What is Digital Trade?

Digital Trade refers to the exchange of goods and services facilitated by digital technology, which may involve consumers, firms, and governments. ¹ Although there is no consensus on its exact definition, it typically encompasses transactions that are ordered online but can be delivered either digitally or physically. Digital Trade also involves digitally-enabled trade in goods that can be physically delivered, for example, the purchase of a book through an online marketplace.² Digital trade can take place within a domestic set up and across borders.

The United Nations Conference on Trade and Development notes that global internet traffic has been exponentially increasing. ³ The COVID 19 pandemic has helped accelerate internet traffic as most activities switched to being conducted online. It is estimated that 80 percent of all internet traffic relates to gaming, videos and social networking. Internet traffic is concentrated in two main routes between North America and Europe and North America and Asia.⁴

Despite significant growth in internet traffic, the situation for Least Developed Countries (LDCs) is telling. Only twenty percent of people in LDCs use the internet. Relative to more developed countries, in LDCs, internet speed is low internet and more expensive. Within LDCs, there are significant divides between rural and urban areas as well as significant gender divides.⁵

International connectivity is crucial for digital trade, and Kenya has been recognized as ‘one of Africa’s leading technology hubs’.⁶ Kenya’s government has made initiatives to improve internet speeds, increase access to fibre optic cables, and expand internet coverage across the country.⁷ These advances are allowing businesses and individuals alike to take advantage of digital trade opportunities that come with access to a faster, more reliable internet connection. Mpesa, for example, is a mobile money service that uses the USSD functionality that every phone has and was launched in 2007.⁸ Mpesa has enabled digital trade in Kenya by providing an array of banking services and a convenient and reliable payment mode to its customers.

While there is no specific law on electronic commerce, Kenya has made progress in developing legal frameworks to support the digital trade environment. The Kenya Information and Communication Act is the primary piece of legislation governing Kenya's ICT sector. The Act created the Kenya Communication Authority, which serves as the primary regulator of telecommunications services.⁹ Kenya has also passed the Data Protection Act of 2019, which protects personal data.¹⁰ Further, the Computer Misuse and Cybercrime Act establishes computer system offences.¹¹ These laws are crucial in regulating and enabling digital trade in Kenya.

Due to faster internet speeds and simpler payment options, commerce has been boosted considerably. There has also been a rise in the number of companies trading physical goods online, including goods like food, clothes, medicine, and even accommodation.¹² Digital businesses in Kenya have expanded with several trading platforms now being used daily, such as ‘Jumia’, ‘Masoko’, ‘MYDAWA’, ‘Kilimall’, ‘Mobar’, ‘Little Cab’ and ‘Pigia Me’. A case study on digital business in Kenya found that 39% of private enterprises are engaged in digital trade.¹³

Kenya has recognized the value and potential of its growing digital economy. Through the Digital Economy Blueprint, Kenya’s mission to continue to develop the digital economy to foster innovation, job creation and commerce is clearly stated.¹⁴ The emergence of digital trade has brought about various trade policy concerns such as digital protectionism, the absence of standardized regulations to govern such trade, the rise of conflicting standards and fresh trade impediments, and increased public concerns about online information.¹⁵ It is critical that these concerns are addressed in the ongoing STIP negotiations.

Digital Trade Provisions in Free Trade Agreements

With the world moving towards a digital economy, digital trade chapters have become increasingly common in free trade agreements. For instance, the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) includes provisions on digital trade.¹⁶ Among the important provisions of the CPTPP are rules supporting the flow of data, and the protection of privacy and consumer rights.¹⁷ A significant feature of the CPTPP is that countries have committed not to impose localization requirements, which means that businesses are not required to establish local data centres or computing facilities in CPTPP markets. Further, CPTPP allows its parties to allow covered service suppliers and investors (excluding financial institutions and cross-border financial service suppliers) to transfer data across borders by electronic means, provided the data is part of their business activity.¹⁸ This provision recognizes that each CPTPP party will have its own regulatory requirements for the transfer of information, and, that governments are free to impose restrictions on cross-border transfer needed to achieve public policy objectives. Further, CPTPP parties have committed not to impose customs duties on electronic transmissions or content delivered by the internet; this provision is a reflection of the moratorium by the World Trade Organization introduced during the May 1998 Ministerial Conference.¹⁹

CPTPP parties do not require access to the source code of another party as a condition of selling, distributing, or importing such software.²⁰ Parties also agree to treat digital content from other countries equally; foreign digital content will be treated similarly to domestic content. Among the non-controversial provisions are collaboration commitments to encourage e-commerce growth and the recognition of the need for cyber security.²¹

The United States-Mexico-Canada Agreement (USMCA)²² is lauded as having some of the most comprehensive and high-standard digital trade provisions ever negotiated.²³ The USMCA’s chapter on digital trade has similar provisions to the CPTPP. The three parties to the USMCA have agreed not to impose customs duties, fees or charges on the importation or exportation of digital products.²⁴ The parties agree to not accord less favourable treatment to a digital product of another country.²⁵ Further, the parties commit to not restricting the cross-border transfer of information including personal information if the transfer is for the conduct of the business of a covered person. This provision recognizes that parties may erect restrictions to achieve public policy objectives. The agreement also mandates parties to have maintained legal framework protections for personal information.²⁶ No party to the agreement will require another to use or locate computing facilities in that Party’s territory as a condition for conducting business.²⁷ Additionally, no party will require access to source code of software owned by a person of another party; however source code may be made available for purposes of regulation or judicial investigation.²⁸ The USMCA like the CPTPP has non-controversial provisions on cooperation, cybersecurity, and electronic signatures.²⁹

Yet another free trade agreement is the United States-Japan Digital Trade Agreement, which mirrors the USMCA provisions highlighted above. From these two agreements, a pattern can be seen as an effort to liberalize data and allow for cross-border data flows, prohibition on data localization requirements, and removal of taxes and or custom duties on electronic transmissions.³⁰ Notably, this is a unique stand-alone agreement on digital trade negotiated by the US. The provisions in this agreement are important to the STIP negotiations as it would aid in identifying the likely trend that the US would follow.

Review of Comments on the US-Kenya STIP Agreement on Digital Trade

Different stakeholders in the United States and Kenya have commented on the proposed US-Kenya STIP Agreement and proposed their recommendations for the ongoing negotiations. This article discusses the comments of three main groups namely, Big Tech, Big Pharma and Advocacy groups concerning digital trade.

1. Big Tech.

This article has focused on comments from IBM, Global Data Alliance, The App Association, The Computer & Communications Industry Association and the Information Technology Industry Council (ITI). These 5 associations are chosen because they accurately represent the interests of the tech world and propose similar recommendations on digital trade within STIP.

Following the successful entry of the USMCA and the US -Japan free trade agreement, it comes as no surprise that that the comments by Big Tech recommend for similar provisions. IBM, a leading global hybrid cloud and AI company, recommends that the STIP should have provisions similar to the USMCA that would commit Kenya to enabling the free flow of data; prohibit localization of data; protect source code and prohibit forced technology transfers and digital custom duties.³¹ The rationale for these recommendations is to remove unnecessary barriers to trade.³²

The Global Data Alliance recommends that provisions similar to the CPTPP and the US-Japan Digital Trade Agreement should be included in the STIP.³³ The alliance recommends that cross-border transfers be unrestricted, localization requirements be prohibited, and custom duties be avoided.³⁴ Similar to the CPTPP and the US-Japan Digital Trade agreement, the agreement’s provisions should not prevent either party from enacting restrictions that promote data privacy, data security and other policy goals.³⁵

The App Association that represents the interest of small business software developers proposes similar recommendations.³⁶ They seek to also remove any barriers to trade and want the STIP to have commitments to cross border transfer flows; prohibition of data localization requirements; removal of custom duties on digital content and the prohibiting of access to source code.³⁷

The Computer and Communications Industry Association also maintain similar recommendations.³⁸ In their comments, they state that the regulations of the Data Protection Act of Kenya are a barrier to cross-border digital trade.³⁹ They advocate that the STIP should have binding commitments like those contained in the USMCA.⁴⁰

From the comments by big techs above, it is to be expected that the US will negotiate hard on the liberalization of data; prohibition of setting up local data centers and prohibition of custom duties. However, Kenya in turn should negotiate just as hard to safeguard its policy space considering that The United States and Kenya have adopted two very different approaches to cross border data transfer. Whereas the U.S uses an open transfer approach where regulation is left to private standards, Kenya uses the limited transfer approach where the government has prescribed regulation and there is a broad requirement to use domestic servers.⁴¹

The Data Protection Act allows for cross border transfers under certain conditions. Amongst them being that, the Data Commissioner must be satisfied, with proof, that the security and protection of the personal data is preserved, and, that the receiving jurisdiction should have commensurate data protection laws.⁴²

In terms of the prohibition on localization of data and the setting up of data centers, this recommendation is likely to negatively impact Kenya, as it would mean that there would be no technology transfer to boost the country's infrastructure.

From the preceding paragraph it is clear that having no custom duties imposed on data transmission is a typical provision of free trade agreements. Kenya has recently forgone its imposition of Digital Service Tax on multinational corporations under the Ruto administration.⁴³ Whether the removal of the tax is to be welcomed is a controversial question. On one hand digital products and services are now cheaper for the consumer an encourages development of local businesses. On the other hand there is a loss of revenue for the government. KRA had predictions of collecting Kshs 13.9 billion within 3 years of application of the tax.⁴⁴

2. Big Pharma.

This part of the article will focus on comments from The Pharmaceutical Research and Manufacturers of America (PhRMA) and the Advanced Medical Technology Association (AdvaMed). These two associations represent the interests of big pharma in the United States.

PhRMA is a trade group representing companies in the pharmaceutical industry in the United States. PhRMA represents a sector that is research intensive and amongst the top five employers of U.S manufacturing jobs. Their comments are largely focused on provisions that protect intellectual property and ensure predictable and transparent market access. Concerning digital trade, they recommend that the STIP should prohibit forced technology transfers; prohibit unnecessary data localization requirements, and restrictions on cross border data flows; and eliminate digital tariffs.⁴⁵

AdvaMed is an American medical device trade association. The association recommends that STIP should include provisions similar to USMCA or the US–Japan Digital Agreement. Their main concerns are to establish a framework that would prevent barriers for the use and development of digital health technologies. They recommend commitments to allow for cross border transfers of data; prevent data localization requirements; and allow for use of patient health data.⁴⁶

From the perspective of American firms, health data is crucial to the development of health solutions and innovation. However, health data is extremely personal and must be protected with the highest standard of safeguards as such data touches on the most intimate parts of a person’s data.

A highly controversial negotiation point will be on the prohibition of forced technology transfers. Drawing reference from the 2022 negotiations of the TRIPS waiver, first world countries and third world countries are at opposite ends of the table.⁴⁷ With the COVID 19 outbreak, third world countries sought TRIPS waivers to create generic vaccines as their own. The negotiations on this waiver did not result in a text that was acceptable to the global south.⁴⁸ Kenya, as a developing nation should negotiate within this context and recognise the need to develop its medical technological capacity.

3. Advocacy groups

This part of the article focuses on comments from three Advocacy groups: Public Citizen, Rethink Trade, and Econews Africa. These groups have been selected because they give a Kenyan perspective to the conversation and advocate for Kenya’s policy space.

Public Citizen is a nonprofit consumer advocacy organisation that promotes public interest.⁴⁹ Public Citizen recommends that Kenya should scrutinize recommendations like ‘non discrimination clauses’ to avoid digital firms securing their monopolistic dominance.⁵⁰ They further warn that rules on limiting data and privacy protections should not be locked in through the STIP or any other trade agreements as e – commerce is evolving with unknown variables. It is crucial that policies in this space must be made in a democratic manner and any decisions should be open to revisions.⁵¹ The digital trade rules recommended, have the capacity to shrink Kenya’s policy space. Efforts and policies that restrict cross border transfers should not be viewed as ‘illegal trade barriers’, as such restrictions protect fundamental human rights. In the same regard, prohibitions against disclosure of algorithms should be criticized for potentially increasing the monopoly power of tech companies.⁵²

Rethink Trade is a program of the American Liberties Project (AELP), a nonprofit research and advocacy organization.⁵³ Rethink Trade is of the view that the STIP can be used to secure corporate interests.⁵⁴ They similarly note that big tech companies are attempting to preserve market power through binding international rules that restrict governments from regulating firms; by masquerading restrictions as digital trade pacts.⁵⁵ Rethink trade advocates that STIP provisions should not undermine the citizen’s rights and privacy by prohibiting data flows or location of cloud computing facilities.⁵⁶ Such provisions would disempower governments from ensuring how data is processed, transmitted or stored. In particular for Kenya, which has established its Data Protection Act, such policies would undermine its policy space.⁵⁷ Rethink Trade notes the need for an exception to typical prohibition of setting up of local data centers for Kenya to be able to develop its own local industries.⁵⁸

Conclusion

In as much as a free trade agreement with the Unites States is exciting, novel and can lead to both parties gaining from trade, Kenya should enter negotiations cognizant of the fact that the provisions agreed upon will most likely be the standard for future trade agreements negotiated with other African countries. To that extent, Kenya should negotiate hard and not compromise on reducing its policy space. Human rights and consumer protections must not be derogated from in favor of multinationals’ cooperate interests. Digital trade or e-commerce, which is still a fairly young and growing market for Kenya, requires provisions that will facilitate its development. As such, provisions on technology transfers and data localizations should not mirror past agreements like the CPTTP or the USMCA, but be unique and idiosyncratic to Kenya’s needs.