Digital Trade Agreements Present New Opportunities in Southeast Asia
October 25, 2021
By Andreyka Natalegawa and Camille Bismonte
Some parts of the Biden administration have been pushing, so far without success, a potential agreement on digital trade with key allies and partners in the Indo-Pacific, demonstrating a renewed commitment to engage with the region. Although the potential agreement would include a range of countries from throughout the broader region, the pact would be particularly impactful in Southeast Asia, where innovation in the digital space has blossomed in recent years. A digital trade agreement with Southeast Asian countries would assuage lingering concerns regarding Washington’s commitment to the region and contribute a much-needed economic pillar to the Biden administration’s approach to the Indo-Pacific. These efforts would signal Washington’s willingness to exercise leadership and cooperation in a field that is of clear strategic interest and commercial value for all parties involved.
Indeed, digital trade represents the next frontier in economic development in the Indo-Pacific and is a potential engine for significant growth for Southeast Asian countries. In their e-Conomy SEA 2020 report, Google, Temasek, and Bain & Company found that, within the region's major economies, 70 percent of the population is online and that the rate of new users has increased at a blistering pace over the course of the Covid-19 pandemic. The significance of this growth in connectivity and the resultant adoption of digital services is reflected in its economic impact. The report found that Southeast Asia’s internet economy expanded 5 percent between 2019 and 2020, reaching approximately $105 billion. This represents a key area of opportunity amid slowdowns in education, travel, tourism, and other sectors impacted by the pandemic. Furthermore, the Covid-19 pandemic has only increased demand for digital banking services, as governments have sought alternatives to cash to deliver financial assistance. Consequently, a digital trade pact with the United States could unleash the potential of what is already a fast-growing sector. It could bring manifold benefits to Southeast Asian countries that seek to diversify their economies and climb up the value chain.
Digital trade represents an area of particular opportunity as some Southeast Asian countries are themselves pioneers in setting global norms and standards in this space. In Southeast Asia, countries are taking one of two paths: toward a more open, accessible, and standardized coordination with other countries, or toward a more localized, protectionist system. By way of example, Singapore has aggressively pursued cooperation on digital issues, as demonstrated by its Digital Economy Partnership Agreement with Chile and New Zealand, the Singapore-Australia Digital Economy Agreement, and ongoing discussions with partners like the United Kingdom, South Korea, and Vietnam on similar initiatives.
Conversely, some countries have pursued increased localization through restrictive data flow policies that require data be stored domestically. In recent years, countries like Indonesia and Vietnam have either attempted to or successfully introduced data localization initiatives that force tech companies to host data on local servers. While these countries have pursued such measures in the name of public security and privacy, there is scant evidence that keeping data within national borders leads to enhanced security. Storing all data pertaining to a specific country or region in a single location actually introduces a point of failure vulnerable to targeted attacks.
A digital trade pact could allow the Biden administration to shape regional norms on data governance and introduce incentives to shift countries away from their security-driven approach to data sovereignty. Moreover, an Indo-Pacific digital trade agreement that prioritizes openness and the free flow of data would be of significant value in providing an alternative to internet governance models promoted by countries like China, which employ extensive restrictions on cross-border data. Beijing has taken steps towards boosting its vision for “cyber sovereignty” on the global stage both actively through diplomatic efforts and passively through the apparent efficacy of its system in maintaining control over the domestic internet. Arguments in favor of such a cyber sovereignty model are already finding sympathetic audiences in Southeast Asia, where many governments consider internal political stability to be of concern and consequently covet the degree of leverage and power a closed system would grant.
The Biden administration needs to articulate and promote its vision for internet governance in the Indo-Pacific. Across the board, free trade agreements signed by the United States that include provisions related to digital trade have significant positive impact on cross-border trade in services, particularly in the financial services and telecommunications sectors. A digital trade pact could provide enough economic incentive for Southeast Asian governments to sign on to high standards that prioritize openness and the free flow of data. In pursuing these aims, the Biden administration need not reinvent the wheel. Existing arrangements like the U.S.-Japan Digital Trade Agreement and the digital trade sections of the United States-Mexico-Canada Agreement prohibit parties from adopting measures that restrict the cross-border flow of data. They could provide a model for future arrangements with Indo-Pacific countries.
The Biden administration’s success in engaging with Southeast Asian nations to form a digital trade pact will be contingent on strong diplomacy. Unsurprisingly, Beijing responded to reports about a potential Indo-Pacific digital trade pact by claiming that such moves are intended to “gang up against China and contain its development and obstruct the common development of countries in the region.” Washington needs to be conscious of this narrative framing and assuage concerns that countries may have about how a digital trade agreement with the United States might impact their relationship with China. Southeast Asian countries maintain extensive economic ties with China and will want to avoid the creation of a “walled garden” that could impact interoperability and shut out much-needed Chinese capital. Washington will need to emphasize that it has a positive agenda and that a digital trade agreement would bring immense mutual benefits to the region.
Southeast Asian governments have increasingly recognized the growing centrality of digital trade in their economies. Initial U.S. efforts to form a digital trade pact would likely target only a few more advanced economies in Southeast Asia, such as Singapore’s. But the establishment of robust and mutually beneficial partnerships with select countries on digital issues would create momentum and incentivize other ASEAN member states to sign on to the digital norms that would allow future accession to such a pact.
A digital trade agreement presents a unique opportunity for Washington to engage with Indo-Pacific countries on an issue of core interest, supercharge economic engagement, raise standards, increase the technical capacities of key allies and partners, and enhance the competitiveness of U.S. companies that wish to do business in the region. In the absence of a broader U.S. engagement with regional trade agreements, a digital trade pact would signal renewed U.S. commitment to avenues of partnership outside of traditional political or military cooperation. This message would be well received in a region where economics is security.
Andreyka Natalegawa is a research associate for the Southeast Asia Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Camille Bismonte is an associate in the East Asia & Pacific practice at Albright Stonebridge Group and is a former research intern with the Southeast Asia Program at CSIS.