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70–918—PDF 2010

S. HRG. 111–1101 

INTERNATIONAL TRADE IN THE 

DIGITAL ECONOMY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INTERNATIONAL TRADE, 

CUSTOMS, AND GLOBAL COMPETITIVENESS 

OF THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

NOVEMBER 18, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTERNATIONAL TRADE, CUSTOMS, AND GLOBAL COMPETITIVENESS

RON WYDEN, Oregon, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

ROBERT MENENDEZ, New Jersey 

MIKE CRAPO, Idaho 

OLYMPIA J. SNOWE, Maine 

JIM BUNNING, Kentucky 

PAT ROBERTS, Kansas 

(II) 

C O N T E N T S 

OPENING STATEMENT 

Page 

Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Subcommittee 

on International Trade, Customs, and Global Competitiveness, Committee 

on Finance ............................................................................................................ 1 

WITNESSES 

Mann, Dr. Catherine M., professor of economics, Brandeis University, Concord, MA ................................................................................................................ 4 

Black, Ed, president and CEO, Computer and Communications Industry Association, Washington, DC .................................................................................. 6 

Burton, Daniel, senior vice president for global public policy, Salesforce.com, 

Chevy Chase, MD ................................................................................................. 8 

Sax, Mike, board president, Association for Competitive Technology (ACT), 

Eugene, OR ........................................................................................................... 9 

Slater, Greg, director of trade and competition policy, Intel Corporation, Phoenix, AZ ................................................................................................................... 11 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Black, Ed: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 29 

Burton, Daniel: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 41 

Mann, Dr. Catherine M.: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 51 

Sax, Mike: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 59 

Slater, Greg: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 73 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 89 

‘‘Enabling Trade in the Era of Information Technologies: Breaking Down 

Barriers to the Free Flow of Information,’’ Google white paper, originally published November 15, 2010 ............................................................ 92 

COMMUNICATION

eBay, Inc. .................................................................................................................. 117 

(III) 

(1) 

INTERNATIONAL TRADE IN THE 

DIGITAL ECONOMY 

THURSDAY, NOVEMBER 18, 2010 

U.S. SENATE,

SUBCOMMITTEE ON INTERNATIONAL TRADE,

CUSTOMS, AND GLOBAL COMPETITIVENESS, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 3:07 p.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Ron Wyden 

(chairman of the subcommittee) presiding. 

Also present: Democratic Staff: Jayme White, Staff Director. Republican Staff: Ken Flanz, Legislative Director. 

OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR 

FROM OREGON, CHAIRMAN, SUBCOMMITTEE ON INTERNATIONAL TRADE, CUSTOMS, AND GLOBAL COMPETITIVENESS, COMMITTEE ON FINANCE 

Senator WYDEN. The subcommittee will come to order. 

I apologize to all our guests. As you may have gathered, it is 

somewhat chaotic in terms of trying to get through all of the organizing. My colleague, ranking minority member, and very, very valuable Senator, Senator Crapo, has been called to a meeting of the 

Deficit Commission, otherwise he would be here. He is very interested in today’s subject: International Trade in the Digital Economy. I appreciate all our guests and their patience. We will go to 

your remarks here in just a moment. 

There is rampant global protectionism being deployed today 

against America’s digital exports. The purpose of our hearing this 

afternoon is to expose it, describe it, and identify ways to combat 

it. Today the subcommittee is going to shed new light on an old 

issue: the importance of keeping the modes of international trade 

open. Whether it is the Oregon Trail, the Silk Road, or the World 

Wide Web, safe and efficient trade routes that enable people to connect are essential for economies to grow. 

The modes over which trade is conducted have changed over 

time, but the fundamentals of trade do not. The development of civilization parallels the growth of open trade routes, and the Internet 

represents the trade route of the 21st century. Keeping the net 

open at home and overseas is of paramount importance to the 

American economy because it is increasingly the primary way that 

the global population will communicate, create, and conduct commerce. 

2 

Our economy has faced some dark times, but one bright spot, one 

very vibrant spot, is the continued innovation in the digital space. 

American companies, whether they are designing and manufacturing semiconductors or rearranging the way that Americans socialize and engage in commerce, are transforming global society in 

profound and irreversible ways. 

This innovation does not just happen in Silicon Valley; it is occurring in communities across the country. To be sure, Intel, 

Facebook, Apple, and Google come to mind when many of us think 

of the digital economy, but these firms are also the platforms upon 

which further innovation occurs, the platforms by which a seller in 

the Pacific Northwest can reach a buyer in Southeast Asia without 

leaving his desk. 

That is why I am especially pleased that Mike Sax is here. He 

is from beautiful Eugene, OR, home of the University of Oregon 

Ducks, where we are number one and will never let a moment pass 

when we can point that out. Mike develops applications that piggyback on the mobile IT platforms like Apple’s iPhone. Thanks to 

Mike, over a million early iPhone adopters around the world can 

download his app to type their e-mail and text messages much 

easier. Mike, in my view, is going to speak today for hundreds of 

small developers and entrepreneurs throughout the country, and 

we are glad once again to see leadership coming from our home 

State. 

The ability of American IT companies to penetrate foreign markets directly affects American companies’ ability to increase exports 

of goods and services, digital or otherwise. So, when an Internet 

website is blocked or filtered or data flow is impeded, it has a direct impact on the American economy and its ability to produce the 

new, good-paying jobs that our country needs. 

As American technology firms create and expand global markets 

for digital products and outpace our competition, foreign governments have responded by resorting to discriminatory measures 

against American technology and content providers. According to 

industry sources that relied on the work of the Open Network Initiative, now more than 40 countries impose broad restrictions on 

online information, which represents a 10-fold increase from a decade ago. 

In many cases, the censorship does not aim to serve a repressive 

political motive, but is about blatant commercial protectionism. 

Make no mistake about it, it is not primarily about politics, it is 

about commercial protectionism, pure and simple. My view is, 

these actions constitute a direct economic threat to the United 

States, and that is what our subcommittee is going to be working 

to combat. 

Now, we have seen this before. American firms drive innovation, 

but we have seen in the past that foreign regimes think that they 

have a license to disfavor American technology because their own 

companies cannot get out of the starting gate. Witnesses today will 

describe specific trade barriers that go beyond discriminating 

against American content. Secret regulations, licensing standards, 

various practices are being deployed to disadvantage American 

companies and the American workers that they rely on. 

3 

The committee stands ready to improve enforcement of current 

trade agreements, like the General Agreement on Trade and Services and, if necessary, to help reshape them to reflect the challenges that are brought to light today. 

I have spoken with Ambassador Kirk about this recently, and I 

believe that it will be possible for the subcommittee to work with 

the technology community and our U.S. Trade Representative to 

obtain a Trans-Pacific Partnership agreement that ensures that 

trade and digital products can move freely throughout the Pacific, 

and that includes securing binding international commitments that 

ensure network neutrality. The work must not stop there. With the 

help of the experts before this panel and others, this committee is 

going to continue to expose and fight protectionism in digital trade. 

We are anxious to hear your ideas, panel members, for doing that 

this afternoon. 

Lastly, for America to be successful in shaping international 

routes in a transparent fashion to make certain that the trade 

routes for digital trade are open, considerable thought has to be 

given to our own statutes. I do not believe it is accidental that most 

of the innovation in the digital economy comes from the United 

States. We made important policy choices as the Internet began to 

take off. 

I remember when I came to the U.S. Senate and started looking 

at taxes, one of the clear examples was that we were not thinking 

creatively about what kind of tax policy we ought to have with respect to the net. We were talking about taxing, for example, newspapers that offered their product online. 

We were talking about giving them hefty taxes and leaving alone 

the snail-mail edition of a paper that came days later. I said, that 

does not make any sense for the digital economy. With colleagues 

on both sides of the aisle, I authored the Internet Tax Freedom bill, 

which I think has been very, very key to promoting economic 

growth in the digital space. 

So we ensured then that the digital economy would not face discriminatory taxes, that there would be the appropriate balance between enabling free speech on line and also providing the necessary 

tools to protect online privacy and protect national security. So we 

will try to build on those safeguards. We will try to build on them 

at home and try to ensure that the principles that they represent 

are applied abroad. 

So I thank all of our witnesses. Let me just introduce our witnesses briefly, and then we will have their presentations. 

First up will be Dr. Catherine Mann, who is a professor of economics at Brandeis. She is one of the world’s experts in trade and 

services, especially digital goods. 

Then I am very pleased that Ed Black will be joining us. He is 

president and CEO of the Computer and Communications Industry 

Association, representing many of our country’s most innovative 

Internet companies. 

Then we will hear from Mr. Daniel Burton, a senior vice president for Global Public Policy at Salesforce.com, which is a firm that 

is involved in cloud computing, enabling business to focus on its 

core mission instead of just wrestling with IT challenges. 

4 

Mike Sax, again, is here from Eugene. He is the board president 

of the Association for Competitive Technology. 

Then we are going to hear from an extremely important Oregon 

employer, Intel, employing many of my constituents. They will offer 

their perspective on trade and digital goods. Greg Slater will be 

giving that presentation. He is the director of trade and competition policy at Intel, one I can report is growing and increasing new 

jobs in Oregon, and we are very, very happy about that. 

So let us go right to Dr. Mann. Let me tell all of our witnesses, 

I know there is almost a compulsion to just read every word on the 

piece of paper that you have. I am going to make your prepared 

statements a part of the record, and, if you could take 5 minutes 

or so and focus on the primary things you want to convey, that will 

be great. 

Dr. Mann, welcome. 

STATEMENT OF DR. CATHERINE M. MANN, PROFESSOR OF 

ECONOMICS, BRANDEIS UNIVERSITY, CONCORD, MA 

Dr. MANN. I appreciate the opportunity to brief you and other 

members here on international trade in the digital age. I am going 

to present remarks in two parts. In the first part, I am going to 

talk about some data about the importance of digital products for 

the U.S. economy and for the global economy, and then the second 

part of my remarks is going to talk about some policy issues. 

Now, we can think about digital IT products in two different dimensions. A narrow dimension is to just think about digital IT, 

meaning things like Internet services, software, where the information technology component is really the whole thing. When we look 

about at that narrow definition of IT, we can look at the global 

marketplace and look at how it has evolved over time and compare 

the software and services component to hardware. 

In the year 2000, around the global economy, for every dollar 

that was spent on IT hardware, global spending on the digital components, the software and services, was $1.50. By 2008, that had 

risen to $2 of digital IT for each dollar of IT hardware. Now, in the 

United States, the relative numbers are $2 of software and services 

for each $1 of hardware in the year 2000, and $2.70 now. So the 

bottom line is, the U.S. spends relatively more on the IT software 

and services, but the rest of the world is catching up. 

The important thing also to note is that the U.S. is not the largest market out there. The U.S. accounted for only 40 percent of 

global spending on IT in the year 2008; it was 45 percent. So it is 

a shrinking share—big, but shrinking. That means that the global 

markets are that much more important. 

Now, in terms of a broader dimension, a way of thinking about 

digital products is to think about something that is called ITenabled services. It is a much broader set of services—finance, education, tourism, accounting, consulting, engineering—those types of 

services that can be delivered using the platform of information 

technology, the hardware, the services, and so forth. 

Again, we can look at the global environment and compare it to 

the U.S. In the global environment, the digital IT—meaning services and software—grew 150 percent between 2000 and 2008. The 

IT-enabled services grew about the same amount, a little bit slowVerDate Nov 24 2008 18:07 Nov 09, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 R:\DOCS\70918.000 TIMD
5 

er, but global trade in goods, the things that we have most of the 

infrastructure for negotiations associated with—goods trade only 

grew by 50 percent. So this IT stuff and the IT-enabled services is 

growing 3 times faster than trade in goods. 

If we then look at the numbers for the United States, the United 

States is an importer of digital IT. This is very surprising, given 

our comparative advantage in information technology products. So 

why is it an importer of digital IT? Some research that I have done 

with my colleagues suggests that it is restriction on foreign presence abroad, a lack of trade agreements, and poor or expensive 

Internet availability in foreign markets. So that suggests to us 

some directions to go with regard to policy. 

So let me talk about five policy issues, and I will just mention 

that all of those I brought up in a book that I wrote in the year 

2000, and all the data, if you want more, is in another book written 

in 2006. 

Anyway, policy issues. Rapid functionality, rapid functional evolution of IT, stands in stark contrast to the static nature of trade 

agreements. The General Agreement on Trade in Services (GATS) 

liberalization, in fact, is by schedule for modes, for products. It is 

immediately out of date. Once we renegotiate something with a 

country, it is immediately out of date rather than being open on an 

ongoing basis. What I think we ought to do is build on the information technology agreement, which was purported to be open to the 

functional evolution of IT products, although that has come under 

some stress recently. 

The second policy issue is with regard to standards-setting for 

digital IT. International rulemaking should be viewed as trumping 

domestic rulemaking. We have to be at the table where international rules are made and standards are set. We cannot presume 

to have the rest of the world absorb our rules. We need to be at 

the table and in alliances with other countries. 

The third policy issue, I think, is the most difficult one. That is 

the intersection between the national jurisdiction of policy and the 

fragmented nature of international data flows. These are issues related to data privacy, data security, and censorship, as well as jurisdictional uncertainty, meaning, I do not know where my data is, 

and whose rules does it have to adhere to? 

In this regard, there is not going to be a global standard. This 

is not possible. It is not like electro-technical standards that some 

body can address. So the issue here is to come up with a strategy 

where we can negotiate agreements and mutual understandings on 

the order of what we tried to do under the Safe Harbor arrangement with the EU. 

It is very limited in scope and in terms of participation, but it 

does create a foundation for going forward to have at least a strategy to negotiate and have understanding with other countries. We 

can expand those agreements to a broader set of countries in everwidening rings of understanding of these issues, but in the end 

there will not be global standards. It is just not possible. 

The fourth question or issue has to do with digital rights management or intellectual property. In my view, it is time to rethink 

and renegotiate the WTO TRIPS, the Trade-Related aspects of InVerDate Nov 24 2008 18:07 Nov 09, 2011 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 R:\DOCS\70918.000 TIMD
6 

tellectual Property Rights, because the length of time, 20 to 25 

years for intellectual property protection, is way too long. 

The last issue has to do with the domestic tax system, our tax 

system, in contrast to the virtual headquarters and the virtual nature of digital products. Tax shifting and transfer pricing are increasingly used by companies. It is very easy with digital IT and 

IT-enabled services. 

Now, the consequences of that are, it not only reduces tax revenues to the government, but it also distorts balance of payments 

measures, such that intellectual property that is innovated in the 

United States ends up being an import because it resides, for tax 

purposes, in a foreign country. So we need to review the U.S. treatment of international taxes. 

So, thank you very much for this opportunity. Digital IT and ITenabled services are of enormous importance in the U.S. economy, 

and they are the foundation for faster growth around the world. So 

I thank you for your attention to these issues and for the invitation. 

Senator WYDEN. Thank you very much, Dr. Mann. That is very 

helpful. I am going to also probably, in the course of the afternoon, 

ask you a question or two on this tax issue. You probably are 

aware that Senator Gregg and I have introduced the first bipartisan tax reform bill in a quarter century, picking up on some of 

the principles that you saw in 1986, where you clean out the clutter and hold down rates, particularly for doing business in the 

United States and keeping productivity. I want to see if I can find 

my tax czar, and we may incorporate a question or two on that. 

But thank you very much. Very helpful. 

[The prepared statement of Dr. Mann appears in the appendix.] 

Senator WYDEN. Mr. Black, welcome. 

STATEMENT OF ED BLACK, PRESIDENT AND CEO, COMPUTER 

AND COMMUNICATIONS INDUSTRY ASSOCIATION, WASHINGTON, DC 

Mr. BLACK. Mr. Chairman, I appreciate the opportunity to testify 

today, and I do want to commend you for your many years of understanding and leadership on issues vital to our industry. 

I will summarize my written testimony, which focuses on the 

trade implications of Internet freedom. Internet freedom advances 

three crucial goals: our political interest in fostering free and open 

societies, our economic interests in opening foreign markets, and 

the promotion of innovation and economic growth. The Internet adds approximately $2 trillion to the U.S. GDP. Total e-commerce amounts to $3.8 trillion annually. In this context, 

foreign information discrimination against digital goods and services fundamentally undermines our economic interests. In an information society, censorship is a trade barrier. 

Often individual companies fight unsupported on the front lines 

in the battle for Internet freedom. We cannot do this alone. The 

U.S. Government must fight for Internet freedom at the governmental level. The current situation is this: more than 40 governments practice extensive on-line censorship. Many nations block 

specific services. For example, in 2007, Turkish courts blocked 

YouTube for refusing to disappear content critical of the Turkish 

7 

hero, Ataturk, worldwide. Additionally, Turkey, Pakistan, and Afghanistan block U.S. sites with content deemed anti-Islamic. 

Network-level filtering is also widespread. 

China has blocked Facebook, Flicker, Foursquare, Twitter, and 

others, and singles out U.S. firms based on offensive content, even 

when Chinese firms carry the same content. China has also retaliated against U.S. firms for political reasons. When Congress 

awarded the Dalai Lama the Congressional Gold Medal in 2007, 

China redirected users from U.S. search engines to their Chinese 

competitor, Baidu. 

Following the disputed 2009 Iranian election, Twitter, YouTube, 

Gmail, and others widely used by democratic activists, were 

blocked. In addition to direct censorship and discrimination, foreign 

government content filtering in countries like China, Vietnam, and 

others degrades a quality of U.S. services at the international network gateway, causing delays and latency. Domestic competition 

avoids these burdens. 

A tax on Internet freedom that directly threatens American values and attempts to control the citizenry’s access to information 

must be relegated to the dust bin of history. They are more worthy 

of 1984 than 2010. Yet this conflict of values—the clash between 

an open and closed Internet—poses a dire threat to our economic 

interests, as well as to our political values. 

Relevant trade laws should be used to combat these abuses. Information discrimination represents a classic non-tariff trade barrier. It also constitutes an unfair rule of origin by filtering out U.S.- 

originating content, such as certain U.S. domains deemed subversive, and violates the fundamental free trade principle of national 

treatment. 

Unreasonable liability rules are another problem. Some jurisdictions make Internet businesses responsible for the misdeeds of others. Congress recognized this risk and crafted safe harbors that 

have been vital to the success of the Internet. But in foreign countries, U.S. companies and their executives have faced civil, and 

even criminal, liability based entirely on disfavored conduct by 

users. Unreasonable liability rules thus function as traditional 

market access barriers. 

We must also recognize Internet freedom starts at home. We 

must lead the world by example. If, even with good intentions, we 

block sites, allow discrimination over accessing the Internet, permit 

intrusive practices like deep packet inspection, and condone government spying or disappear content, we legitimize more farreaching practices overseas. 

I will conclude with a few brief recommendations. First, the 

USTR should investigate and bring appropriate trade cases. The 

public order exception should not be used as a get-out-of-jail-free 

card and to restrict Internet trade. Second, we should follow the 

blueprint established in the Korea FTA, which removes unnecessary barriers to cross-border information flows. 

Third, we need to retool our trade policy. While I believe the current trading regime already prohibits censorship filtering and 

blocking, we can make this more explicit in future agreements. We 

should demand enforceable commitments to free flow of information, and we should also internationalize ISP safe harbors. 

8 

USTR needs to refocus and implement a Special 301-like process 

for censorship that restricts Internet services. The Industry Trade 

Advisory Committee process needs a freestanding Internet committee. An industry that adds $2 trillion to the U.S. GDP deserves 

formal input. 

In conclusion, threats to Internet freedom are both a test of our 

fidelity to American values and also a test of our willingness to 

stand up for American economic interests. 

Thank you. 

Senator WYDEN. Thank you. Very helpful. We will have questions 

in just a moment. 

[The prepared statement of Mr. Black appears in the appendix.] 

Senator WYDEN. Mr. Burton, welcome. 

STATEMENT OF DANIEL BURTON, SENIOR VICE PRESIDENT 

FOR GLOBAL PUBLIC POLICY, SALESFORCE.COM, CHEVY 

CHASE, MD 

Mr. BURTON. Thank you, Chairman Wyden, for inviting me to 

join you today. As the senior vice president for global public policy 

at Salesforce.com, and as the former president of the U.S. Council 

on Competitiveness, I take particular pleasure in appearing before 

you and really applauding your leadership efforts on behalf of the 

high-tech industry over many years now. 

Salesforce.com is a world leader in cloud computing, which I will 

address today. We provide Internet-based solutions to organizations of all sizes in all industries globally. Our main offerings are 

services that allow organizations to input, store, process, and access data to manage their sales and service organizations. 

Before cloud computing, our customers would typically purchase 

software and hardware and build their own data centers. Today, instead of buying costly IT infrastructure, they simply log onto our 

website and access their computing needs as a subscription service. 

Salesforce is ranked number four on Fortune’s list of the 100 

Fastest-Growing Companies. 

In my remarks today, I would like to emphasize two things. 

Number one, cloud computing is a powerful economic stimulus that 

is changing the face of trade. Number two, in order to maximize 

the economic benefits of the cloud, public policy should facilitate 

international data flows, spur cloud adoption, and encourage transparency. 

Every major analyst firm believes that cloud computing will expand its share of the IT market. According to a recent Goldman 

Sachs report, cloud computing is ‘‘unstoppable.’’ 

To grasp the power of the cloud model, it is important to understand something called ‘‘Multi-Tenant Architecture.’’ Multi-tenancy 

allows organizations to use customized software while sharing core 

services, like database and security. It is cheaper, more efficient, 

and often more secure than the alternatives. 

The rise of apartment buildings shows just how fast multitenancy can move through markets. In 1869, the first apartment 

house opened in New York. Just like cloud computing, it stirred up 

a lot of controversy. One wealthy New Yorker declared, ‘‘Gentlemen 

will never consent to live on mere shelves under a common roof.’’ 

9 

The benefits of apartments were so compelling that, by the early 

1900s, the vast majority of New Yorkers were doing just that. 

The shift to electric utilities also shows how quickly multitenancy can become the overwhelming market choice. In 1900, the 

U.S. Census Bureau counted 50,000 private electric power plants 

and only 3,600 central utility stations. Thirty years later, utilities 

accounted for almost 80 percent of all U.S. electricity. 

Just as there was a massive shift to apartment buildings and 

electric utilities a century ago, so is there a massive shift to the 

cloud today. As the cloud absorbs more and more computing functions, it will drive the digitization of goods and services. 

Now, much of the policy discussion about cloud computing has 

tended to emphasize IT infrastructure and geography. The preoccupation with these issues, however, misses the point. To maximize the benefits of the cloud, we should focus on promoting its 

use, not restricting its deployment. Herein lies the central lesson 

for public policy. The greatest economic benefits of cloud computing 

will accrue to those communities that use it to boost productivity 

and innovation, not to those that try to control it. 

In order to draw the adoption of cloud services, public policy 

should focus on three goals. First, facilitate the transmission of secure cross-border data flows. The cloud has raised new concerns 

about jurisdiction and undue government access to data. U.S. trade 

officials should enter into a serious dialogue with other governments to address these issues. 

Second, move government IT operations to the cloud. Congress 

must match OMB budget guidance with appropriations that will 

make the U.S. Federal Government a lead example of the benefits 

of cloud computing. 

Third, encourage cloud providers to be more transparent about 

their operations. Privacy, security, interoperability, and portability 

are usually cited as the top cloud policy issues. Creating industry 

norms and insisting that cloud vendors transparently measure 

their performance against these norms will go a long way towards 

addressing these issues. 

In conclusion, just as apartment buildings and electric utilities 

made it feasible to deliver enhanced services to a large number of 

users, so does multi-tenant cloud computing. Its wholesale adoption 

is just beginning and will have a powerful impact on international 

trade and economic growth. I appreciate the efforts of this committee and your personal leadership to develop policies for this new 

frontier. 

Senator WYDEN. Very helpful, Mr. Burton. America is going to 

learn a lot about cloud computing in the days ahead. Thank you 

for laying it out very clearly. 

[The prepared statement of Mr. Burton appears in the appendix.] 

Senator WYDEN. Mr. Sax, welcome. 

STATEMENT OF MIKE SAX, BOARD PRESIDENT, ASSOCIATION 

FOR COMPETITIVE TECHNOLOGY (ACT), EUGENE, OR 

Mr. SAX. Thank you, Chairman Wyden. I would like to thank 

you, Ranking Member Crapo, and the distinguished members of 

the committee for holding this hearing about exports in the digital 

10 

economy. It is very important for small businesses, and I really appreciate the opportunity to be here. 

I am an import myself. I moved from Europe to Oregon 15 years 

ago because I was looking for a place with a dynamic market that 

I could reach with low barriers of entry and a strong IP climate 

where innovation could thrive, and I found that in Oregon. I have 

been very, very happy ever since. 

I wear two hats. I am a software business owner, but I also am 

chairman of the Association for Competitive Technology, and we 

have over 3,000 member companies who all are specialized in software and technology, and we love customers and building products 

that serve them. 

The international markets are a tremendous opportunity for us, 

and they are very important to us. The problems that we deal with 

as small businesses are actually very similar to the ones bigger 

companies have to deal with. The biggest difference is that we do 

not have legal staff or trade experts to deal with those problems, 

so they are a very big distraction for our own executives, or it is 

very expensive to hire lawyers to deal with these issues. 

Cloud computing is a very important opportunity for us because 

it offers small companies the advantages of big companies without 

having to make the huge capital investments. We can rent servers 

and, when we grow fast, we do not have to buy equipment in advance, we can rent more servers and accommodate the growth. 

So it is a tremendous opportunity, but it also presents a fair 

number of very complicated problems for small businesses, having 

to navigate a landscape where there is a patchwork of regulations 

for privacy and security and data retention, and the way payments 

work. 

Having to figure out what the right thing to do is, how we are 

in compliance with all of those sometimes-conflicting regulations, 

and making sure we do not expose ourselves to liabilities is sometimes prohibitive and almost takes away some of the advantages 

and the opportunities that cloud computing can present to us. 

Another issue that we have to deal with is a new form of protectionism. For example, in China, Chinese game companies can build 

a product and bring it to market right away. U.S. companies are 

subject to two different review processes that they have to go 

through before they can legally sell copies to the Chinese market. 

During that time, when we have a popular product, Chinese consumers want that product, so they start pirating it. By the time we 

go through the full process of review and can sell our first legal 

copy, the market is already saturated with illegal copies, and the 

opportunity has vanished. So that blocks American companies out 

of the Chinese market. 

Dealing with the international patent system is also very challenging. In Europe, applying for a patent and enforcing it is 10 

times more expensive than it is in the U.S. because, even though 

there is a unified process, there are still 40 different member states 

that have their own regulations. The patents that we file have to 

be translated into the languages of those 40 states. Those are technically expensive translations that basically cause companies to not 

even bother applying for patent protection in Europe. 

11 

Another form of protection is joint venture requirements, where 

we have to partner with a local company and give them a majority 

in the new joint venture in order for us to be allowed to do business 

in certain countries, or we have to put a whole bunch of money into 

a reserve account before we are able to do business in certain countries, money that is very hard to come by in this economy, especially for small businesses. 

So there are a lot of huge opportunities internationally for small 

businesses, but there are also quite a few challenges, and I am hoping that the committee can help address some of these. Thank you. 

Senator WYDEN. Thank you. How many people do you employ, 

Mr. Sax? 

Mr. SAX. Right now, my business has four employees, but basically throughout the years I have employed about 60, I believe. 

Senator WYDEN. Good. Very good. All right. 

[The prepared statement of Mr. Sax appears in the appendix.] 

Senator WYDEN. Mr. Slater, welcome. 

STATEMENT OF GREG SLATER, DIRECTOR OF TRADE AND 

COMPETITION POLICY, INTEL CORPORATION, PHOENIX, AZ 

Mr. SLATER. Thank you, Mr. Chairman. I appreciate the opportunity to appear before you to discuss international trade issues in 

conjunction with the economy. 

As you know, Intel is a leading manufacturer of computer network and communications products. We manufacture 75 percent of 

our product in the U.S., including Oregon, and generate 75 percent 

of our revenue overseas. Intel is engaged in the development of a 

computing continuum, where an individual’s applications and data 

will move with that person throughout the day as he or she engages in different activities. To manage that data and applications, 

that individual will use an assortment of digital devices that need 

to be interoperable. 

The creation of this computing continuum will tremendously increase trade. For example, Intel and 70 other companies recently 

invested $50 billion to drive interoperability for cloud computing. 

Intel also, this year, launched a software application store for 

netbook computers. Digital goods and services like cloud computing 

and creative software applications are dependent on the free flow 

of data enabled by a global digital infrastructure. 

That infrastructure, in turn, relies on devices and equipment 

that make e-commerce possible, so accessibility and interoperability 

of those devices and that equipment is crucial to e-commerce. For 

these reasons, trade rules intended to promote the digital economy 

need to enhance not only innovation for the entire digital ecosystem, but they need to remove trade barriers for that ecosystem 

and not just pieces of it. 

However, the rules that prevent or remove impediments to the 

movement of physical goods and services are not always as effective when applied to trade in a digital realm. We, thus, would like 

to highlight three international trade issues of concern to the digital ecosystem. First, trade agreements need to be updated to more 

effectively address emerging trade non-tariff barriers to e-commerce. Second, greater government support for international standards and best practices that encourage e-commerce and resolve conVerDate Nov 24 2008 18:07 Nov 09, 2011 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 R:\DOCS\70918.000 TIMD
12 

cerns not effectively addressed by trade agreements is important. 

Third, the elimination of tariffs on digital goods is also critical. 

First, trade agreements need to be modernized in light of rapid 

technology developments in the digital economy. The U.S. Trade 

Representative has done a good job of updating trade agreements 

to enable e-commerce, but more can be done. There are several instances in the areas of intellectual property, liberalization of digital 

services, and standards development that illustrate how trade rules 

need to be updated to better serve the digital economy. 

For instance, future free trade agreements should prohibit any 

requirements to locate IT infrastructure, such as servers, in a country as a condition of allowing digital services. Legitimate privacy 

and security concerns associated with those services can be effectively addressed in other ways, and future free trade agreements 

should make it clear that national technology regulations should be 

based on relevant international standards, and governments should 

not be involved, generally speaking, in dictating or developing IP 

licensing policies in conjunction with those standards. 

Second, we believe the development of international standards 

and best practices can adequately fill many of the regulatory gaps 

not suited for binding, international agreements. These broader alternatives to national regulation have unique benefits. For example, they are more flexible, they are easier to update, and they ensure greater interoperability. 

The Asia-Pacific Economic Cooperation has experimented extensively with practices and principles to enable the digital economy 

in its 21 member countries, and in those experiments it has balanced legitimate security, privacy, IP, and other concerns. And as 

an example, we encourage strong U.S. Government support for efforts like the APEC digital prosperity checklist and believe that future FTAs could reference some of the items in that prosperity 

checklist, such as the APEC cross-border privacy rules. 

Finally, the importance of eliminating tariffs for enhancing the 

digital economy is critical. The WTO information technology agreement eliminated a number of tariffs on a wide array of IT products, 

enabling dissemination of a lot of technology across the globe at a 

reduced price. However, that agreement is now more than 10 years 

old and needs to be updated to include additional IT products, and 

especially digital goods. 

Intel appreciates the opportunity to present before you these 

ideas, and we look forward to working with you on these important 

issues. Thank you. 

Senator WYDEN. Thank you very much, Mr. Slater. We had a 

wonderful program, as you know, in Oregon. The big announcement there was very welcome, and I think a number of the areas 

you suggest are exactly what we need to promote growth at that 

facility, and lots of others. We thank you very much. 

Mr. SLATER. Thank you for showing up at our announcement, 

Senator. 

Senator WYDEN. Thank you. 

[The prepared statement of Mr. Slater appears in the appendix.] 

Senator WYDEN. Let me ask each of you a question by way of 

starting, because I think I made it clear that our ability to innovate 

and ensure success in global markets, to some extent, hinges on doVerDate Nov 24 2008 18:07 Nov 09, 2011 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 R:\DOCS\70918.000 TIMD
13 

mestic policies. We have to get domestic policy right. I think what 

I would like to do is start with you, Dr. Mann, and just go down 

the row and give each of you the chance to single out what you 

would consider the most important domestic policy concern that relates to our competitiveness in this space. 

In other words, there are plenty of them, but everything around 

here is all about choices. Single out the one in this area, in the digital economy, that you think will do the most to enhance American 

competitiveness here and in these tough global markets we are trying to get. 

Dr. Mann? Your choice. 

Dr. MANN. Give every science and technology graduate abroad a 

green card when they graduate. Do not send them home. Use their 

brains here. 

Senator WYDEN. In effect, when we spend our tax dollars making 

sure that they get that education that relates to American competitiveness, that is going to allow us to get more good-paying jobs in 

America, because we paid for their education, you would like to see 

them have the opportunity to continue to stay. 

Dr. MANN. Most of them would like to stay, but we tell them that 

they must leave. Then they start their new businesses abroad and 

they become competition. That is just a small segment of the broader issue, that globalization is completely vilified by the population. 

Global engagement of any sort is viewed so negatively that the notion that one should want to export, that one should want to be 

globally engaged, that doing so enhances the competitiveness of 

America, that is 360 degrees opposite to what most people think. 

Senator WYDEN. That is a very important point. Your second response, of course, leads to a very wide array of consideration, starting with how we even explain it. What I have always said when 

I am home is, what I want to do in Oregon is, I want to make 

things, and I want to grow things here, and I want to add value 

to them, and I want to ship them somewhere. 

Dr. MANN. Right. 

Senator WYDEN. So a big part of this is going to have to even be 

explaining it, but, in particular, the fact that you would highlight 

is the fact that American resources, and in many instances American tax dollars, are used to educate people who come here, and 

then, as a result of American tax dollars, those folks take somewhere else, thousands of miles away, the fruits of their American 

education and compete with American companies. That is an important issue, and I thank you for it. 

Mr. Black, you get to choose. 

Mr. BLACK. I have a feeling I am going to want to echo a lot of 

what other people say. But let me pick and say I think the tendency domestically, which is mirrored internationally, to try to think 

that the Internet is a solution to problems, many of which have 

been around for millennia, that we can deal with security issues 

and pornography issues and defamation issues and a wide range of 

behavior, which we may not like, but to think that we can somehow clamp down on the Internet and certain behavior and use tools 

to address these, and do so in a way which frankly has a tremendous amount of collateral damage, that we can do that and somehow it does not hurt the openness and dynamic potential of the 

14 

Internet, it is wrong. We tend to look at these issues in a tubular 

way and say, let us enact this legislation and force people on the 

Internet, create this liability, create this penalty, not recognizing 

that, if enough of that is done, it can fundamentally change the tremendous, unique character of the Internet. 

Senator WYDEN. Now, I understand, Mr. Black, you are concerned about what has come to be called COICA, the Combatting 

Online Infringement and Counterfeits Act. Is that correct? 

Mr. BLACK. Yes, Mr. Chairman. I think it is actually a great example—or bad example, if you will—of what I just said. Unfortunately, this morning, I understand, the Judiciary Committee 

marked up this legislation, which basically is a proposal to block 

access to sites for legitimate underlying concerns. 

We care about infringement; we care about other things that go 

on on the Internet. But in this case, they really did not have adequate hearings. The significance and implications of the legislation, 

I do not think, have been thought through. The stakeholders, the 

general public, as well as many parts of the business community 

that would be affected by it, have not really had adequate input. 

It is, sadly, I think, a good example of what not to do in an important, complicated, digital ecosystem. 

In contrast, I again commend this committee for beginning here 

a thoughtful, deliberative inquiry into the nature of the problems 

and laying a foundation, ultimately—hopefully—for important legislation, but not wanting to solve a tubular issue and using tools 

that are not fully understood and their ramifications underappreciated. 

Senator WYDEN. We will follow up with you on that matter as 

well, Mr. Black, because it seems to me that online copyright infringement certainly is a legitimate problem, but it seems to me 

that the Combatting Online Infringement and Counterfeits Act, 

what is known as COICA, as written, as it is written today, is the 

wrong medicine. 

Deploying this statute to combat online copyright infringement 

seems almost like using a bunker-busting cluster bomb when what 

you really need is a precision guided missile. If you do not think 

this thing through carefully, the collateral damage of this statute 

would be American innovation, American jobs, and a secure Internet. 

Because I have followed the developments in this area—and of 

course action on the Hill—unless this statute is modified, the Combatting Online Infringement and Counterfeits Act is modified, so 

that it no longer makes the global online marketplace more hazardous, more hazardous to consumers and American Internet companies, I am going to do everything I can to take the necessary 

steps to stop it from passing the U.S. Senate. So, we will work 

closely with you on this. This is going to be an important matter, 

and we will seek your input and that of others, but I wanted to 

make my intentions clear this afternoon with respect to that proposal. 

All right. Let us go to Mr. Burton. You get to wave your wand. 

One policy. One policy in the digital space that will make the most 

difference in American competitiveness both here and abroad. 

15 

Mr. BURTON. Thank you. I think my answer may surprise you 

because, if I look at the future profile of competitiveness and if I 

look at the way that wealth will be created, processed, transferred, 

stored in the future, it will increasingly be done on cloud computing platforms. Therefore, the policy prescription for the U.S. 

should be to do everything it can to stimulate the strong establishment and expansion of those cloud platforms. 

If there is one underlying principle that is part of that priority, 

I think it is to drive international confidence in the U.S. as a safe 

haven for data, a place that other countries, other foreign companies are willing to process, store, and transfer their data and their 

applications. 

I think a lot of that impetus falls on the shoulders of industry, 

but I think part of it falls on the shoulders of the U.S. Government 

in terms of having serious negotiations with other governments so 

that the rest of the world sees the U.S. as a safe haven for international data processing. 

Senator WYDEN. All right. 

Mr. Sax? 

Mr. SAX. For small tech businesses, I think the primary issue is 

still, unfortunately, access to capital, which is especially challenging for tech businesses because we are selling things that 

banks do not always understand. I have a friend in Texas who is 

a fellow ACT member who was trying to get an SBA-backed loan 

for a tech venture, and he went to 12 banks, and he could not get 

funding. One of the bankers finally said, if you were building a gas 

station, I could get you a loan right now. I think you are going to 

be successful, I like you, but you are not building a business that 

I can create a loan for. 

So selling things that do not require us to buy big buildings or 

big machines, but actually invest in jobs, is still something very difficult to get money for. The only other thing that I would like to 

say is important for us is to allow us to be able to take advantage 

of cloud computing, and not having to deal with this patchwork of 

regulations that make it very difficult. 

If, in the U.S., we can work towards harmonization across the 

U.S. of security and privacy regulations, I believe we can establish 

a leadership position in the world that not only makes it more effective for small businesses in the short term, but also allows us 

to be a leader, not just in technology, but also in tech policy in the 

world. 

Senator WYDEN. So do you believe that Federal legislation is 

needed now to address the concerns you have in cloud computing, 

the patchwork of regulations, or is this—— 

Mr. SAX. I believe that we need to work towards harmonization. 

How that technically is accomplished, I do not really know, because 

I am more of a software entrepreneur than somebody who—— 

Senator WYDEN. Mr. Black, you follow this closely. What would 

your firms think of that? Are there discussions under way about 

that? 

Mr. BLACK. I guess, if you would rephrase the question a little 

bit. 

16 

Senator WYDEN. Well, what Mr. Sax told us is that he envisions 

big headaches for small firms. He has big headaches. He has already enough small headaches; he does not need to do that. 

Small firms, big headaches. A lot of it is stemming from, the way 

Mr. Sax has characterized it, some of the issues relating to cloud 

computing and the complexity of regulations and the like that send 

his firms, I gather, off in different directions trying to sort it out. 

Is that a fair recitation of it? 

Mr. SAX. Yes, it is. I would be very hesitant to, obviously, call 

for more regulation. But if we can simplify what is there and harmonize it, I think we would all benefit. 

Senator WYDEN. That is it. 

Mr. Black, any thoughts? 

Mr. BLACK. Sure. I suppose, first, in terms of regulations, there 

is no doubt that regulatory procedures can make it difficult for new 

businesses to start up. At the same time, they can also be useful, 

if they are carefully structured to provide an environment which is 

a fair, level playing field and open and competitive. So I think we 

have to address that, not in a macro approach, but look at which 

regulations are helpful, which are not. 

The dynamic, particularly for investment, a good example is the 

patent system, which is really regulation of information, if you will, 

and knowledge. We all have seen historically there are some benefits from the patent system. We also have, I think, a broad consensus these days that the patent thicket creates tremendous problems at times for many parts of industry, and it has been gamed 

as a system. 

So I suppose for small businesses in the tech world, getting financing is critical. But sometimes we see patents, for example, can 

be an asset and sometimes they can be a blockage, if somebody 

says, well, your business will interfere with businesses that have 

patents that will basically sue you and try to keep you out. So it 

is more complicated, but I do think government is able to be much 

cleaner in the kind of regulations it has, less detailed, more reactive to real problems that exist. In a dynamic industry, we do not 

want micro-management. 

Senator WYDEN. Mr. Burton, do you have any thoughts on what 

Mr. Sax said? 

Mr. BURTON. Yes, I do. I think actually that cloud platforms will 

solve a lot of these problems. As Mr. Sax said, they are a boon to 

small business because, if you look at Salesforce, about a third of 

our customers are small businesses, a third are medium-sized, a 

third are global corporations. What it affords is, the smallest company can be running on the same industrial-strength platform as 

the largest multi-national. They may have four licenses instead of 

40,000, but they have access to the same speed, security, strength, 

privacy. 

So I actually think, as small business begins to see cloud platforms as a go-to market strategy, not only to run their own businesses but develop, market, and sell their products, I think a lot 

of the security and the privacy issues that are associated with fragmented regulations actually start to go away. 

Again, to come back to my larger point, I think it is all about 

smoothing data flows, because Mr. Sax, if he develops on a cloud 

17 

platform, does not just want to sell to the people of Oregon or 

Washington, DC, he wants an international platform. He can have 

that with the cloud. 

Senator WYDEN. Mr. Sax, are you all right with what Mr. Burton 

said: they are going to take care of you if we just get the platform? 

Mr. SAX. Well, as an example, if I am an Oregon company, and 

I am using services from a data center in California, I have consumers from Texas, I am selling products from vendors in Alabama, which jurisdiction applies? Which privacy regulations? If a 

breach happens in my data and data is compromised, which regulations—how do I deal with that? Which State procedures do I follow 

to notify consumers? Those are complicated issues, especially for a 

small business to figure out. So harmonization and clarity on jurisdiction would really help. 

Senator WYDEN. We are going to follow this up, and we are going 

to sort of use you as kind of a textbook on how we can make cloud 

computing work for small businesses, because it is clearly a winner. The reason I asked is, when you said it, it made me think 

about some of the discussions that we had 15 years ago when we 

first started talking about the Internet Tax Freedom bill, as people 

talked about the welter of jurisdictions. In the tax area, of course, 

there were thousands, so it was even more acute. That is not saying anything about global jurisdictions. 

But whenever I hear about a small business having difficulty 

with regulation, I say to myself two things: one, I want to keep government’s role as small and focused as we possibly can, but certainly in the digital space, where we have been talking about having to comply with rules from various places, and servers are one 

place and various other aspects of the business are elsewhere, it is 

important to get it right. So we will follow that up, and maybe we 

can take both of you two and rope Mr. Black into it. 

I want to go, before we leave you, to the situation with capital. 

Have you been asking Oregon banks to try to make available capital to you, and you are getting turned down? 

Mr. SAX. I personally have not, but I have talked to a lot of our 

member companies that have. 

Senator WYDEN. In Oregon or elsewhere? 

Mr. SAX. Mostly elsewhere. I do not have an example in Oregon 

right now. 

Senator WYDEN. All right. Well, we are working on that also as 

a result of the Small Business bill that passed before the last recess. We need to get reports from all of you whether that is making 

a difference in terms of improving access to capital for small business, because that was the legislation, largely authored by Senator 

Landrieu, the chair of the Senate Small Business Committee, that 

in effect made $30 billion available through the community banks, 

in effect getting the boost from government. So we will want to 

hear if there are any changes that are coming about, certainly towards the end of the year, that we are starting to see as a result 

of that legislation. 

Mr. SAX. I will be very happy to follow up with that. 

Senator WYDEN. Very good. 

Mr. Slater, you get to designate the big one for Intel in the digital economy. 

18 

Mr. SLATER. If you are going to limit it to the digital economy, 

first of all, I support Dr. Mann’s comments on the need to access 

highly-skilled labor. There just are not enough U.S. graduates in 

the stem fields to fulfill that need when we are operating at maximum capacity and growing. But since she took that issue, let me 

raise another issue, which is the R&D tax credit. 

As you mentioned, Senator, in your opening remarks, there needs 

to be comprehensive tax reform to make American business more 

competitive. But from a technology perspective, I think renewing 

the R&D tax credit, making it permanent, and even enhancing it, 

would go a long ways towards providing big and small businesses 

the certainty and predictability they need to invest in technology 

and digital devices. Our own industry is facing some barriers on 

silicon development, and we need to invest in process technology to 

continue Moore’s law, or the technology developments in microprocessors. So, that would be very helpful. 

Senator WYDEN. Thank you. You probably know I strongly support that position. Senator Gregg and I have made it a special 

focus in our tax reform efforts, and, in the recommendations that 

we got from Erskine Bowles and Alan Simpson, they, too, also recommend the permanent extension of R&D. 

It just seems to me a kind of roller coaster of trying to figure out 

where it is going to be and what machinations are going on on Capitol Hill, and when they are going to take place is hugely unsettling 

for business, trying to make judgments about investments that 

hinge on that. So you have my support on that. 

Mr. SLATER. Thank you. 

Senator WYDEN. All right. That takes us through everybody’s 

first priority. 

Dr. Mann, let us go, next, to the question of digital IT in the two 

areas that you were talking about. You talked about digital IT 

products. That would be, say, software, processing services. The 

second is IT-enabled services. This is, in effect, using the Internet 

as the mode of delivery, and we go out and get the fruits of the 

Internet, everything from professional services, tourism, business, 

education, and the like. 

Where do we get the best bang for our buck in terms of job creation? In other words, you identified barriers, it seemed to me, in 

both areas. But colleagues are going to ask me about this. Suffice 

it to say, I am going to have to go to 99 other Senators—and Chairman Baucus has a great interest in this area and knows a lot about 

trade generally. 

I am going to have to go out and talk to Senators about, what 

are the areas that are going to be most important? They are going 

to say, so, Ron, where are the jobs? Where are the jobs going to 

come from in terms of knocking down all these barriers in this 

thing that you are kind of wonking out on there in the subcommittee and talking about with all these tech experts? Where 

are the largest benefits in terms of job creation? 

Dr. MANN. All right. Well, IT-enabled services is a much broader 

set of job-creating sectors than the narrow group of digital IT—software and IT services. So one is just orders of magnitude larger 

than the other. If in fact those two sectors’ trade grew at the rates 

that I suggested were basically three times faster than the rate of 

19 

growth of goods trade—so about 150 percent over a 10-year period 

versus 50 percent—then we would be looking at exports of $570 billion for other private services, which is this IT-enabled services category. So IT services by themselves, a smaller category, maybe $35 billion. So there is an order of magnitude difference. What I would 

suggest is that the initiatives that you would put into place with 

regard to some of these standard-setting bodies, opening up and ensuring foreign direct investment as being a part of trade agreements, negotiating bilaterally, regionally, and therefore multilaterally in sort of waves and rings moving outward in trade, whatever 

traction you get on those dimensions, it will help both of the 

groups. It is not a trade-off. 

Whatever you do to enhance digital IT, which is the smaller 

groups, the software and the IT services, whatever you do to enhance those are going to have collateral benefits, synergistic benefits to the trade in the larger group of IT-enabled services. So it is 

not an either/or decision. 

Senator WYDEN. This is such an important area. Would you mind 

perhaps doing a little paper with some examples in this area? Because I think that would be especially helpful. Everything in what 

I am trying to zero in on—and I think it is true for 99 other members of the U.S. Senate—it is just going to come back to job creation, job creation, job creation. So, if you would not mind. Especially, I think your point makes a lot of sense, that certainly you 

are talking about IT products being a smaller space than the second category, but that there is something of a—— 

Dr. MANN. You need the IT products in order to do the ITenabled services. One is delivered via the other, so it is a 2-for, absolutely a 2-for. 

Senator WYDEN. You are being logical and making a very good 

point, and I think that that is what we need to pick up on, is kind 

of finding ways to connect the two and then show that we have 

some really good examples, because that is what is going to make 

a difference in job creation. I think your points are very good and 

very valid. 

Dr. MANN. Let me just make one nuance that I think is important to recognize. One thing that we know about the interaction of 

job skills and using information technology, whether it is software 

programming or whether it is somebody who is using the software 

to do some financial thing, or do tourism, even, is that, the more 

we use information technology as part of the product itself, the 

more it enhances the need for worker skills. 

So as technology is used in the U.S. economy, used for international trade, it means that those who have the skills do disproportionately better, both in terms of employment opportunities 

as well as the wages they earn, compared to people who do not 

have the skills in the technological fields. 

So the double-edged sword here is that it makes the pie a lot bigger in terms of both jobs and in terms of production for our firms, 

but it also widens the gap between those who are capable of engaging in those jobs and in those firms and those who are not. 

Senator WYDEN. You make an additional point that is extremely 

important. The news pages are filled with these accounts about a 

20 

growing income gap between people at the top and those who have 

the smallest incomes; an important message, certainly, as it relates 

to our country and our desire, particularly, to give everybody the 

chance to get ahead. What we see as the best way to get ahead is 

education, because the gap between those who are well-educated 

and those who have less education is growing even faster than is 

the income gap, which is the subject of all these much-covered 

news accounts, and the like. So, good point. 

Mr. Black, a member of your association, of course, is Google. 

Earlier this week, they put out a white paper that makes a strong 

case as to how World Trade Organization rules are being violated 

by countries that are blocking or filtering American digital products. 

Mr. Recorder, by unanimous consent, I would like this white 

paper to be made a part of the record at this point. 

[The white paper appears in the appendix on p. 92.] 

Senator WYDEN. Now, Mr. Black, in your testimony you highlight 

areas where the trade agreements can be improved, and that is 

consistent with the Google white paper. But what do you make of 

the rest of the document which details specific actions by China, 

and the World Trade Organization commitments that the paper asserts, it appears to be violating? 

Mr. BLACK. First of all, I think the paper is a valuable contribution to the dialogue. It confirms much of what we have heard from 

a variety of companies over the years about the problems that are 

out there, and reflects their frustration that, frankly, effective government action to address those problems has not really been 

taken up until now. 

I think the paper has, in a way, only the tip of the iceberg, but 

never a good reiteration of a number of the problems and types of 

practices which we encounter, which are problematic. The other important point of the paper is that it says that we have trade rules 

that appear to be violated by these practices. 

The paper does not actually finally connect the dots and say, 

therefore we have enough evidence here to go after this country, 

but I think certainly, if you will, in a prosecutorial context, provides more than a prima facie case. It is more like an indictment. 

It may not be a conviction, but it is certainly grounds, I think, and 

should provide an incentive for further investigation by the relevant government agencies to really follow up and look at the 

uniqueness in any number of countries—China, one, but also others—to see whether or not there are non-viable trade cases. 

The reason I am not willing to kind of make it per se is, different 

countries have different conditions in some of the trade agreements 

they sign, so you have to look at the specific obligations of different 

countries and the specific practices. But we would be very surprised if there were not sufficient violations by a number of countries that would justify effective trade actions. I think there is a 

tactical issue. 

China is huge and important, and solving many of the problems 

in China is critical. I am not sure that it is not worth considering 

simultaneously, or maybe even initially, attacking some of the 

practices in important but smaller trading partners, where we do 

not have so many complicating collateral issues, perhaps, and set 

21 

the precedent. And, yes, go to the international community and 

say, we are going to take these obligations seriously, we care about 

this stuff, and we are bringing some cases. 

It may well be that the match-up of offenses and responsibilities 

works for China. It may be that it is big enough, complicated 

enough, that we want to get a little experience under our belt before we go directly in that direction. But, yes, I think the paper 

helped provide the foundation that action is justified and necessary, the facts justify further investigation, and probably initiating action. 

Senator WYDEN. So relative to the WTO, let me get a sense of 

what you think ought to be done. I guess one option is the Obama 

administration self-initiates a 301 inquiry. That begins the process 

and, depending on where it goes, China faces the prospect of being 

sued at the WTO. There are other kinds of options: convening a 

special session on the matter at the WTO, which probably gets 

more in line with putting the world on notice that the United 

States is concerned about these practices of violation of current 

commitments. Where do you come down in terms of the seriousness 

at this point with respect to whether there ought to be an Obama 

administration self-initiated 301 inquiry, convening a special session. Where would you come down on that? 

Mr. BLACK. Because we have, frankly, felt—although there have 

been some good statements by the Secretary of State and other 

things, there has been some good rhetoric—I would be pretty happy 

if I saw real action in almost any one of those areas. I am probably 

inclined to be greedy and would like to say, proceed along those 

various tracks because they each offer different possibilities. 

If the administration is willing, with, I hope, strong congressional support, philosophically on a bipartisan basis, to go forth to 

the global community and say this strongly, I think it makes sense, 

making the broad statement so that we do not look like we are 

kind of changing course arbitrarily, but putting it into context. But 

then I think, if you do not actually move against some specific 

countries with specific abuses, it is just more rhetoric, so there has 

to be some concrete follow-up. But it is good to put it into the context of a broad policy commitment. 

Senator WYDEN. So what we have been all about this afternoon 

is identifying protectionism in the digital economy, combatting it. 

Your view, Mr. Black, on whether there are enough cops on the 

beat, particularly at the three offices, the Trade Representative, 

the Commerce Department, and State, that ensure that we are 

going to be able to identify and prosecute those who are setting up 

trade barriers to digital goods and services. 

Mr. BLACK. If the policy is properly aligned and oriented and 

geared up to this area, I think it will probably be necessary to give 

additional resources. I think that would be justifiable. It is a complex part of the economy, and understanding it and developing the 

tools and personnel to be able to make effective presentations probably require additional resources. 

Senator WYDEN. Are there people in these departments who really understand these issues? I think what is striking about all of 

this is, people in government—and maybe there are one or two 

wayward souls out there who get up in the morning and say, I 

22 

want to spend my day being rotten to the digital economy. I do not 

think that happens. I think you get up in the morning, you have 

lots to do. 

The President is trying to double exports in 5 years. Frankly, one 

of the reasons that I wanted to do this hearing is, I think, to 

achieve the President’s objective of doubling exports in 5 years, you 

have to make sure that you have trade-friendly policies for the digital space. 

But I also think you have to have people who really understand 

these issues. Those three departments, those three branches of government, Commerce, the Trade Representative, and State, do we 

have people who really are up on these issues? 

Mr. BLACK. Without a doubt, all three departments do have people who are knowledgeable about this area. But in order to now 

move an agenda aggressively, I am not sure. I do not really want 

to pick on any other part of the economy, whether it is in the agricultural world, manufacturing, or whatever. But most of those 

agencies do have substantial resources structurally that have 

evolved to protect industries, frankly, which, as a percentage of 

GDP compared to the tech industry, are minuscule. 

So I am not sure, in the long range of things, that there is not 

some reallocation of resources. That does not mean those people 

are the right ones to necessarily deal with and understand our industry, but I think you could restructure. Frankly, look, we are in 

a new century. It makes sense to re-think where our economic priorities are and structure government accordingly. 

Senator WYDEN. Let me turn to you, Mr. Sax, if I could. Any specific examples that you can highlight that relate to some of your 

concerns about tapping the full potential of the digital economy? I 

mean, you obviously want to get access to foreign consumers. If 

web platforms are degraded or blocked, that is going to have a big 

impact on you. Can you give us an example or two that your companies in your association are especially concerned about? 

Mr. SAX. Sure. Well, let us say a company builds collaboration 

software that allows people to collaborate, and the CEO is traveling 

to China and they are working on an agreement. Normally they 

can work together to remotely edit a document together, but, because of some Internet blocking, the product does not work. That 

CEO is going to be very upset, but he is not going to call the President of China and say, Mr. President, tear down this firewall. 

No, he is going to call me or the vendor of that product and say, 

your product does not work. So those kinds of blockings do not only 

block out the population of that country as a market, but they also 

can significantly affect the confidence that consumers have in the 

products that we build. 

Senator WYDEN. That is a very good example. You cannot be 

President Reagan and say, ‘‘Tear down that wall.’’ 

Mr. SAX. That is right. People are not interested in policy or 

trade agreements. They want this thing to work, and they hold us 

accountable. 

Senator WYDEN. Very good. 

A question for you, Mr. Burton, in terms of Salesforce. You 

talked in your testimony that more and more international trade 

consists, of course, of the transfer of electronic bits, that you are 

23 

processing millions of transactions for customers each day, highlighting the importance of open data flows. 

What choices are made by the firm in terms of ideal locations for 

servers and economic benefits that come to a community that hosts 

a server facility? 

Mr. BURTON. Well, thank you for that question, Mr. Chairman, 

because I think that really highlights an important policy issue. I 

think when I prepared this testimony, I think I stated we were 

processing about 350 million transactions per day. I checked our 

site this morning, and yesterday we processed 402 million. That is 

a huge jump in just 2 weeks, so I think that just shows the explosive growth that you see in the cloud arena. 

As I stated in my testimony, I think that a focus on data centers, 

or where servers are located, and trying to lock cloud computing 

into a geographic anchor, really misconstrues what I think the priorities are. I think, if you look at data centers, they are really not 

going to be the seedbeds, cloud data centers, for a lot of new businesses, because the security around them is so tight and the controls around them are so extensive to make sure that the data is 

protected and the people working there manage themselves appropriately, that they do not lead to sort of lots of traffic in and out 

and small business creation. 

So I think the focus should not be on where the data centers are 

located, but in fact, as the core policy principle I highlight in the 

testimony, the focus should be on making sure that organizations 

use the cloud and that they use it to drive their productivity and 

improve their innovation. So use, not control, I think, is the primary policy that we would recommend. 

Senator WYDEN. All right. 

Mr. Slater, one last question for you. Any sense of what kinds 

of levers Intel would like to see the United States essentially pull 

on to influence some of the big emerging countries, particularly 

India and China, to get some of the IP policies that will be more 

conducive to American technology and the export of digital goods? 

These obviously include IT hardware. 

Are there certain things that you would like to see our government pursue, particularly for the big, emerging economies where 

the stakes are going to be, obviously, very high for Intel, like China 

and India? 

Mr. SLATER. Thank you, Mr. Chairman. In addition to enforcing 

the TRIPS agreement, which the current administration is doing in 

the realm of IP, I think another thing that needs to happen is to 

look at the erosion of IPR, not just its enforcement. One of the 

things that the U.S. Government can do is partner with likeminded governments to influence these developing IP frameworks. 

And they are developing. They are experimenting in the realm of 

IP to build up indigenous or local domestic innovation. So, for example, we have suggested that the U.S. Government partner with 

Europe and come up with a joint statement on IP rights that reinforces some of the TRIPS restrictions that have not been discussed 

in a long time. So joint statements are great. 

The TRIPS committee is another forum they can use to make 

sure that IP is not eroded. And then in APEC, where things are 

non-binding, they are more experimental, is another forum. And 

24 

having APEC here in 2011. There is going to be an ICT summit. 

That is a great opportunity to come out with a leaders’ statement 

that focuses on the need to safeguard IPR and connect it to innovation, and in particular the digital economy. 

Senator WYDEN. Very good. 

Let us go back to this tax question, Dr. Mann. I am going to keep 

my tax man kind of down at the Deficit Commission with the folks 

there, the members, and Erskine Bowles and Alan Simpson. So I 

am going to wing it a little bit and just kind of see if we can highlight some of the concerns you have in the tax area. 

I think we all understand that working-class people in America 

hear about these tax laws, and they say, oh, they are shipping jobs 

overseas. That is outrageous; knock it off. I saw on such-and-such 

TV show that there are actually incentives to ship jobs overseas. 

Then you talk to American companies, and American companies 

highlight the fact that the United States has the second-highest 

corporate rate in the world. And the companies make the argument 

that, if you continue the current tax structure, you have to have 

those tax laws that will allow for incentives to do business overseas, because, if you do not have those incentives, because the work 

overseas affects employment opportunities for Americans in the 

United States, it will be reduced. That usually ends the discussions. 

What Senator Gregg and I sought to do was to have a different 

discussion. We said to the American companies, what would we 

have to do in order to make it attractive for the dollars to stay 

here? In other words, what kinds of rates would we have to put in 

place? And we lower the corporate rate in our proposal from 35 percent to 24, so we cut the corporate rate literally close to a third in 

order to make it attractive and to be able to say to those 

working-class folks that those dollars that are now used to create 

incentives to do business overseas, we are taking those very same 

dollars and we are bringing them back to the United States to 

make it attractive for businesses to grow in the United States and 

for manufacturers to generate manufacturing opportunities in the 

United States once again. That has been sort of the state of play. 

You also see that to some extent in the recommendations of the 

Bowles-Simpson—at least the chairs of the Bowles-Simpson Commission. They modify our proposal. I think the words they used 

were, ‘‘Wyden-Gregg style reform.’’ That is what is listed in the 

three proposals. 

Let us set that aside, though, because it seems to me, just from 

what you said, you are talking about something different. What we 

largely were dealing with is the question of deferral and foreign 

credits. I think what you are talking about, essentially the model 

that you describe, it really relates more to transfer pricing, I think. 

The part of the proposal that ought to help, particularly with the 

developed countries, with the OECD countries, I think, the part of 

the proposal that lowers the corporate rate from 35 to 24, ought to 

help get more of the work you are describing done in the United 

States. 

So I would like to know two things. One, is that the case? Because, of course, that applies primarily to what are known as the 

C corporations. Now, because of the changing nature in American 

25 

business, most of the business entities today are no longer C corporations, they are sole proprietors, they are LLCs, they are partnerships. They are not C corporations. They are organized differently. 

So tell me what you think we ought to be doing in taxes in order 

to grow as much employment in the United States as possible. We 

have actually been able to get a good response to our legislation 

from some of the folks at home I talk to in both business and labor. 

In other words, I have a conversation with the Intel folks, and I 

say, we are lowering the corporate rate from 35 to 24, and the folks 

at the big opening that we had in Hillsboro said, we like the 

sounds of that. 

But I can also go into a labor hall, and I say, we are talking 

about lowering rates for business and using those dollars to put 

people to work in the United States, and there is a good response 

to that as well. So, there is, I think, the foundation for real tax reform there. 

But I would like to know how it does apply to this space, the digital space that you have described, that really does not lend itself 

to the kind of traditional discussion about deferral and foreign 

credits as you would have if you were talking about a manufacturing company, or even much of the work Intel does. It may be 

different in some of the particulars about the kinds of firms that 

you are talking about. So take me through it so we can have at 

least some kind of sense of what we ought to be working for as we 

kind of continue this push for broader tax reform. 

Dr. MANN. I am not going to pretend to be an expert on taxes, 

but the point that I was trying to make is 2-fold. First, when tax 

systems have such disparate rates for activities or assets, meaning 

patents or intellectual property, or an inter-temporal sense, which 

is your deferral, when systems, when different sides of the border 

have such different rates for those different activities, assets or 

inter-temporal nature, then you have set up tax arbitrage. That is 

an activity that ends up being distortionary, first. Number two, you 

have whole corporate structures and companies set up whose sole 

purpose is to figure out how to get the best deal. 

Senator WYDEN. It is code for gaming. 

Dr. MANN. Well, you can call it gaming, you can call it tax evasion, or whatever you want to call it. But one of the largest-growing 

new hiring opportunities is in the area of transfer pricing. One of 

my business groups has a whole new roundtable that has a monthly webinar about transfer pricing. It is one of the biggest, as I say, 

employment opportunities for my students, is transfer pricing. 

That may be great for some bottom-line aspects for multinational corporations or corporations who engage in international 

trade and international income generation, but it is fundamentally 

not something that is generating new value or innovation or something like that, what we would like to have for the U.S. economy 

as a whole. So as I say, tax arbitrage is fundamentally not a 

welfare-enhancing activity. To the extent that you get rid of it, it 

is good. 

The second issue is that when these—for example, the narrow 

question of intellectual property being held abroad or corporate 

headquarters being in a mailbox in a tax-advantaged location, what 

26 

that means is that all of the transactions associated with the value 

of that intellectual property, which shows up in the balance of payments as a receipt or payment associated with a license or a royalty or something like that, these are all now distorted in the sense 

that the asset was created, the intellectual property was created 

here in the United States by one of our corporations, but, for tax 

purposes, it resides abroad. 

So every time our corporations use that asset, it generates an import in the national statistics. That is a distortion in terms of our 

understanding of both the innovation domestically, as well as how 

that plays out in the global marketplace as we measure it as crossborder transactions. So it is fundamentally distortionary in terms 

of our perception of how we engage with the rest of the world. So 

those are two manners in which taxes play a big role. 

Senator WYDEN. The only thing I would add is, if you persist in 

saying you do not know much about the tax treatment in this area, 

I am going to have to put something in the record to formally disagree, but I think you have given a really thoughtful analysis. If 

anything, you have been pretty diplomatic, because some of it sure 

sounds like it is a path to more tax evasion, and that is the last 

thing this country needs. This country needs to increase American 

competitiveness in these tough global markets, to make it more attractive to grow a business in the United States. 

That is what we are all about in terms of trying to lower rates 

for businesses and companies that manufacture and do business in 

the United States, and pay for it by taking away some of these tax 

breaks that create incentives to go elsewhere. So you have given 

a very lucid explanation of some of the activity that is just starting 

to emerge in this area, and that is what I was hoping for. Expect 

to get a call from John O’Neill when he is liberated from the Deficit 

Commission. He will call you to follow up. 

This has been an exceptionally good panel. This is the first hearing the U.S. Senate—or I think any legislative body in Washington—has had on trade in digital goods. This has never happened 

before. I assume folks are listening in, hearing it streamed online. 

I want to make it clear that this seems to be the first such hearing, but it is not going to be the last such hearing. It is very clear 

to me that, for Americans to have the kind of high-skill, high-wage 

jobs in our country at a time when we are seeing folks clobbered 

by what is really embedded structural unemployment, we have to 

tap these opportunities. We have to get at the exact kind of issues 

you all have brought up over the last 90 minutes or so. 

So, if there is nothing further that the panel would like to add, 

I want you to know I think this has been an exceptionally helpful 

hearing. There are going to be a whole host of issues that we are 

going to be following up on. But this ought to be a wake-up call. 

This ought to be a wake-up call to the country and to policymakers, 

that what we have normally thought of as trade barriers, particularly to the manufacturing sector—because I think that is what 

people have traditionally associated this whole question of a trade 

barrier with; there is a barrier to steel, there is a barrier to one 

manufactured product or another—this is different. This is different. 

27 

The barriers that your companies and Facebook and Google and 

a whole host of other firms are facing look like they are going to 

be as insidious and as damaging to the American economy as what 

people have thought of as a trade barrier to manufactured products 

such as steel. So we are going to have to make sure that we go 

after all of them to meet our pledge to the public that we are making the changes that are going to allow for Americans to have more 

high-skill, high-wage jobs. You have given us a lot of insight. And, 

while this is the first hearing, it is not going to be the last. 

With that, the subcommittee is adjourned. 

[Whereupon, at 4:42 p.m., the hearing was concluded.] 

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