The Trade Winds Are Turning: Insights into the 2024 National Trade Estimate

Commentary by Thibault Denamiel, John Strezewski, andWilliam Alan Reinsch

Published April 5, 2024

On Friday, the Office of the U.S. Trade Representative (USTR) published its annual National Trade Estimate (NTE) Report on Foreign Trade Barriers, a congressionally mandated report outlining barriers to commerce faced by U.S. firms in foreign markets. Though not typically a controversial affair, this year's release has caused controversy after USTR considerably altered its approach to historically firm U.S. trade policy stances. The changes in the NTE symbolize a larger shift in U.S. trade philosophy that is set to define the country's economic direction.

The first example from this year's NTE concerns foreign barriers to digital trade. In past NTE reports, USTR had consistently identified foreign digital trade rules, namely data localization mandates and ex ante competition regulations, as barriers to U.S. companies working abroad. Regulations such as the European Union's Digital Markets Act (DMA), Vietnam's data localization requirement, or Israel's Protection of Privacy Law had always been included.

The 2024 issue, however, removed several digital trade restrictions or included them in a recontextualized manner. According to analysis from Inside U.S. Trade, last year's report included "Data Localization Requirements" as a subheading in seventeen of its country chapters. The 2024 report, however, contains just three data localization subheadings. The few data localization requirements that the report does note-in China, Russia, and Bangladesh, for instance-are characterized only as state surveillance risks rather than trade barriers in and of themselves. In effect, USTR has withdrawn from its previous position on data localization and digital trade more generally, prioritizing national security interests over free trade principles.

At the root of this shift is USTR's reinterpretation of what constitutes a "trade barrier." In 2023, USTR defined trade barriers broadly as government policies that restrict international trade, while noting explicitly that "the recent proliferation of data localization and other such restrictive technology requirements is of particular concern." The 2024 NTE, however, disregards precedent, defining barriers as "government measures that unduly impede the international exchange of goods and services" and removing any specific reference to data localization requirements. It also notes that U.S. trading partners have a "sovereign right to adopt measures in furtherance of legitimate public purposes"-odd language for a report meant to call out foreign governments for regulations that unduly limit the exchange of goods and services.

In a statement, USTR Katherine Tai argued the redefinition was part of her agency's move to "return it [the NTE] to its stated statutory purpose." The meaning of USTR Tai's words is not clear. Section 181 of the Trade Act of 1974-the law that compels USTR to publish its annual trade report-approaches trade barriers in a broad sense, more like the definition laid out in the 2023 report than in the 2024 update. It instructs USTR to identify and analyze foreign policies or practices that bar or distort trade, U.S. foreign direct investment, and electronic commerce but does not go much further than that. Whether USTR has the flexibility to reinterpret the agency's statutory authority after years of alleged deviation is dubious; one could argue that the 2024 NTE's new interpretation is actually further away from the original statutory language.

The NTE's shift instead seems to be an attempt to support the Biden administration's new approach to data flows. Late last year, the administration began unexpectedly revoking support for some of the tech industry's most foundational principles, enshrined for instance in the United States-Mexico-Canada Agreement and the U.S.-Japan Digital Trade Agreement, and seems intent on staying this course. In October 2023, for instance, it formally withdrew U.S. support for the key principles, including free cross-border data flows, at the World Trade Organization Joint Statement Initiative negotiations. Soon after, USTR pulled back from negotiations on the Biden administration's signature trade initiative, the Indo-Pacific Economic Framework for Prosperity (IPEF), after deciding it no longer aimed to include a ban on data localization in the agreement's text. In February, the administration issued its own executive order limiting the transfer of certain U.S. data to foreign adversaries.

The NTE is now also experiencing profound changes on the data flows front. All these actions represent USTR's attempts to support two broader Biden administration policy goals. The first is adding some height to the fence surrounding the increasingly large yard of U.S. economic security. Questions around cross-border data flows are at the center of the administration's conflation of security and economic policy, and USTR's actions help support White House efforts. Second, USTR's actions contribute to the administration's crackdown on Big Tech, in another move that utilizes trade policy tools to address domestic competition concerns.

There have been strong reactions to the NTE from the business community and civil society. The U.S. Chamber of Commerce, Computer & Communications Industry Association, and National Foreign Trade Council have been among the many industry groups to denounce USTR's decision. They insist the administration's capitulation on digital trade issues will give foreign governments the go-ahead to increase barriers to U.S. exports and discriminate against U.S. firms. Progressive groups, conversely, have applauded the move. In a response letter to USTR, 24 trade-skeptical organizations, such as Public Citizen and the Citizens Trade Campaign, praised Tai for her efforts to rein in "Big Tech monopolists," who had used the NTE to "elevate special interest[s]."

The NTE's de facto policy reversal comes at a tricky time for U.S. technology firms. Across the world, countries have begun to formulate punitive ex ante competition legislation modeled on Europe's DMA, which applies almost exclusively to U.S. tech champions, including Apple, Google, and Meta. Restricting cross-border data flows, moreover, is becoming more popular worldwide, as more countries revert toward digital protectionism during a period of heightened geopolitical tensions. Technology companies are some of the companies that stand to lose the most from these policies, as user data remains their most important commodity.

The second example of where USTR has changed the NTE's approach is its pullback on opposing import substitution policies-policies that aim to replace foreign imports with domestic production. Developing nations such as India, Brazil, and Ghana implemented import substitution industrialization (ISI) policies through high import tariffs, quotas, and large subsidy packages in an effort to stimulate domestic economic growth after World War II. Those policies turned out to be largely unsuccessful given their long-term inefficiencies, and most countries have abandoned them in favor of policies oriented more toward open growth.

This move has so far garnered less attention from the trade community, where the discourse has so far mostly focused on digital issues. Nevertheless, the U.S. government has invested a considerable amount of time and effort on the international trade stage to ensure that other nations pull back policies concerning import substitutions and instead open opportunities for more international exchange. USTR abandoning that stance thus also represents a significant change in U.S. trade policy.

Much like the digital trade barriers issue, this pullback seems to be in line with the Biden administration's overall direction. The administration is undertaking a significant revamping of U.S. supply chains, with the policy of onshoring at its core. Recent industrial policy packages are in part import substitution strategies-they aim to replace foreign inputs by domestic ones which, given the price advantages often enjoyed by foreign goods, can only be achieved via significant state-led investment.

Both changes in the NTE show, broadly, a similar trend: the United States is now leading the charge in global trade fragmentation. Where it was once the strongest advocate of multilateral liberalization, USTR now espouses a trade policy that emphasizes local requirements and self-sufficiency. Pulling back opposition to barriers to cross-border data flows and import substitution policies seems to fit big-picture Biden administration objectives: the actions provide the necessary "policy space" for industrial policy designed to mitigate dependencies on foreign inputs in critical supply chains and enable data localization requirements to tighten cross-border data flows and permit more aggressive anti-Big Tech competition policy efforts.

These actions are taken in the name of national security and equity-two worthwhile pursuits that aim to address some of today's most pressing challenges. However, in adjusting its trade agenda so radically to fit the Biden administration's policy picture, the United States risks running into two issues. The first is an increasingly fragmented trading system unmoored from multilateral trade rules, in which today's protectionism hinders any meaningful attempt at promoting more economic growth through expanded trade. With 96 percent of the world's consumers outside the United States, that will inevitably spell trouble for the U.S. economy. The second has to do with consistency of values. The 2024 NTE's changes, along with the Biden administration policies they support, show a drastic shift away from principles that were once key to the U.S. trade agenda. The last eight years have already been marked by uncertainty for economic partners; the Biden administration's policies regarding data flows and import substitution add to the landscape's current unpredictability. The United States had been consistent for years as an open trading partner that stood for the rule of law in international trade; it is now veering so far from its previous stances that current and potential allies are left wondering whether it is reliable at all.

Thibault Denamiel is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. John Strezewski is an intern with the Scholl Chair in International Business at CSIS. William A. Reinsch holds the Scholl Chair in International Business at CSIS.

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