After the United States Trade Representative (USTR) concluded negotiations of the Trans-Pacific Partnership (TPP), a massive trade agreement among 12 Pacific Rim nations, a couple of high-profile issues remain a concern for stakeholders. Among those concerns is the issue of data localization, particularly in the financial services sector.
Increasingly, nations are requiring global financial firms to maintain servers and data centers domestically. These requirements impose unnecessary costs on financial institutions and can hamper data security. Such protectionist schemes ignore the global interconnectivity of the financial system.
As part of Trade Promotion Authority (TPA), which was passed last year, Congress instructed trade negotiators at USTR to “protect cross-border data flows and prohibit data localization requirements for all sectors” in all agreements negotiated over the five years covered by the Authority. Despite this mandate, the U.S. Treasury raised concerns about the ability of financial regulators and supervisors to obtain data stored overseas during the 2008 financial crisis. As a result, the ban on data localization requirements was exempted from the financial services chapter of TPP.
In response, bipartisan coalitions in both the House and Senate urged Treasury and USTR to address the issue in order to eliminate the protectionist exemptions. After working with members of Congress and those in the industries impacted, Treasury and USTR announced earlier this week that they have made significant progress toward addressing this concern going forward.
The crux of the new plan would prohibit data localization for financial services in ongoing trade negotiations, including the Transatlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TiSA). Specifically, the prohibition in future trade deals would apply as long as financial regulators can obtain data stored in other countries. If a country fails to provide access to the data, under Treasury and USTR’s proposed scheme, there would be an opportunity to take corrective measures to rectify the problem. If that fails, the proposal contemplates a dispute settlement process.
Though the Treasury and USTR proposal does not apply retroactively to TPP, the finalization of which is dependent upon Congress approving the agreement, some Pacific Rim countries would be brought into the new proposal by their participation in TiSA. Additionally, the proposal would apply to new member nations joining TPP. This proposal is encouraging, though questions remain regarding the implementation of these modifications and the willingness of our trade partners to comply.
Encompassing 40 percent of the global economy, the TPP is a complicated agreement. The question presented by trade agreements like TPP is not whether they are perfect – they will never be; rather, the question is whether the agreement is better than the status quo. While National Taxpayers Union has not taken a position on the agreement, we are pleased to see Treasury and USTR’s willingness to address legitimate concerns in a constructive fashion. Hopefully, additional improvements will be made for the benefit of taxpayers and the economy at large.