Non-Tariff Measures and Behind-the-Border Domestic Regulation Impacting Trade in Research and Innovation Services

Moving beyond the pure semantics of how to best name this topic, I guess this invites a more focused exploration of what kind of research and innovation services we are currently exporting (or are prevented from exporting, or wish to export more of), via what modes of supply, and to what markets, since the behind-the-border domestic regulatory barriers our exporters face will vary depending upon how these three questions are answered.

So just by way of inventorising the kinds of NTBs that are the most likely to impact these exports, let me list a couple of them, before expanding upon how best to deal with them from a trade-policy perspective.

• Nationality-based restrictions on who can participate in publicly-funded research projects can limit the ability of firms or academic institutions to participate in this very important vehicle for international research collaboration. This is a noted problem in China but also in the EU, policymakers have for several years started to take a more restrictive approach to who can participate in Horizon 2020 funding.
• Investment screening procedures that aim to limit the ability of foreign firms to acquire equity stakes in domestic firms that are leading innovators in a specific technology or sector can also be problematic if they are overly restrictive. This has been an issue in the United States with the tightening of CFIUS procedures and requirements, but also in Germany, and the EU more generally.
• Punitively restrictive business licensing requirements that effectively close entire economic sectors to foreign participation (or foreign majority-controlled equity participation) impede the ability of firms to set up a commercial presence (for research, production or sales) in a market that is of potential interest to them. This is a problem in many markets from Indonesia, to India to China.
• Tough data-localization requirements that force companies to store or process any data collected on local citizens in-country can also artificially raise costs (including compliance costs) and undermine the business case for providing services in the jurisdiction imposing these requirements. This is another pervasive problem in markets such as Turkey, Vietnam, China and Brazil.
• Strict limitations on the ability of firms to transfer data across borders can also have a severe impact on innovation as has been demonstrated in the aftermath of the GDPR coming into force in the EU, or which is equally clear for any foreign service provider trying to develop any kind of online business model in China. This is a problem in Europe that sees the cross-border flow of data more from the perspective of privacy protection and human rights than in purely economic or commercial terms. But there are other economies where cross-border data flows are severely restricted, such as China.
• Laws and regulations that force companies to disclose their source code or their proprietary algorithms as a condition for doing business in the jurisdiction imposing these requirements also represent significant disincentives for companies to consider doing business in such places. This has been a problem for companies such as Microsoft for many years, and is most prevalent in markets such as China, Russia, India, among others.
• Forced technology transfer or otherwise a systemic failure to effectively enforce intellectual property rights is another barrier to research and innovation, since these require strong IPR enforcement in order to be able to justify the massive capex outlays that they require. This is one of the biggest grievances that the US currently has against China, but is also prevalent in other markets that are keen to move up the technological value chain, such as India.
• Export controls that prohibit companies from exporting the fruits of their research and development work from the country imposing these controls must also be included in such an inventory. This has recently become a serious problem in the United States, albeit not to my knowledge for Australian export interests.
• Discriminatory tax incentives or other subsidies that are only made available to local firms or institutions can likewise be the source of significant market distortions that tip the playing field decisively against foreign service suppliers in the areas of innovation and research. Brazil is an example of this in its ICT and automotive sectors.
• Local content requirements that force foreign service suppliers to source labour or other inputs from purely domestic providers significantly raise costs and reduce competitiveness. These sorts of measures are prevalent in markets such as Brazil, Indonesia, India, to name just three.
• Overly restrictive labour market policies that impede service suppliers from accessing certain markets or impose onerous conditions on them when doing so must also be included in such an inventory. These sorts of measures hamper the freedom of action of MNCs and SMEs alike in markets such as Mexico, Indonesia and South Africa.

When it comes to addressing these barriers, it should be obvious that DFAT can’t make demands of our trading partners to reduce these barriers if it is unaware of them. This means that informing DFAT when businesses run into a trade barrier made effective through domestic regulation in one of their export markets is very important.

In some cases, Australia may already have an existing treaty commitment with the market in question that makes the imposition of one of these domestic regulatory barriers potentially liable to a legal challenge. This would be the case for example in the event of restrictions on the free flow of data, forced data localization requirements or the mandatory disclosure of source code in any country that is a party to the CPTPP.

In other cases, WTO rules might explicitly outlaw the regulatory behaviour in question. This is the case with local content requirements and discriminatory tax incentives. Brazil just lost a very high-profile case at the WTO brought by the EU and Japan over how it sought to artificially stimulate local R&D in its information and communications equipment and automotive sectors.

In other cases, Australia might be currently engaged in FTA negotiations with an offending trading partner and there may be some room to make life easier for Australian services suppliers in these sectors over the medium to long term through the conclusion of mutual recognition agreements or other instruments that allow the qualifications of Australian experts to be recognized.

To be clear, non-tariff barriers and behind-the-border domestic regulatory barriers don’t come down quickly, since they require regulatory reform by our trading partners. This means there are few quick fixes to these barriers. Instead, they require a sustained and concerted effort, backed up by data and evidence of the damaging effects these barriers are having on trade, competition, productivity and economic welfare. Arming DFAT with the information it needs to start tackling these barriers, but also informing it of any success stories Australian exporters have experienced, are key to maintaining this effort.

By Simon Lacey - Senior Lecturer in International Trade, The University of Adelaide