Note: Today’s essay is based on this recently released law review article by Taylor Phillips and I.
Not long ago, if a person somewhere in the United States wanted to take a spin class, they did so at a local gym or spin studio. That same person may continue to do so now, or they may get on an exercise bicycle at home, use the Peloton app, and be led through that class by instructor Ben Alldis coaching them from the Peloton studio in London. What was not so long ago a hyper-localized exchange of a service now takes place across international lines and is greatly facilitated by digitalization. This kind of trade, where neither the buyer nor seller crosses international lines, is known in WTO-jargon as Mode 1 trade in services. According to the World Trade Organization, in 2017, the international trade in these Mode 1 services was worth $3.7 trillion dollars. Trillion with a T. Continued technological advances mean that number is almost certainly going to grow quickly.
The rules around the trade in goods have a much longer history and are much more fully enumerated than the rules around trade in services, but the extent to which trade agreements cover services has been increasing.
Still, the growth in digitally-enabled and digitally-oriented services is so new and so quickly evolving that, to some degree, it has outpaced the construction of the international legal architecture that governs global trade in services.
Work From Home and the Digital Trade in Services are Linked
Meanwhile, domestic dynamics are adding to the already large potential benefit that increase in the digital services trade can deliver. The COVID-19 pandemic was obviously terrible in a variety of ways, but one silver lining to it was that it gave a big boost to working from home. Thanks to digitalization, a lot of workers were able to continue work largely as they had before. If you think about it, work from home is, in essence, a service being provided digitally where once it had to be done in-person. Work-from-home is not only here to stay, it’s going to keep growing and, in the process, reshape how we live. Adam Ozimek, one of the leading economists who studies work from home, estimates that by 2026 40 million professionals will be fully remote. Just at an individual level, many people love being able to work from home and a solid majority (77%) say that they prefer being either fully remote or in a hybrid setup over being in the office five days a week.
(This chart is from Derek Thompson’s Atlantic article linked to in the 77% above).
These two trends, international trade in services facilitated by greater digitalization and a shift toward more people working from home, are linked. Once a person is doing their professional work at home and delivering it digitally to whoever pays them, it doesn’t really matter whether that payer is domestic or international and so any dynamic that promotes work from home at least implicitly promotes the digital trade in services. Likewise, anything that makes it easier to digitally trade services internationally is going to benefit freelancers who work from home since now they have many more potential clients. This is a newly emerging form of globalization that looks very different from ships carrying stacks of cargo containers but it is nonetheless a very real form of globalization. As the 2019 World Trade Report notes, “Globalization is not slowing or stalling. Rather, it is evolving, driven by trade in human skills, knowledge, and ingenuity.”
Liberalizing the Trade in Digital Services
My co-author and I recently published a law review article explaining how the international legal structure around the international trade in Mode 1 services has evolved and why it has evolved that way. I won’t go through that whole history here but, given the potentially enormous benefit of this burgeoning digital services trade, I do want to point out some of the challenges that the trade in digital services presents for international trade law and then make the case for governments doing what they can to promote these digitally-facilitated services.
One of the core ideas undergirding international trade law is that states have a right to engage in legitimate regulation but that disguised protectionism ought to be curtailed. The challenge of differentiating between the two can be difficult. Regulatory differences are often quite complex, and even when everyone agrees on the impact of a given regulation—a big if—the intent of that regulation is frequently in the eye of the beholder. Some argue that regulatory trade barriers are just clever means of protecting domestic businesses from foreign competition, while others note that the further international law wades into domestic regulatory matters, the more potential it has to constrain national sovereignty. If you want to read more about the politics around regulatory trade barriers in goods, I wrote a whole book about it.
Along these lines, there is a long history of states using specious national security arguments as a rhetorical fig leaf for protectionism. Digital services are no exception. Given the generally looser global trade rules around services than goods, the trade rules which would facilitate the growth of digital trade can be waived in almost any instance that a country feels would threaten data privacy, a critical piece of technology, or any number of other security justifications. The growth of digital trade, and the benefits therein, could thus be stymied by abuse of this loophole.
Similarly, cross-border movement of data is helpful to businesses that span borders, but some countries assert that their citizens’ privacy can only be properly protected if those citizens’ data is kept in-country and stored according to very specific requirements, and so those countries want to hold on to as much policy sovereignty as possible with regards to privacy and data location, even if it abrades international business.
This legitimate regulation versus disguised protectionism conceptual problem for international trade law is particularly challenging with regards to digital services. TBT and SPS-aligned organizations such as International Standardization Organization (ISO) and the World Animal Health Organization (OIE) provide a helpful boost to regulatory cooperation in goods; no similarly effective organizations/rules exist to do that in services.
The way we see it, states can do this kind of trade liberalization in digital services in four ways. The first is to create those third-party international organizations and have them set private standards in a manner akin to what ISO does for a wide range of technical standards for goods. This could be particularly helpful in highly technical policy areas like data security.
The second avenue is networked governance, a term used to denote having governments cooperate closely but informally. That could be especially helpful around concerns states’ national security concerns; indeed this kind of international regulatory cooperation with regards to data is already used to share information related to flight passenger name records.
Third, states can enter into mutual recognition agreements for professional qualifications. This would mean that a person’s professional certification in one country allows them to provide that service in the other country and vice versa. To give an example of what this looks like, Canada and the EU recently entered into a mutual recognition agreement with regards to architects’ certification, so now an architect who lives in Montreal can provide her services in Lyon without having to go through a separate professional certification process in France. In practice, her provision of that service would almost certainly be done digitally. These mutual recognition agreements could be massively helpful in allowing doctors, lawyers, engineers, and huge numbers of other professionals to provide their services in many countries, all without having to leave their kitchen tables.
Fourth and finally, states can always enter into binding international treaties with each other. Just this morning, the European Union and the United States announced that they have reached a new agreement on transatlantic data flows. The details have not yet been released (and the devil is very much in the details on these things) but at least in principle they’ve found agreement. Let’s hope it is an ambitious agreement and not a least common denominator agreement. We’ll see. As President Biden pointed out in his remark at the announcement, these transatlantic data flows facilitate $7.1 trillion in international commerce between the U.S. and the EU.
This final approach can obviously be regional or bilateral as in the U.S.-EU relationship, but there is no reason, at least in principle, that a true multilateral agreement on digital services cannot be reached. In 2015, under the auspices of the WTO, members states completed the Information Technology Agreement which significantly liberalized the trade in information technology goods. They could do something similar with a Digital Services Trade Agreement (DSTA- pronounced ‘desta’). We do love our acronyms in the trade nerd world.
It’s Not Just the Peloton-ing Professionals Who Benefit from Peloton Globalization
Being able to sells one’s labor essentially anywhere means that people can live where they want. Many people will still want to live in Manhattan, but a lot of people, for any of a number of reasons whether it’s cost or family connections or proximity to outdoor activities, may instead want to live in smaller places. Digital services and work from home let them do that.
The combination of Peloton globalization and work from home will likely be particularly beneficial to smaller metro and rural areas. Rural areas have thinner markets and so all kinds of services can be difficult to access. That is not only inconvenient for people who live in those areas, it discourages people from moving to them. If however it is easy to get access to those services, whether it’s a spin class or a doctor’s visit, because it can be delivered digitally, that shifts some of the calculus in the cost-benefit analysis of whether to move to that rural area or not. That’s especially heartening given the extent to which many rural areas have been seeing stagnating or declining populations.1 A knock-on benefit to this is that it may help soften America’s politically poisonous urban-rural divide if a sufficient number of professional class workers spread out beyond already prospering urban cores. Via the same mechanism, work from home may help ameliorate high housing costs in America’s most expensive cities.
Greater trade in international services could be enormously beneficial too. It is not hard to envision telemedicine being very convenient and cost-saving for people in rural areas. Digital services may be particularly helpful to small businesses by obviating the need to set up a physical location abroad. Being able to consume foreign media like the Netflix show “Babylon Berlin” is another benefit. At the same time, this digitalization is helping American producers export more media content.
(This chart is from the 2019 World Trade Report).
3D printing and digitally transmitted computer-aided design files are making high-quality, customized hearing aids a lot more affordable. All of the online platforms that we all take for granted get better with scale, that scale increases by being global, and so the digital trade in services is at least indirectly augmenting the quality of those platforms. These are but a few of the many examples of benefits that come with an increase in the digital trade in services.
These two trends (work from home and the increasing trade in digital services), especially when combined, are going to expand economic freedom, drive prosperity, further knit the world together in new and fascinating ways, and we’re just getting started. It is a very exciting time!
Special thanks to my co-author on the law review article Taylor Phillips, an incandescently brilliant student and one of the best people I have ever met. Without her, that article wouldn’t have gotten done.
I am so convinced of work from home’s potential to help rural areas that in the 2022-2023 academic year, when I have a research sabbatical, one of my main research projects is going to be focused on creating a regulatory policy playbook to promote work from home with a particular emphasis on Vermont.