The 21st century avatars of East India Company – IP, IT and FTAs

There is a war going on between global e-commerce giant Amazon and Walmart/Flipkart for control of the Indian market. Likewise, Google’s 7.73% and Facebook’s 9.9% acquisition of equity in Reliance-Jio points to a furious race for control of the telecommunications space where the infrastructure already exists.

Foreign companies battling it out on Indian turf. Sounds familiar?

In the past several months, countries across the globe have been focused on how best to handle the coronavirus pandemic and revive their economies. Prime Minister Narendra Modi recently invited US companies to invest in India’s healthcare, infrastructure, defence, energy, farm and insurance sectors. No doubt this will involve the drawing up of new trade agreements.

In the meantime, the US-Mexico-Canada Agreement (USMCA) has been ratified and gone into effect July 1. USMCA, which effectively replaces the North America Free Trade Agreement (NAFTA), is intended to serve as the gold standard in US trade policy in future trade agreements. Of particular import in the treaty are the chapters dealing with digital trade, intellectual property and financial services.

Intellectual property (IP), as is currently interpreted, is an umbrella term for grouping intangible assets such as patents, databases, copyrights, software, and algorithms. Nearly 90% of the value of the ‘big five’ tech companies (Amazon, Apple, Microsoft, Facebook, and Alphabet/Google) comes from their intangible assets. Over the last 20 years, the global economy has become much more dependent on intangible assets rather than physical assets such as factories and merchandise.

Though USMCA met with significant opposition from the Canadian IT industry, it was ratified by the Canadian government. Jim Balsillie, the co-founder of Blackberry, claims that poor IP stewardship costs the Canadian economy more than $100 billion annually in lost revenue. He believes that if Canada can’t protect its IP, the country risked becoming a “client state” to countries which can. A “colonial supplicant”, as Balsillie memorably puts it. He also lashed out at Google’s smart-city project in Toronto as a “colonising experiment in surveillance capitalism, attempting to bulldoze important urban, civic and political issues.” Policymakers in New Delhi should take note.

If technology leaders in a developed country such as Canada with a decent entrepreneurial and innovative record (especially in artificial intelligence), express strong reservations about USMCA, there is a good reason for developing and under-developed countries to be extremely wary of signing onto trade deals with USMCA-like provisions, since they can endanger a country’s sovereignty, security and economy.

For example, one of the lesser-known provisions prevents any party to a trade deal from passing laws that restrict the cross-border flow of data. So, if an American firm sets up shop in India, it would be free to transfer any data it collects to servers back in the US. The same is true for an Indian company operating in the US. However, this arrangement benefits American firms almost exclusively since they possess massive datasets which have been generated over a 20-year period and can exercise monopolistic power. The economic implication is that smaller countries cannot prosper in an economy based on intangible assets without sovereign control over their data.

The new Digital Trade chapter in USMCA focuses on the rules for the expansion of trade and investment in the innovative products and services where the United States has a competitive advantage. Here are some of the more important rules -- prohibit customs duties on digital products distributed electronically (e-books, videos, music, software, games, etc), protect cross-border data flows and limit data localisation requirements, limit treaty signing nations’ ability to require disclosure of proprietary source code and algorithms, promote open access to government-generated public data, and limit the civil liability of Internet platforms for third-party content that such platforms host or process.

In the chapter on IP, there is an extra-territorial provision which grants a) ex officio authority for customs officials to stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any Party, and b) duty evasion verifications and in-country facility visits by customs authorities.

As for the rules governing financial services, the important clauses pertain to treating US financial service suppliers as being on on par with local suppliers. The granting of most-favoured-nation status, prohibiting the imposition of certain quantitative and numerical restrictions that would limit the business of US financial services suppliers, and an expanded list of cross-border services, such as portfolio management, investment advice and electronic payment services.

Now for a short history lesson.

In what passes for history courses at the secondary school level in India, you were probably taught that, under the British Raj, major railway networks were established across India and an elaborate legal, police and administrative system set up to govern the country. ‘Infrastructure’, in today’s parlance.

Mentioned in passing, of course, would have been the Sepoy Mutiny of 1857 (anecdotally focused on the Hindu-Muslim divide), the ‘Black Hole of Calcutta’ and the British East India Company. There were, of course, at least five East India Companies set up by five European powers between 1600 and 1664 – Britain (1600), Holland (1602), Denmark (1616), Portugal (1628) and France (1664) – to establish trading posts in coastal areas of Asia so as to dominate the local trade with Europe.

The trading posts of the 1600s, fortified and backed up by the European navies, served multiple functions – marketing, warehousing, and the transportation and delivery of goods. Much like Amazon today? The posts soon turned into colonies and metastasized, ably assisted by local rulers who signed one-sided treaties for the companies’ military support in exchange for certain privileges.

After losing the trade-related First and Second Opium Wars with Britain, China ceded control of major ports such as Shanghai, Canton and Hong Kong by signing the singularly one-sided Treaties of Nanjing (1842) and Tianjin (1858) with numerous extraterritoriality provisions and the conferral of most-favoured-nation status to Great Britain. The US was also party to the Tianjin treaty.

Likewise, the 1858 Treaty of Amity and Commerce between the US and Japan gave Americans the right to engage in free trade, and reside in Tokyo and Osaka. An extra-territorial provision ensured that they would not be subject to Japanese law since the laws of Japan were ‘very peculiar’.

Four hundred years on, the rulers and the products have changed, but the rules haven’t.

Veni, vidi, vici?

(The writer is a Professor of Computer Science based in the US)