This abstract was submitted to and presented at CCRC International Conference 2022.

Digital Trade and National Security:
A Search for a Better Balance
Rikako Watai, Professor of Administrative Law, Keio University Law School, JapanINTRODUCTION
The spread of the internet has transformed economic transactions, and digital markets have
expanded across the globe. Over the past two years, the ongoing COVID-19 pandemic has
also accelerated the development of digital trade 1. Since its establishment in 1995 as a neworganization that would develop to replace the 1947 General Agreement on Tariffs and Trade(GATT), the World Trade Organization (WTO) has set comprehensive international trade
rules for goods and services. But rules are not yet in place for digital trade, and in January
2019 a number of countries came together on a voluntary basis to release the Joint Statement
on Electronic Commerce2, prompting discussions that continue to this day.
The rules of individual countries on digital trade do not necessarily coincide. The UnitedStates is home to IT platformers like Google, Apple, Facebook, and Amazon.com (GAFA) 3,
which means that private-sector companies exert a powerful influence on the rule-making
process. By contrast, the European Union formulated the General Data Protection Regulation(GDPR) in 2016 and has followed a policy based on protecting personal information, taking
an approach to rule-making that focuses on individuals rather than businesses. In China, thegovernment takes the lead on data management, through a legal system that limits crossborder transfer of data and requires that data be stored within China’s borders 4.
Japan has also developed its own approach. At the World Economic Forum annual meeting in
Although no globally agreed definition yet exists for digital trade, the Organisation for
Economic Co-operation and Development (OECD)’s definition, “digitally-enabledtransactions of trade in goods and services that can either be digitally or physically delivered,and that involve consumers, firms, and governments” has become quite established.
2 World Trade Organization, Joint Statement on Electric Commerce WT/L/1056, 25 January
2019 (19-0423).
3 In October 2021, Facebook announced that it would change its company name to Meta.
4 Yoshinori Abe, Data Localization Measures and International Economic Law: How Do
WTO and TPP/CPTPP Disciplines Apply to These Measures?, 16 Public Policy Review 5, 1,
3-4 (Policy Research Institute, Ministry of Finance, Japan, Feb. 2021).
https://www.mof.go.jp/english/pri/publication/pp_review/ppr16_05_02.pdf (last visited Jan.
10, 2022).
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January 2019, then Prime Minister Shinzo Abe announced Japan’s concept of Data Free Flowwith Trust (DFFT), and this was included in the Leaders’ Declaration at the G20 Osaka
Summit in June. DFFT outlines the position of the Japanese government, which aims toachieve a balance in drawing up digital trade rules between data security and user confidence
on the one hand and the free and open flow of data on the other. Since coming to office inNovember, the new cabinet under Prime Minister Fumio Kishida has announced that
economic security will be its biggest priority 5. The relationship between economic security
and digital trade is not yet clear, but data is clearly of major importance in a digitalizedsociety, and data leaks have the potential to cause national security problems. It is necessary
to consider the balance that needs to be struck between promoting digital trade and national
security concerns.
THE DEVELOPMENT OF DFFT
DFFT is an approach based on the idea that guaranteeing privacy, security, and the safety ofintellectual property as the foundations of data flow will help to encourage the free flow ofdata. Central to the approach is the idea that data flow should be “with trust.” The US-Japan
Digital Trade Agreement signed in January 2020 aims to construct a new trading area throughthe free flow of data, and DFFT is an attempt to embody this and put it into practice. The
treaty includes relevant provisions on: a ban on imposition of customs duties (Article 7), nondiscriminatory treatment of digital products (Article 8), freedom of cross-border transfer ofinformation (Article 11), a ban on requirements for data localization (Article 12), a ban onrequirements for disclosure of source code (Article 17), and a ban on demands for access tocryptography (Article 21). Of these, the prohibitions of demands for data localization,
disclosure of source code, and access to information using cryptography can be said toinvolve the “with trust” concept.
Data localization requires a business to locate facilities and related data within a country’s
borders as a condition of carrying business there. Regulations based on this requirement
might include bans on transfer of data, or requirements affecting the retention and storage ofdata acquired and collected for the purpose of corporate activities. If data transfer is restrictedby strict data localization requirements, this will inhibit the free flow of data. Also, if
compulsory access by public institutions to information held by private-sector companies(government access) is used to secure an advantage for that country’s industries, such moves
would surely not only violate WTO agreements, but also go against the promotion of digitaltrade. Some government access, however, such as in criminal investigations, can be regarded
Brad Glosserman, Kishida doubles down in economic security, Japan Times (Oct. 12, 2021)
https://www.japantimes.co.jp/opinion/2021/10/12/commentary/japan-commentary/kishidaeconomic-security/ (last visited Jan. 10, 2022).
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as legitimate, provided proper legally defined procedures are followed. The question is what
other circumstances should be regarded as legitimate reasons for limiting the free flow ofdata. Most people would probably agree that national security should be included as alegitimate reason. For example, taking steps to prevent the leak of important technology
essential to national security would probably be regarded as legitimate, and provisions toallow this would not violate WTO agreements, so long as the necessary minimum measures
were taken.
Although no clear definition of “national security” exists6, as far back as GATT, Article 21
contained provisions on Security Exceptions that allowed countries to take steps to limit free
trade based on national security considerations. Article 4 of the US-Japan Digital TradeAgreement also contains national security exceptions. Consequently, even in agreements
based on the principle of free trade, the necessity of exceptions from the perspective of
national security concerns has been recognized for more than 50 years.
Article 21(b) of GATT states that “nothing in this Agreement shall be construed … to prevent
any contracting party from taking any action which it considers necessary for the protectionof its essential security interests: (i) relating to fissionable materials or the materials fromwhich they are derived; (ii) relating to the traffic in arms, ammunition and implements of war
and to such traffic in other goods and materials as is carried on directly or indirectly for thepurpose of supplying a military establishment; or (iii) taken in time of war or otheremergency in international relations.” These provisions recognize that a state has a legitimate
right to protect its essential security interests, but it is fair to say that the reasons envisaged
for these exceptions refer to an extremely limited set of circumstances.
The security exceptions in Article 4 of the US-Japan Digital Trade Agreement stipulate that
“nothing in this Agreement shall be construed to: (a) require a Party to furnish or allow accessto any information the disclosure of which it determines to be contrary to its essential security
interests; or (b) preclude a Party from applying measures that it considers necessary for thefulfilment of its obligations with respect to the maintenance or restoration of international
peace or security, or the protection of its own essential security interests.” This suggests thatthe grounds for application of these exceptions may be somewhat broader than those inGATT Article 217. If these exceptions were applied frequently, they would probably have thepotential to damage the intent of the agreement.

Rikako Watai, Digital Trade and National Security Exceptions, 27 Int’l Trade L. & Reg. 2,119, 123 (2021).
7 Similar provisions are included in the Comprehensive and Progressive Agreement forTrans-Pacific Partnership (CPTPP).
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NATIONAL SECURITY AND DIGITAL TRADE
The Kishida administration has established a new ministerial post for economic security, andpreparations are underway for draft legislation on the promotion of economic security to besubmitted during the ordinary session of the Diet in 2022. Four topics have been set as
priority areas to be addressed in the draft legislation: a more robust supply chain, ensuring thesecurity and reliability of key infrastructure, technological cooperation between thegovernment and private sector, and non-disclosure of patents in sensitive areas 8. Since
economic security means taking necessary steps to guarantee the economic autonomy of thecountry for strategic reasons, it is likely that this will have a certain impact on digital trade.
As with the concept of national security itself, no fixed definitions exist for economicsecurity. In Japan, discussions began from the definition agreed by the Industrial Structure
Council’s Special Sub-Committee for Economic Security Issues in 1982: “Economic security
means defending the country’s economy from major threats arising internationally, chiefly byemploying economic means.” 9 In June 2021, the Japanese government’s Basic Policy on
Economic and Fiscal Management and Reform 2021 10 outlined the strategic direction foreconomic security as follows: “The Government will expand and deepen cooperation withlike-minded countries under the international order based on fundamental values and rules,
and will seek to ensure Japan’s self-determination and acquire advantages for our country,”
noting that “from this perspective, the Government will implement concrete measures andpolicies to strengthen its efforts to identify, protect, and develop critical technologies and toenhance the resilience of essential industries.” It seems that economic security is understoodas representing the basis foundations for free trade.
DIGITAL TRADE AND NATIONAL SECURITY EXCEPTIONSAt the G7 Digital and Technology Ministers’ Meeting in July 2021, agreement was reached
on a roadmap for cooperation on DFFT, and since the 2023 G7 summit is due to take place inJapan, moves to secure the status of DFFT as an international system are likely to gather pace

Isabel Reynolds and Emi Nobuhiro, Japan Economic Security Minister Says Business Must
Be Free, Bloomberg (Nov. 26, 2021) https://www.bloomberg.com/news/articles/2021-1126/japan-economic-security-minister-says-business-must-be-free (last visited Jan. 10, 2022).
9 Special Sub-Committee for Economic Security Issues (Keizai anzen hosho mondaitokubetsu shoiinkai), Industrial Structure Council, “Keizai anzen hosho no kakuritsu omezashite” (Toward the establishment of economic security), (April 28, 1982) 27.
10
Cabinet decision: “Basic Policy on Economic and Fiscal Management and Reform 2021
(English version) Four Driving Forces that Open the Way to the Future of Japan: Green,Digital, Creation of Vibrant Local Regions, Measures against Declining Birthrate” (June 18,2021) 28.
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in the years to come11. In drafting rules for digital trade, the positions of each country differ,
but efforts to bridge these gaps are likely to continue. It is not uncommon in drawing up rules
among states to reserve policy space for national security issues, and such provisions are also
necessary from the perspective of ensuring that the rules operate “with trust.” Ambiguity
remains, however, particularly with regard to where to draw the line between “nationalsecurity” and “protectionism.” There is a need for thorough-going discussions of plausible
situations in which national security might become an issue in digital trade. States have broadpolitical and policy discretion in invoking the security exceptions, and how to control this is
likely to be a challenge.
It is to be hoped that in the future, the approach to the free use and application of data put
forward in the US-Japan Digital Trade Agreement will continue to find wider acceptance andwill eventually develop to be adopted as part of WTO rules.

The roadmap included four main points: an assessment of evidence on the impact of data
localization, a comparative analysis of each country’s policies on cross-border data transfers,
formulation of guidelines for trusted government access, and steps to accelerate thedevelopment of mutually acceptable sharing of data.
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