman eds., 2013) (providing a deft analysis
of ICT enabled services).
59
See Mark Muro, The Wrong Lesson Companies Learn from Silicon Valley, WALL
ST. J.: THE EXPERTS (May 13, 2015, 6:00 AM), https://blogs.wsj.com/experts/2015/05/13/thewrong-lesson-companies-learn-from-silicon-valley/ [https://perma.cc/RDB6-5FC5]. McAfee
and Brynjolfsson dub this effect the “recombinant innovation” properties of digital technology.
60
Robert L. Biocchi & Joseph M. Phillips, IBM Smarter Building Management, IBM (Jan.
2015),
https://www.ibm.com/industries/government/smarter-building-management-paper/[https://perma.cc/B2PK-H9TE].
61
Dan Weeds, What is GE Predix Really Building?, FORBES (Sept. 28, 2016, 6:20 AM),https://www.forbes.com/sites/danwoods/2016/09/28/what-is-ge-predix-reallybuilding/#238d87bd3c5b [https://perma.cc/6WNB-784G].

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costs and optimize the use of its capital assets. 62 Even Germany’s
Fraunhoefer Institute is advocating “Industrie 4.0” as the German
manufacturing Mittelstand’s formula for embracing this change. 63
Change has not been restricted to manufacturing; agriculture and othercommodity markets, such as oil production, are also in flux. Traditional
knowledge experts, such as farmers, are becoming global information service
consumers as their reliance on big data analysis grows. 64 Similarly, the costof fracking for oil production has dropped by about 25 percent in the past few
years due to IT and robotics, thereby allowing the restoration of production
despite much lower prices. 65
2. Easier entry: Significantly, platform strategies are increasingly
available to smaller specialist firms as well as large ones. The integration ofsophisticated physical goods with analytics also opens the expansion of once
small, new markets like medical monitoring. For example, X2 Biosystems
offers a new biomedical diagnostic technology product system to monitor
concussions and head injuries, mainly in football and other contact sports. X2
charges $120 per monitoring device. Each user also is charged a fee of $1 permonth, which provides a dependable, long-term stream of data. 66 Thus, thelong-term advantage of X2’s physical product is built on its data-monitoringand predictive modeling service for risk management.
Moreover, digital information services can bolster the business case for
product innovation. Information derived from products can generate collateralrevenues and analytic learning because firms rely on “data that is ‘non-

62
Steve Lohr, Weak Results at IBM as Its Strategy Shifts, N.Y. TIMES (Oct. 21, 2014),
https://nyti.ms/2k2SsQo [https://perma.cc/8K88-MAL5]. IBM foresaw a huge upside to data
analytics, but struggled to establish high-margin business models comparable to those once
earned by the software, services, and storage associated with mainframe computing.
63
Stefan Heng, Industry 4.0: Huge Potential for Value Creation Waiting to Be Tapped,
DEUTSCHE
BANK
RES.
(May
23,
2014),
https://www.i40.de/wp/wpcontent/uploads/2015/04/Industry-4.0-Huge-potential-for-value-creation-waiting-to-betapped.pdf [https://perma.cc/WB94-TJPN].
64
Lauren Manning, What is Ag Big Data? How 8 Companies are approaching it, AGFUNDER
NEWS
(Nov.
12,
2015),
https://agfundernews.com/what-is-ag-big-data5041.html[https://perma.cc/4YYP-TXGH].
65
Clifford Krauss, Texas Oil Fields Rebound From Price Lull, but Jobs Are Left Behind,
N.Y. TIMES (Feb. 19, 2017), https://www.nytimes.com/2017/02/19/business/energyenvironment/oil-jobs-technology.html [https://perma.cc/V9KA-VK62].
66
Liz Gannes, Wearable Sensors Could Be an Antidote to Football’s Concussion Problem,
ALL THINGS D (Nov. 25, 2013, 1:53 PM), http://allthingsd.com/20131125/wearable-sensorscould-be-an-antidote-to-footballs-concussion-problem/ [https://perma.cc/AP3M-WED7].

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rivalrous.’” 67 Once information is used, it is available for infinite reuse. 68
Big Data can spin off additional products or be sold to third parties who wantto combine it with other data. This drives firms, even those that offer only
specialized products, to emphasize investments in platform tools.
3. Manufacturing as a service: Products and services are combining in
novel business models on a global scale. More startups, especially for
consumer products,69 are substitutiting the traditional development andmarketing model with an experimentation and discovery model. 70 From thestart, they use IT platforms to interact with potential and, ultimately actual
users, to refine product designs and marketing. 71 Growing numbers of large
market incumbents are also relying on co-invention.72 The network
economics of digital platforms make technology more valuable as the numberof users climbs and a global “ecosystem” of co-suppliers grows around it. As
Apple’s success attests, the platform and its anchor products increase in value
as more co-suppliers extend complementary offerings. Digital platforms also
increase the significance of “user interaction,” including user co-invention,
which is propelling firms to go global quickly in order to gather data todifferentiate products according to local patterns of use. Together, thesechanges permit greater customization of products and allow more costeffective alteration of product specifications, including local customization,even with larger-scale production.
4. Changes in the size and geographic focus of clusters: Core geographic
clusters of talent for advanced technology will likely persist because
commercializing innovation involves betting on people. Clusters thrive on alarger talent pool and typically develop informal ways to measure reputations,beyond resumes, that may be vital for commercializing knowledge. However,67
VIKTOR MAYER-SCHÖNBERGER & KENNETH CUKIER, BIG DATA: A REVOLUTION THATWILL TRANSFORM HOW WE LIVE, WORK, AND THINK 101 (2013).
68
Either public policies, like privacy protection, or corporate strategies may limit reuse.
69
JAMES MCQUIVEY, DIGITAL DISRUPTION: UNLEASHING THE NEXT WAVE OF INNOVATION
101 (2013).
70
The survey results of Ashish Arora, Wesley M. Cohen, & John P. Walsh, The Acquisition
and Commercialization of Invention in American Manufacturing: Incidence and Impact (Nat’lBureau of Econ. Research, Working Paper No. 20264, 2014), echo our point that firms are
becoming more reliant on open co-invention.
71
See STEVE BLANK & BOB DORF, THE STARTUP OWNER’S MANUAL: THE STEP-BY-STEPGUIDE FOR BUILDING A GREAT COMPANY (2012); PARKER, supra note 53.
72
Co-invention is not a new phenomenon. See Timothy Bresnahan & Shane Greenstein,Technical Progress and Co-invention in Computing and in the Uses of Computers, BROOKINGSPAPERS ON ECON. ACTIVITY: MICROECONOMICS (1996), https://www.brookings.edu/wpcontent/uploads/1996/01/1996_bpeamicro_bresnahan.pdf [https://perma.cc/VUH6-FRHX].

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as IPD platform dynamics become more accessible, they drive more markets,
including traditional markets not commonly associated with ICT. Traditional
industries will be restructured in a world of IPD-enabled digital platform
clusters. Technologically infused clusters can be built around “craft”
knowledge.73 They can build on virtual ICT platforms, such as the cloud andits ecosystem of services, or on specialized batch production.
II. KEY GOVERNANCE CHALLENGES
Traditional trade policies never addressed possibilities raised by the new
innovation model. For example, going forward it will be important to consider
ways to approach regulations that may discourage learning, discovery, andflexibility, such as the use of competition policy as a barrier, the use ofindustrial policies to block global data flows and transnational access to cloudinfrastructure, or the use of privacy and security issues as barriers or enablersof new pools of demand.
Further, as the United States’s ability to get its way in negotiations erodes,
it will be important to build credible coalitions to pursue solutions. Suchsolutions are likely to be anchored in a flexible package of approaches. For
example, traditional trade pacts can address some items in order to discourage
and remove barriers to novel products and business models. Thus, WTO
agreements on IT and services could be the simplest route forward, despite theAdministration’s aversion to multilateral deals. Serial or parallel bilateralnegotiations would almost certainly be slower to yield results, but they may
be the only politically feasible vehicles for U.S. initiatives for the next few
years. The tougher problem of promoting a trusted digital environment byaddressing privacy and security issues could begin with bilateral regulatory
agreements, but eventually, the Administration may conclude that trade canstill be a complementary vehicle at a later date and more propitious forachieving a wider trade deal. At that time, existing conventions and regulatory
pacts could be converted into “additional commitments” in a trade deal onmarket integration. This precedent evolved into the TPP—especially in
Chapter 20, which covers the environment—where adherence to theConvention on International Trade in Endangered Species of Wild Fauna andFlora became an additional commitment. 74

73“Innovative industries” go beyond traditional high-tech industries that Atkinson and Ezell
argue are characterized by high, fixed initial research and capital costs usually dispersed overlarge volumes of output at low marginal costs. See ATKINSON, supra note 17.
74
The TPP built on such precedents as the Annex on Forest Sector Governance in the U.S.–
Peru FTA. The U.S. Trade Representative argues that the Peru FTA “includes concrete steps

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New and different challenges now are arising from the expansion ofmarket access for novel products and business models. Although some
initiatives may not be feasible in the short-run, it is better to be clear about
where policy could reasonably aspire in the medium-run. We are addressing
a 20-year challenge, not a four-year policy maze.
Three initial challenges and responses are straightforward. First, it would
be prudent to extend the WTO International Technology Agreement (ITA) tofurther cover innovation-intensive industries. Since the IPD introduces more
technology-like behavior even in traditional industries, every industry cannot
be treated as high-tech. However, even after the progress in the revision of
the ITA in 2015, the pace of major innovation will further increase and theeconomics of innovation-intensive industries (such as network effects) will
extend beyond IT. For example, wireless health is one industry to expand thelist of products in an ITA. 75 Second, it would help to negotiate the highest
possible standards of liberalization for products that cross the traditionalboundaries between goods and services. Going forward, Small and MediumSized Enterprises (SMEs) should be able to deliver specialized manufactured
products produced by a 3D printer in their home office and then ship it abroadusing DHL. Or, SMEs could transmit a digital design of a product to a 3D
printer at a local subsidiary, directly to a customer, or to a DHL office inanother country. 76 However, trade rules and market access obligations, suchas service access or national tariff schedule commitments, may not make suchdecisions entirely based on efficiency choices.
Choices driven byincompatibilities between forms of market access need consideration, as
well. 77 Third, it also would be a good idea to use solutions packages to
the Parties will take to strengthen forest sector governance and combat illegal logging and illegal
trade in timber and wildlife products.” OFFICE OF THE U.S. TRADE REPRESENTATIVE, UNITEDSTATES-PERU TRADE PROMOTION AGREEMENT: STRENGTHENING FOREST SECTOR GOVERNANCE
IN PERU (2009).
75
Michelle A. Wein & Stephen J. Ezell, Concluding a High-Standard, InnovationMaximizing TPP Agreement, INFO. TECH. & INNOVATION FOUND. 1 (Dec. 2013),
http://www2.itif.org/2013-concluding-innovation-maximizing-tpp.pdf[https://perma.cc/8LSM-HK9P]; Michelle A. Wein & Stephen J. Ezell, How to Craft an
Innovation Maximizing T-TIP Agreement, INFO. TECH. & INNOVATION FOUND. 1 (Oct. 2013),
http://www2.itif.org/2013-innovation-maximizing-ttip-agreement.pdf [https://perma.cc/Y7B3CVQR] [hereinafter Wein, How to Craft an Innovation Maximizing T-TIP Agreement].
76
Initially, when fax machines were large and expensive, delivery services such as FedEx
installed them in their offices so small businesses could get “instant delivery” of documents via
a FedEx office fax. Today, firms like UPS run manufacturing support facilities near theirtransport hubs.
77
Other discrepancies in trade rules speak to these choices. For example, technical barriers

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25liberalize the intermingling of goods and services. Negotiators should workout accommodations of issues such as the growth of “smart fields” thatcombine elements of hardware, sensors, and data analytics—used to guideplanting and insurance packages and to deal with weather risks. Also,
negotiators should seek trade liberalization to better address the integration ofservices and goods.78 Because the closest thing to protection in current trade
proposals is the attempt to build off the established principle of technology
neutrality, it will be a challenge to find ways to ensure that this principle isapplied successfully. 79
Countries will also need to expand the domestic regulatory framework forservices along the lines set out in the TPP to include both services and digital
economy goods. They must ensure that administrative rule-making istransparent and uses timely, objective criteria. Nondiscrimination among
member country firms based on national origin should prevail, policies shouldbe technologically neutral, and a least restrictive trade requirement should be
adopted when designing a policy. Policies also should be designed torecognize the work of competent non-governmental organizations (NGOs) insome policy issues, including technical certifications and setting standards. 80
Next, negotiators should work to clarify trade-related obligations on
interoperability requirements. Trade negotiators should explore how to deal
with the trade implications of requirements that, for example, data should be
portable among different services. This is a legitimate policy objective, but it
is open to policy mischief.81 Some possible abuses might be curbed byto trade disciplines of the WTO only apply to goods, a major gap for the IPD. WTO, Technical
BarrierstoTrade,WTO
AGREEMENTSERIES(2010),
https://www.wto.org/english/res_e/publications_e/tbttotrade_e.pdf [https://perma.cc/P6ECKU48].
78
A GPS unit unable to access geographic information services cannot function. This wasa hindrance for Uber in China because its system relied on Google Maps, but direct access toGoogle Maps were blocked in China.
79
A WTO dispute ruling endorsed the potential for overlap of goods and services
obligations, but using a contingent, case-by-case approach. We seek a broader principle.
Appellate Body Report, European Communities–Regime for the Importation, Sale andDistribution of Bananas, WTO Doc. WT/DS27/AB/R (adopted September 25, 1997).
80
For an endorsement of such horizontal disciplines, see European Services Forum &Coalition of Service Industries, Regulatory Cooperation Component in the Services Sectors to
an EU–US Economic Agreement, (Nov. 12, 2012), http://www.esf.be/new/wpcontent/uploads/2012/11/ESF-CSI-Joint-Statement-on-Regulatory-Cooperation-Componentof-EU-US-Agreement-Final-12-Nov-2012.pdf [https://perma.cc/S62T-X2JE].
81
For an example of a concern, even within the boundaries of the EU data directives, seeDavid Meyer, European DPAs Mull Strategy for Tackling Uber’s Data Catastrophe, INT’L

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specifying that interoperability requirements must be the least trade restrictive.
Governments can legitimately regulate for valid reasons, including
competition policy, but should do so in a way that does the least damage tomarket access obligations. Clarifying the underlying principles in negotiating
and assuring that they are least trade restrictive and nondiscriminatory would
reduce risks. They also would set a foundation for letting MSOs assist in
implementation.
Another improvement would be to strengthen the intellectual property(IP) protection for certain forms of craft knowledge.82 The IPD opens theway for new, innovative “clusters” to emerge in smaller markets and in
traditional industries that have global market ambitions. Many of theseclusters will marry IPD technologies to traditional craft knowledge. Tradeagreements have extensive, sometimes controversial coverage of IP in theform of firmware, software, copyrights, and patents. However, craft
knowledge may focus more on trade secrets, a domain long protected bynational laws, but largely neglected by trade agreements. Negotiators could
also build on the TPP and develop additional approaches to deal with trade
secrets for trade-related purposes and then ask how it fits into the logic oftrade-related investment practices.83 They could also build on the TPP’sprotection of industrial design secrets and soft laws calling for protection
against theft of craft knowledge that is stored digitally.84
Finally, it is important for countries to guarantee four sets of rights and

ASS’N PRIVACY PROFS. (Nov. 28, 2017), https://iapp.org/news/a/european-commission-expertsuneasy-over-wp29-data-portability-interpretation/ [http://perma.cc/XJ3W-LBVS].
82
Competitiveness in information services (including hybrid combinations of goods andservices) depends on flexible business models to monetize the service and their applications,like games that begin as “free” and then seek ways to earn revenues using “add ons” (e.g.,
money messaging services or the purchase of gaming resources). In contrast, ads depend on
recycling data from interaction on users and then selling the analysis to help advertisers placeads. The policy implication is that when public policies block the ability to combine/experimentwith the integration of payment systems with information services, this effectively hinders
market access for the basic service. Trade strategy should target regulatory barriers to flexible
integration of payment systems.
83
Wein and Ezell make the recommendation on trade secrets. The logic linking this to the
IPD is our responsibility. Piracy cases are likely to be less frequent with the advent of the cloud
because content is more often downloaded directly from the cloud. Wein, How to Craft an
Innovation Maximizing T-TIP Agreement, supra note 75.
84
TPP’s Article 18.56 on “Improving Industrial Design Systems” states that “The Parties
recognise the importance of improving the quality and efficiency of their respective industrial
design registration systems, as well as facilitating the process of cross-border acquisition ofrights in their respective industrial design systems . . . .” TPP, supra note 21, at art. 18.56.

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freedoms to support a competitive global market for information services andthe cloud computing infrastructure that enables these services. 85 First,
agreements should guarantee the freedom of cross-border information flows,
affirm the freedom to choose where infrastructure for the cloud ecosystem ofservices is located,86 and affirm the right of a foreign company to provide aservice by accessing its own business data across national borders. Second,
agreements should affirm the freedom to locate infrastructure wherever a
supplier wishes, without requiring a local presence. The freedom to locate
cloud infrastructure implies the ability to move the services enabled by thecloud across borders. Specifically, it means that discrimination againstelectronic delivery of services, including software, and quantitative limits on
the number or volume of services delivered should be banned. As a corollary,cross-border payments for services, subject to prudential regulation, should bepermissible. 87 When public policies block the ability to combine orexperiment with the integration of payment systems with information services,market access for the basic service is hindered. International governanceshould target unduly restrictive regulatory barriers to ensure flexible
integration of payment systems. Third, the right of customers to use
extraterritorial suppliers of services via public telecommunications networks
should be affirmed. Fourth, government policy should also respecttechnological neutrality in the delivery of the service, affirm the use ofinternational standards for encryption technology, and recognize the right ofany firm that qualifies as a “data controller” within a trusted digital
environment (as discussed next) to use encryption for commercial purposes. 88

85
For similar points, see Anupam Chander & Ulyen P. Le, Breaking the Web: Data
Localization vs. The Global Internet (Univ. Cal. Davis Law Sch., Working Paper No. 2014-1,
2014), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407858 [http://perma.cc/Q64GBPK5]. See also ANUPAM CHANDER, THE ELECTRONIC SILK ROAD (2013). Some analysts urge
efforts to tackle data flow issues through the use of existing AATS commitments on services
and investment.
This might have technical legal merits but, as was the case with
telecommunications in the 1990s, this sector has become too prominent to rely on hopefulinterpretations. The political and legal bolstering of a governance framework is vital. Andrew
D. Mitchell & Jarrod Hepburn, Don’t Fence Me In: Reforming Trade and Investment Law to
Better Facilitate Cross-Border Data Transfer, 19 YALE J.L. & TECH. 182, 185–237 (2017).
86
See COWHEY & ARONSON, supra note 1, at 125–66. Chapter 6 of Digital DNA spells out
the specifics of this principle. It derives from a joint U.S.–EU position paper.
87
TPP countries could have “scheduled” this commitment with exceptions for specificservices that could not be expanded once the agreement was ratified. Competitiveness in
information services depends on flexible business models, such as games that begin as free andthen seek ways to earn revenues by selling add-ons (e.g., the purchase of gaming resources).
88
See TPP, supra note 21, at art. 8 Annex 8-B §A.

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III. CREATING A TRUSTED DIGITAL ENVIRONMENT

Underlying efforts to create a robust digital environment is the need tocreate trust among governments, firms, and NGOs. At a minimum, a trusted
digital environment should rest on the following four key elements.
First, a “club” of important core countries is needed to provide sufficient
heft to overcome the threshold challenge for international action. Whatever
the negotiating platform, a crucial consideration is that regimes always mustovercome a threshold problem. Participants in such a coalition need to havesomething at stake, significant influence on the world market, and sufficiently
compatible interests to pull together and serve as the foundation for aneffective regime. This club would need to address market access andcompetition issues—the classic domain of trade policy. The club would alsoneed to deal with digital privacy and security issues involved in building atrusted digital environment. Member countries of the Organisation for
Economic Co-operation and Development (OECD) and TPP participants
together likely would constitute a large enough share of the world economy to
be a credible club. This group covers the Pacific more extensively than theOECD countries alone. It also would have a favorable set of initial incentives
for members. 89 OECD diplomats could focus on using bilateral or regional
free trade agreements (FTAs) as building blocks for the club because they
precisely target the initial core participants without obligating FTA members
to extend similar market access and trusted digital environment benefits tononmembers. These conditions reduce fears of free riding by countries that
seek market access without making commitments—a risk under the mostfavored-nation rules of the WTO—and provide a basis to allow FTA groups
to negotiate tailored accession conditions with countries that wish to join themlater.90 In the case of the TPP, for example, it was considered likely that
Korea, Indonesia, and Colombia (or even the United Kingdom after Brexit)
would seek early accession. The larger question in the long term would havebeen the interest of China, Thailand, and others to meet the requirements tojoin the TPP. As is quite normal in these clubs, wider membership was anultimate goal, not a starting point.91

89
In the IPD, more sophisticated economies had much at stake and strong incentives to
explore better governance measures. Other TPP participants, like some small members, initiallycared less about the IPD, but wanted to demonstrate that they were serious players who were
eager to participate in the global innovation transition.
90
This was how China (2001), Saudi Arabia (2005), Vietnam (2007), and ultimately Russia(2012) negotiated to join the WTO.
91
Interviews with officials involved in the TPP negotiations, 2016.

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29

The WTO could ultimately anchor two additional building blocks: theInformation Technology Agreement and the Trade in Services Agreement(TiSA).92 The Information Technology Agreement, originally concluded in
1996, was updated in 2015 but requires additional expansion to fully capture
the IPD, as this Article will discuss below.93 A third revision to the agreement
might cover additional items flowing from IPD. TiSA, a global plurilateralpact launched in 2013, is still being negotiated at the WTO. Twenty-three
countries, including the European Union (“EU”), representing approximately
70 percent of the world’s trade in services, are participating. 94 Unlike the1997 Basic Telecom Agreement (BTA), TiSA does not extend most-favorednation (MFN) benefits to WTO countries that do not participate in theagreement.95 This is crucial because large economies such as Brazil, India,
Russia, and China—none of which participate in TiSA96—should not benefit
from a club in which they do not pay for admission and their performance is
not assessed. This is especially true because a critical benefit would be tobring quasi-convergence to national regulatory practices.
A second element needed to create a trusted digital environment is aquasi- convergence of authoritative rules based on common principles andnorms that emphasize flexible mixes of binding (hard) and non-binding (soft)
rules and policies within a common governance regime. The governance mix
features some specific hard policy rules; it relies particularly on binding
agreements requiring the embrace of policy capabilities based on key
principles that frame the parameters of specific national rules. 97 The political

92
The Trade in Services Agreement (TiSA) is an international trade treaty between 23
Parties, including the EU and the United States. TiSA is meant to liberalize thetrade of services such as banking, healthcare, and transport. Trade in Services Agreement, EUR.
COMMISSION, http://ec.europa.eu/trade/policy/in-focus/tisa/ [https://perma.cc/2BJR-TRRS].
93
The ITA’s 82 members (as of 2017) represent 97 percent of the world’s trade in IT
products. An ITA Expansion in 2015 added 24 members, including China, Chinese Taipei,
Israel, and the OECD membership. World Trade Organization, Briefing Note: The Expansionof Trade in Information Technology Products (ITA Expansion), (Dec. 16, 2015),
https://www.wto.org/english/news_e/news15_e/itabriefingnotes161215_e.pdf[https://perma.cc/SN5G-F5QZ].
94
Twenty-three WTO members are participating in the TiSA talks: Australia, Canada, Chile,
Chinese Taipei, Colombia, Costa Rica, the EU, Hong Kong China, Iceland, Israel, Japan, Korea,
Liechtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Peru, Switzerland,
Turkey, and the United States.
95
Trade in Services Agreement, supra note 92.
96
OFFICE OF THE U.S. TRADE REPRESENTATIVE, Trade in Services Agreement List ofParticipants, https://ustr.gov/TiSA/Participant-List [https://perma.cc/M8ZH-DK4Y].
97
See COWHEY & ARONSON, supra note 1, at 94–124. Chapter 5 of Digital DNA explains

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dynamics digital privacy and security, important elements of a trusted digital
environment, are distinctive and difficult to manage. However, many of thegovernance elements needed for a solution are analogous to issues tackled
successfully in the WTO’s 1997 Agreement on Basic Telecommunications
Services.98 Authoritative soft rules can anchor quasi-harmonization ofnational rules. The best way is to move much of the governance action to
MSOs, while retaining an explicit role for the soft trade rules that frame theregime to complement hard trade rules. Some policy practices would be
forbidden to reduce certain market risks for companies, such as the TPP rule
forbidding a government from demanding a company’s software source code
as a condition for market entry. The soft trade rules give countries direction
on how to achieve certain policies. Moreover, existing trade agreements
already contain many rules that would complement any such new policies. For
example, the parties could agree to implement the pact on the trusted digital
environment in a manner consistent with basic trade obligations, such as
nondiscrimination and least trade restrictive regulations. 99 Together, the hardand soft trade rules provide the framework of checks and balances that reducethe cooperation risks that can paralyze efforts of coordination. Various
solutions may arise from coordination between national-level regulators andtransnational MSOs within the checks and balances created by soft trade rules.
The third element of a trusted digital environment is reciprocity. A
plurilateral pact should feature what is known as conditional MFN clauses.
This approach confines the benefits of the plurilateral pact only to its
signatories. Many of the key challenges for this regime will be in interpreting
soft rules through the MSO process. Which companies can be involved andbenefit? The answer is an important factor in charting the course forward. If
Chinese firms, through, for example a U.S. or Australian subsidiary, canbenefit from privacy and security certifications without China being a memberthat in the trade context, soft rules are binding obligations on countries to create particularcapabilities, whether for making and enforcing rules or for creating rules to achieve certain
agreed-on “purposes.” The specific mechanisms or policies are up to the individual nation solong as they fulfill the intent of the obligation. APEC Principles, in contrast, are not binding.
For a similar approach on trade, see CHRIS BRUMMER, MINILATERALISM: HOW TRADE
ALLIANCES, SOFT LAW AND FINANCIAL ENGINEERING ARE REDEFINING ECONOMIC STATECRAFT(2014).
98
The WTO Negotiations on Basic Telecommunication, WTO (Mar. 6, 1997),
https://www.wto.org/english/news_e/pres97_e/summary.htm [https://perma.cc/6TCG-Q7VV].
99
Least trade restrictive does not equate to weak regulation. It is a condition thatgovernments can do what is necessary, but should be prepared to justify how the rules do notsignificantly harm market access for reasons unrelated to the purpose of the rules. Drug safety
rules are both strong and consistent with trade policy obligations.

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31or signatory, technocratic implementation of the soft rules and the politics will
be complicated. The text of the TPP agreement went a long way toward
establishing a precedent for such discretion.100
The TPP provisions on services suggest some useful starting points on
conditionality.101 The provisions permitted TPP members to create a system
for mutual recognition of MSO certifications of companies for privacy andsecurity practices without granting MFN status to non-TPP countries. The
provisions also stipulated that a TPP company that was a shell for a non-TPP
company could be denied these benefits.102 For example, an Indian company
with a subsidiary office in Tokyo could have been denied certification benefits
because India did not belong to the TPP. If the TiSA had provisions on atrusted digital environment, then it would have to make choices on how tohandle this issue of selective benefits. For now, WTO experts agree that
plurilateral agreements do not impose general MFN obligations. However, arequest for accession to the TiSA by China, for instance, would raise importantquestions about what guarantees to require. The accession negotiation would
impose some degree of conditionality on benefits.
If new states accede to either agreement, questions would arise about
whether equivalency must be reaffirmed every time a new member joins theclub. We say yes. Answering the question is a difficult task, but a necessary
one. It is a positive sign if there is enough interest from other major players
who might eventually promote a digital economy agenda. This could motivate
countries to consider ways to expand it, such as by creating WTO plurilateralagreements to bolster the emerging regime. Overall, soft rules about a trusted
digital environment will require serious reconsideration of national policies by
China, India, Indonesia, and other players103—which would be a welcome
development.
A fourth pillar of a trusted digital environment is the use of MSOs to
improve governance. Civil society practices show promise as a way to tackle
complex technology dynamics. Some policy problems will atrophy inimportance as a result of market innovations offering plausible fixes; others
will require ongoing policy experimentation and adjustment. MSOs, whichusually emerge from bottom-up collective efforts, provide a way of harnessing

100

We thank Don Abelson for his observations on most-favored-nation treatment.
TPP, supra note 21, at art. 10.3–10.4.
102
Interviews with an official involved in the TPP negotiations, 2016.
103
This could be especially sensitive for China, which might have joined the TPP at a later
date. Experts from Indonesia told us in August 2016 that an active conversation on how to
conform its national laws to the TPP had begun.

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invaluable bottom-up expertise. Although the organization of MSOs varies
depending on the nature of the particular issue, a common set of evaluative
guidelines can identify whether they qualify as legitimate players in regard to
implementing trade obligations. Such guidelines already exist regarding,among others, standards-setting organizations. Both governments and MSOs
are more credible if they are intertwined. Ultimately, governments bear the
final measure of democratic accountability. Substantial transparency isneeded to operate in a world with strong civil society dynamics, including
policy implementation.
Soft rules also help operationalize the governance of privacy and establish
more recognized roles for MSOs in crafting applications for industries orprocess requirements for operations by data controllers. We propose thatnegotiators develop language that allows the Federal Trade Commission(FTC) and other national privacy authorities to accept MSOs as auditors andreviewers of privacy guidelines. Soft rules should also outline conditions formembership. The guidelines will require thoughtful construction. The Bildt
Commission, for example, urged a requirement that an MSO in internet
governance be open to all, but not dominated by any one faction. 104 The
WTO characterizes international standards organizations, one important formof MSOs, as adhering to the following principles for developing standards:
transparency, openness, impartiality and consensus, effectiveness andrelevance, and coherence.105 An additional presumptive guideline forrecognition could be that the MSO membership is expert and self-organizing,as was the case with the Internet Engineering Task Force (IETF).106 Such a

104

CTR. FOR INT’L GOVERNANCE INNOVATION & THE ROYAL INST. FOR INT’L AFFAIRS,GLOBAL COMMISSION ON INTERNET GOVERNANCE: ONE INTERNET (2016),
https://www.cigionline.org/sites/default/files/gcig_final_report_-_with_cover.pdf[https://perma.cc/ZDY7-JX74].
105
ACP-EU TBT PROGRAMME, STRENGTHENING THE QUALITY INFRASTRUCTURE
INSTITUTIONSOFETHIOPIA(2016),
https://europa.eu/capacity4dev/file/50029/download?token=UUMcZ2df[https://perma.cc/26XD-4PGX].
106
One illustrative effort to apply such criteria is playing out during the transition of
ICANN’s IANA from U.S. control to a more independent form of global MSO. The U.S.
government participated in the negotiations and announced criteria by which it would judge theacceptability of the final proposal, but the MSO community took the lead. For the U.S. criteria,
see Lawrence E. Strickling, Stakeholder Proposals to Come Together at ICANN Meeting inArgentina,
NAT’L
TELECOMM.
&INFO.
ADMIN.
(June16,2015),
http://www.ntia.doc.gov/blog/2015/stakeholder-proposals-come-together-icann-meetingargentina [https://perma.cc/MQ4R-7TBV]; Joe Waz & Phil Weiser, Internet Governance: The
Role of Multistakeholder Organizations, 10 J. TELECOMM. & HIGH TECH. L. 331, 333–50 (2013).

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guideline would be a safeguard against governments organizing the MSOs
from the top down as a general rule. At the same time, it would recognize thatthe membership parameters of an MSO like the Society for Worldwide
Interbank Financial Telecommunication (SWIFT) 107 would necessarily differ
substantially from that of other MSOs. It also reinforces the link between
expertise and willingness to delegate authority to an MSO.
The soft rules should resemble the WTO BTA obligations to create coreregulatory capacities for telecommunications markets that still permitted
substantial discretion on the specifics of the rules. The model soft rules for atrusted digital environment would be the existing OECD and Asia-Pacific
Economic Cooperation (APEC), principles to creating a baseline for privacy
protection with a light touch. As with the APEC and OECD principles, theyshould oblige members to develop the capacity to cooperate with othersignatories on issues related to enforcement measures to promote a trusted
digital environment. As part of the policy process, the soft rule capabilities
should include mechanisms to recognize and to certify MSOs among thesignatories. (APEC is attempting to craft something like this.) Successful
support for a system of certifications crossing national borders would greatly
facilitate the IPD.
These soft rules should mandate: (1) policy capabilities at the national
level to safeguard privacy; (2) cooperation on enforcement of privacy
safeguards among Digital Economy Agreement (DEA) members; (3)cooperation by all member states in the creation of a system for thecertification of MSOs that can assist in the implementation of privacy
codes; 108 (4) a guarantee that signatories have the right to establish additional
privacy safeguards beyond the baselines, where such safeguards should beleast trade restrictive and nondiscriminatory with regard to the national originof business enterprises from members of the club, consistent with technology
neutrality trade, and as transparent as possible within the constraints ofnational security policies; and (5) privacy and security safeguards, requiring
cooperation among club members to create third-party mechanisms thatfacilitate verification of commitments made in various privacy agreements
among members. 109
On MSOs, see JESSICA F. GREEN, RETHINKING PRIVATE AUTHORITY, AGENTS AND
ENTREPRENEURS IN GLOBAL ENVIRONMENTAL GOVERNANCE (2014).
107
See COWHEY & ARONSON, supra note 1, at 167–93.
108
This is analogous to the role of standards organizations in regard to technical barriers totrade codes in trade pacts.
109
See COWHEY & ARONSON, supra note 1, at 167–93. This is how the U.S.–EU dispute over
SWIFT was resolved.

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What would be the best achievable set of principles to embrace? This
Article suggests melding the OECD and APEC privacy principles. The EU
endorsed the OECD principles because they are consistent with the problemsolving logic of the EU policies. The basic logic marries contract law to a setof consumer protections to address market problems created because personal
information is nonrivalrous in its use, and knowledge of its use and value isasymmetrically distributed. The information service supplier knows morethan the individual user. For example, the growing pool of information thatwill be collected on drivers by their automobiles, such as typical driving
speeds and fuel efficiency, in order to improve maintenance has more uses
and values than the vehicle owner may anticipate.
These principles could serve as the basis for drafting soft rules as an annexof additional commitments on a trusted digital environment. 110 Such an annex
would be analogous to the commitments on procompetitive regulatory
principles for telecommunication markets that provided an additional
commitment in the WTO Agreement on Basic Telecommunications Services.
Even if these commitments are ultimately adopted, states could still impose
additional safeguards for privacy and security. However, such rules would
need to be developed in accordance with the “horizontal trade disciplines.”111
Table 1 summarizes the foregoing analytic narrative.
Table 1: Twelve Important Privacy Principles
Principles
1. Consent
2. Identifiable accountable agent
3. Appropriate data security protection

Objective
Base personal data collection on theconsent of the user
Specify who deals with user questions andcan address and redress data complaints
Base corporate risk management on risk
assessment that can be audited

110
See CTR. INT’L GOVERNANCE INNOVATION, supra note 104 (endorsing the OECD
Principles).
111
Horizontal trade commitments apply to all scheduled service sectors unless otherwise
specified. Scheduled trade commitments are split into two sections: first, “horizontal”
commitments which stipulate limitations that apply to all of the sectors included in the schedule.
Any evaluation of sector-specific commitments must therefore take the horizontal entries into
account. In the second section of the schedule, commitments, which apply to trade in services
in a particular sector or subsector are listed. Guide to Reading the GATS Schedules of SpecificCommitments and the List of Article II (MFN) Exemptions, WTO,
https://www.wto.org/english/tratop_e/serv_e/guide1_e.htm [https://perma.cc/D9SV-BXM4].

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Digital Trade and Regulation in an Age of Disruption
4. Transparency in governance practices
5. No restrictions on transborder data
flows

35

Data collectors must use policies that aretransparent to users
Countries that host data will observe
OECD principles or have a data controller do so

6. Appropriate national governanceMembers should pass, protect, andenforce national laws and cooperate with others

7. Equal treatment of data privacy

Data privacy should be maintained,
regardless of medium and where it is stored

8. Privacy cross-border enforcement

Members should share information andassist in investigation and enforcement actions,
including deference to mutual law enforcement
procedures in most cases

9. Multi-stakeholder organizations aremutually recognized for certification

Embrace transparency and mutuallyaccept findings of data controllers certified byother member states; including guidelines for
multi-stakeholder organization recognition

10. Develop collective review
mechanisms for disputes
certifications

over

11. Commercial encryption for privacy
12. Affirm horizontal trade disciplines

Includes procedures for third-party
national monitoring by consent of parties
Accept commercial encryption bycertified companies of member states
Rulemaking is transparent, nondiscriminatory bynational origin, and least burdensome for trade

At the same time, the principles can play out under an interplay of broad
trade disciplines and detailed regulatory side agreements abetted by MSO
arrangements. Such a complex variation occurred when the EU and theUnited States crafted the Privacy Shield for trans-Atlantic data flows.112

112

EUROPEAN COMMISSION, GUIDE TO THE EU-U.S. PRIVACY SHIELD,
https://publications.europa.eu/en/publication-detail/-/publication/b0555243-bfc2-41a5-985b9435d29063ca [https://perma.cc/H8U7-BTRP].

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Under a set of joint principles, the EU announced a bilateral regulatory
agreement to accept U.S. government guarantees of its enforcement ofcorporate declarations of compliance with the agreed upon principles. The EU
has the option to withdraw acceptance if annual reviews reveal significant
compliance issues. 113 Within this bilateral review mechanism, the long-term
question is what systematic role MSOs will play in figuring out the practicalimplementation of the privacy guidelines.
CONCLUSION
Any effort to expand market access and conduct rules to tap the fullpotential of the digital DNA that is transforming global innovation—and
therefore, global growth—faces choppy waters in a time of backlash against
globalization in leading countries. Yet if we are correct about the underlying
economic dynamics, even die-hard believers in the priority for traditional
manufacturing and commodity industries and their workers face few choices
if they wish for competitive viability and future jobs. Functional necessity
does not inevitably lead to political and diplomatic success. The Article’s
authors believe that a better alternative within the realm of political-diplomatic
feasibility is possible over time. Thus, this Article lays out an approach for
pushing forward global negotiations on market access tied to the IPD whilebuilding a trusted digital environment. This Article does so by linking a pacton privacy—as a precedent and model for one on cybersecurity—to a trade
pact addressing IPD issues. This Article argues that trade can bolster measuresbuilding a trusted digital environment while advancing that a trusted
environment is essential to getting trade and competition issues right.
Whether by bilateral or plurilateral trade pacts or by regulatory initiatives
leading to trade pacts as consolidating mechanisms, the building blocks forthe global framework of our digital economic future are not impossible toimagine and implement.

113

See Cowhey & Aronson, supra note 1, at 194–232. The Privacy Shield featured far moregovernment micromanagement at the front end than would meet our aspirations for flexibility
and experimentation. But much of the implementation will, over time, look closer to the MSO
model, especially because of sector-specific agreements on privacy management.