Analysis: Economic security and digital trade – time for an EU-US digital agreement

In response to rising geopolitical tensions, both the EU and the US are increasingly restricting the cross-border flow of trade and investments. This analysis proposes that the EU should seek a digital agreement with the US.

What is this analysis about?

This report reviews ongoing efforts to advance the EU’s integration of digital trade with other countries and proposes a way forward that acknowledges the need to address certain security concerns related to the digital economy. We conclude that the EU can and should pursue negotiations for a digital agreement with the US, regardless of who wins the US presidential election in November 2024.

Why did you investigate this topic?

In response to rising geopolitical tensions, both the EU and the US are increasingly restricting the cross-border flow of trade and investments. While addressing narrowly defined risks related to dual-use technologies may be a legitimate security policy goal, it is becoming increasingly clear that digital trade is suffering due to the barriers to trade that are currently being erected in response to rising geopolitical tensions. It is therefore important to find a way forward that can increase the EU’s digital trade despite ongoing geopolitical tensions.

You discuss the concept of 'friendmentation' in relation to digital trade between the EU and the US. Explain what you mean by this term?

'Friendmentation' refers to the unnecessary fragmentation between otherwise closely allied partners. One example of friendmentation is the current regulatory fragmentation impacting EU-US digital trade.

While much attention has been given to 'friendshoring,' the idea of redirecting supply chains towards allied trading partners, with 'friendmentation' we would like to highlight the negative economic and security aspects of unnecessary regulatory or policy divergences that hinder deeper integration. In this report, we argue that a digital trade agreement between the EU and the US could mitigate these issues and strengthen economic ties.

The analysis suggests that a digital trade agreement between the EU and US is both possible and necessary. What would be the main components of such an agreement?

A digital trade agreement between the EU and US could include binding rules on key areas like cross-border data flows, data localisation, and the protection of source code. These are some of the most important provisions needed in a digital trade agreement today. Additionally, both parties could benefit from enhanced cooperation on emerging technologies, such as artificial intelligence (AI) and quantum computing, and infrastructure like subsea cables.

The report also suggests that digital trade facilitation measures, such as electronic signatures, electronic payments, and paperless trading, should be part of the agreement. Importantly, we find that there are already precedents for these provisions in agreements that the EU and US have reached with other trading partners.

You mention the potential for security provisions in this agreement. What kind of security measures do you think are feasible within a digital trade context?

Security concerns over countries such as Russia and China are and will likely continue to be a key aspect of transatlantic discussions. Exactly how the EU and the US will continue such discussions is yet to be determined. In our report, we outline an idea for the EU to investigate the possibility to include two types of digital security provisions in a digital agreement with the US.

First, we encourage the EU to investigate a mutual commitment to ensure the supply of critical digital inputs, such as semiconductors and cloud services, during emergencies. This could build on existing efforts under the EU-US Trade and Technology Council (TTC). Second, we propose looking into the feasibility of provisions on joint measures to limit the diffusion of certain dual-use digital technologies to actors that do not respect principles of peace, human rights, or intellectual property rights. These provisions would focus on clearly defined security threats and avoid broad, protectionist industrial policies. By addressing security concerns in a targeted way, such measures could help stabilise both regions' digital ecosystems while maintaining compliance with World Trade Organization (WTO) rules.

What is the National Board of Trade Sweden?

The National Board of Trade is the Swedish government agency for international trade, the EU internal market and trade policy. Our mission is to facilitate free and open trade with transparent rules as well as free movement in the EU internal market. We provide the Swedish Government with independent analyses, reports and policy recommendations and take into account the views of businesses of all sizes in international trade policy-related matters.