The Journal The Authority on Global Business in Japan

During the lead-up to the 2019 G20 Summit, held in Osaka on June 28 and 29, ministers, representatives, and heads of the G20 member countries—along with nine guest nations and eight organizations—met on June 8 and 9 in Tsukuba, Ibaraki Prefecture, for the Ministerial Meeting on Trade and Digital Economy.

The conference was one of eight ministerial meetings in Japan alongside the G20 Summit. The first of these gatherings was the Agriculture Ministers’ Meeting in Niigata City on May 11, and the final one will be the Foreign Ministers’ Meeting on November 22 in Nagoya, Aichi Prefecture.

GLOBAL CHALLENGE
The Tsukuba meeting—representing 80 percent of the world’s
gross domestic product (GDP)—was headed by three key Japanese officials: Minister of Economy, Trade and Industry Hiroshige Seko; Minister for Internal Affairs and Commu­nications Masatoshi Ishida; and Minister for Foreign Affairs Taro Kono.

Seko held bilateral meetings with representatives from 10 participating G20 members to discuss major issues such as:

  • Global digital commerce, including data flow
  • Reform of the World Trade Organization
  • Policies for privacy and artificial intelligence

Although the United States was not present in Tsukuba, United States Trade Representative Robert E. Lighthizer spoke with Seko by telephone during a break between sessions.

The theme of the conference, “human-centered future society,” referred to technology that will benefit human advancement, not obstruct or replace it. This technology was described at the meeting as “methods that design and implement digital policies to maximize benefits and minimize the challenges from the development of the digital economy, and to overcome challenges with special attention to developing countries and underrepresented populations.”

DATA FLOW
One such challenge debated among the G20 members is the free flow of data—personal and non-personal—that is moved from one IT system to another, particularly across national borders. Disagreement about how to manage data remains a stumbling block for growth of the digital economy. Countries such as Russia and China have passed laws that require data to be stored locally, while the United States, Japan, and the European Union have been shaping a multilateral outline for cross-border data flow that they hope will be copied by other nations.

The flow of data is, in many cases, obstructed by the existence of localization requirements. For example, if a company needed to process data belonging to a Russian citizen, doing so without using a server physically located in Russia would be illegal.

London-based global law firm Bird & Bird explains such rules as laws requiring that data about a nation’s citizens be collected, processed, and stored inside that country. A side effect of this is an increase in costs for companies conducting business abroad. Data localization requirements force businesses to either use cheaper services or maintain data storage and processing capabilities in multiple countries.

“Businesses large and small rely on cloud-based market­places, payment systems, and software systems,” said Sassoon Grigorian, director of government affairs & public policy, APAC & Japan, at Salesforce.com, Inc. “All these systems rely heavily on the ability for data to predictably move from country to country, where an enterprise has either supply chain or customers. And when national governments unreasonably and unnecessarily block this flow, the economic harm is meaningful.”

DIFFERENT PATHS
There is also a cost imposed by the fact that many others, such as Japan and the European Union, are restricting the movement of personal data between countries unless the data privacy regimes are found to be adequate, a contractual frame­work is in place to honor the rules, or, in the case of Japan, consent is received.

“It is understandable that a country wants to protect the personal data of its residents, but the rules between countries are so varied that the cost to businesses to properly implement them has drastically increased,” said Scott Warren, partner at the law firm of Squire Patton Boggs in Tokyo and vice-chair of the ACCJ Digital Economy Committee. “Even the concept of what constitutes a data breach—and whether and when to notify the public—varies significantly among the EU, the United States, Japan, and China, for example. This makes it difficult for companies to effectively handle such issues.”

In addition to Russia and China, India and Vietnam have also placed extensive restrictions on the flow of data. Some constraints have legitimate purposes—such as privacy, national security, and fair commerce—but some experts have argued that this “internet balkanization” or fragmentation of the online world is intended to unfairly support commercial interests and silence political dissent.

Whatever the reason, the rules have unintended conse­quences for the global GDP. A 2016 panel entitled “Is the Internet Frag­menting?”, hosted by Microsoft Corporation and the Washington DC chapter of the non-profit Internet Society (ISOC-DC), found that data-flow restrictions could lead to a decline in GDP growth of $250–450 billion.

From left : US President Donald Trump, Japanese Prime Minister Shinzo Abe, and Indian Prime Minister Narendra Modi

LIFEBLOOD
The gathering and sharing of data are vital to modernization
and global economic growth. Those attending the Ministerial Meeting on Trade and Digital Economy recognized the advantages, saying, “Cross-border flow of data, information, ideas, and knowledge generates higher productivity, greater innovation, and improved sustainable development.”

Grigorian told The ACCJ Journal: “Cross-border data flows help fuel a growing economy, and governments have a role in helping to develop responsible in-principle policies that enable them. The global services economy is growing and is lifting up countries that foster trade in data flows.”

This has been confirmed through research. A 2018 study from the Information Technology and Innovation Foundation, a non-profit public policy think tank based in Washington, DC, found that the digital economy accounts for 25 percent of the world’s GDP. Entitled Digitalization and US Competitiveness in the Global Economy, the report also found that half of all value created in the global economy over the next decade will be generated digitally, and 75 percent of data flowing across the internet comes from traditional industries.

In 2017, the Congressional Research Service found that US exports of digitally enabled services were valued at $439 billion, accounting for more than half of US services exports.

TRUSTED FLOW
Japan thinks it has a solution. Introduced by Japanese Prime
Minister Shinzo Abe at the January 2019 World Economic Forum in Davos, the Data-Free Flow with Trust (DFFT) concept is Japan’s proposal to facilitate the free flow of data and encourage trust between nations through international cooperation and legal frameworks.

At the forum, Abe shared his hope that the Osaka G20 would be “long remembered as the summit that started worldwide data governance.” And at the Ministerial Meeting on Trade and Digital Economy, the DFFT was pro­­moted as a key feature of Society 5.0, Japan’s proposed framework for a super-smart society, the next stage in human societal development after information, industry, farming, and hunting. To achieve Society 5.0, governments will need to support and fund infrastructure, fintech, robotics, and artificial intelligence.

But not all representatives are on board with the DFFT, and the objections bring things back around to data flow. Indian Commerce and Industry Minister Piyush Goyal said that his country does not support the initiative at this stage because “countries must have the sovereign right to use their data for the welfare and development of their people and advocacy of free trade.” But this, he added, should not necessarily justify the free flow of data.

Egypt, Indonesia, and South Africa abstained from the 2019 G20’s data initiative, while India has since boycotted it entirely.

Acknowledging these objections and difficulties, Seko remained hopeful that these nations will come around. Although there are differences in elements of trust that each country values, he concluded that they could at least recognize that trust promotes free data flows, and that this can lead to the economic development of the world as a whole.

G20 HOST CITIES

Japan has worked to pair ministerial meetings with locales that best represent the goals of those discussions.

Each city representing the 2019 G20 Summit was chosen to express distinctive aspects of Japan. The Ministerial Meeting on Trade and Digital Economy was held on June 8 and 9 in Tsukuba, Japan’s leading city for research and academia, home to about 9,400 researchers and students from more than 130 countries.

The Tourism Ministers’ Meeting on October 25 and 26 will be held in the Hokkaido resort town of Kutchan, a small ski retreat with a population of 16,000 that is steadily becoming increasingly more popular.

  1. Kutchan, Hokkaido Prefecture
    Tourism Ministers’ Meeting (October 25 and 26, 2019)
  2. Niigata, Niigata Prefecture
    Agriculture Ministers’ Meeting (May 11 and 12, 2019)
  3. Tsukuba, Ibaraki Prefecture
    Ministerial Meeting on Trade and Digital Economy
    (June 8 and 9, 2019)
  4. Karuizawa, Nagano Prefecture
    Ministerial Meeting on Energy Transitions and Global Environment for Sustainable Growth (June 15 and 16, 2019)
  5. Nagoya, Aichi Prefecture
    Foreign Ministers’ Meeting (November 22 and 23, 2019)
  6. Osaka, Osaka Prefecture
    G20 Summit Meeting (June 28 and 29, 2019)
  7. Okayama, Okayama Prefecture
    Health Ministers’ Meeting (October 19 and 20, 2019)
  8. Matsuyama, Ehime Prefecture
    Labour and Employment Ministers’ Meeting
    (September 1 and 2, 2019)
  9. Fukuoka, Fukuoka Prefecture
    Finance Ministers and Central Bank Governors’ Meeting
    (June 8 and 9, 2019)

 

SECURING DIGITAL
The Ministerial Meeting on Trade and Digital Economy’s statement also acknowledged concerns linked to privacy, data protection, intellectual property rights, and national security. At the same time, it emphasized that cooperation is crucial to stronger security.

Security breaches have already left a mark in 2019. In the United States, the Florida town of Riviera Beach paid hackers $460,000 in Bitcoin as ransom, after having lost access to their entire city computer system. Lake City, also in Florida, did the same, but handed over a whopping $897,650. While that may seem like a lot, it’s nothing compared with the estimated $18 million it has cost Baltimore, MD, to recover from a ransomware attack earlier this year.

These incidents are minor compared with what could be done by a nation state bent on taking down the economy of a foe. With that in mind, US President Donald Trump issued an executive order in May declaring telecommunications equipment produced by China’s Huawei Technologies Co., Ltd. a national security risk.

Back in Japan, hackers exploited a security flaw in the Seven-Eleven 7pay app just days after its launch by Seven & i Holdings Co., Ltd. An estimated ¥55 million was stolen from more than 900 customers due to the app’s weak security features, which made it easy for password reset links to be sent to email addresses not belonging to the owner.

Such incidents harm consumer confidence in digital payments at a time when the Japanese government—and others around the world—are pushing for a cashless society. G20 members insist on the urgency and value of an ongoing discussion on security and education about the digital economy to strengthen public confidence.

“We recognize the global aspect of security in the digital economy together with the need to develop localized and customized frameworks and methodologies,” the ministers said in their concluding statement from Tsukuba. “Industry-led and market-led global technical standards—developed based upon principles of openness, transparency, and consensus—help deliver interoperability. These promote trust, which is essential for enabling the benefits of the global digital economy.”

WAY FORWARD
During the first day of the G20 Summit in Osaka, Abe issued
the Osaka Declaration on Digital Economy. Joining him were 27 world leaders and participating WTO members who had signed on to the January Joint Statement on Electronic Commerce in Davos. During the 10-minute briefing, he revealed the launch of the Osaka Track, an initiative that supports rule-making for the digital economy on a global level and echoes the statement made by the Ministerial Meeting on Trade and Digital Economy.

The Osaka Track’s primary focus is data flow and electronic commerce. Leaders hope it will provide a political impetus to negotiations at the WTO to move forward swiftly and proficiently.

“All countries can prosper from the responsible, rules-based management of data flows. As proposed in Osaka, the G20 should continue to focus on this foundation of the global economy, finding constructive ways for all countries to support and benefit from the initiative. The future of digital trade may well depend on it,” said Grigorian.

Abe pointed out in Osaka that promotion of rule-making on data flow and electronic commerce, which are driving forces toward progress in a digital era, is an urgent task. “It is necessary to make international rules and disciplines to harness the full potential of the fast-growing digital economy. We will speedily pro­mote international efforts for rule-making on data flow and electronic commerce.”

 FOUR KEYS TO THE DFFT

Organizations such as the ITIF and the Internet Society have been calling on countries to embrace open but rules-based systems that support the free flow of data. In the week leading up to the Tsukuba conference, the ITIF released its report outlining four key principles to realize Japan’s DFFT:

  1. Rather than tell companies where they can store or process data, countries should hold them accountable for managing the data they collect, regardless of where they store or process it.
  2. Countries should revise the inefficient processes and outdated legal agreements that govern law enforcement requests for access to data stored in another country’s jurisdiction.
  3. Countries should develop the legal and administrative policies, with appropriate checks and balances, that allow internet service providers to block data flows involving illegal distribution and use of unlicensed content.
  4. Countries should support, not undermine, the role of encryption in securing data flows and digital technologies.
Aaron Baggett is a staff writer at Custom Media for The ACCJ Journal.

Photos: Embassy of the United States, Tokyo