Written evidence submission from Advertising Association (DTD0004)

Advertising Association’s response to the International Trade Committee’s inquiry into digital trade and data

About the Advertising Association

1. The Advertising Association promotes the role and rights of responsible advertising and its value to people, society, businesses and the economy. We bring together companies that advertise, their agencies, the media and relevant trade associations to seek consensus on the issues that affect them. We develop and communicate industry positions for politicians and opinion-formers, and publish industry research through advertising’s think-tank, Credos, including the Advertising Pays series which has quantified the advertising industry’s contribution to the economy, culture, jobs and society.

Context

2. The membership of the Advertising Association is very broad and includes the associations representing industry sectors, such as the advertisers (through ISBA), the agencies and advertising production houses (through the IPA and APA), all the media (from broadcasters and publishers, cinema, radio, outdoor and digital), advertising intermediaries and technology providers (through IAB), market research (through MRS) and marketing services such as direct marketing (through the DMA) and promotions.

3. Advertising plays a crucial role in brand competition, drives product innovation and fuels economic growth. Many industries such as arts, sport and culture depend on it for their revenues and it also funds a diverse and pluralistic media enjoyed by consumers of all ages, including children and young people.

4. Advertising is a driver of economic growth and competition. We have estimated that every pound spent on advertising returns £6 to GDP through direct, indirect, induced and catalytic economic effects. We estimate that advertising spend will be over £26.7 billion in 2020, which we estimate, will result in £160bn to GDP, supporting 1 million jobs across the UK.

5. Online advertising accounted for more than half of all advertising expenditure and is predicted to grow to a 62% market share by 2020.

6. Please contact Konrad Shek (konrad.shek@adassoc.org.uk) for further information.

Our Response

7. Digital trade underpins the UK economy and is vital to both services and goods exporters. We support the UK’s aims to be a leading world class digital economy and there is a tremendous opportunity to maximise the benefits and potential of a global inter-connected digital economy. To do this requires a forward looking and holistic approach to digital governance, which encourages innovation and promotes the free flow of data but at the same time applies appropriate safeguards to protect personal data. It will also require cooperation at the multilateral level to work towards unnecessary barriers being removed and to facilitate cross-border data flows.

8. To set some context for the advertising and marketing industry’s reliance on data:
1. better data availability can improve the analysis of consumer trends, market segmentation and help deliver more relevant ads.
2. data collected via through surveys and opinion polls can also be used to develop specific consumer and behavioural insights.
3. data is fundamental to online advertising and to the matching of buyers and sellers of online advertising inventory.

9. Moreover, advertising’s importance to the free internet should not be understated. Advertising funds free content online and it is indispensable to content creators and publishers to monetise their work. Online advertising allows companies to increase their digital reach through attract new consumers and increase awareness of their products and services.

10. Digital advertising has grown to account for more than half of UK advertising expenditure. The UK’s ad tech sector, which produces digital tools and services for the advertising industry, comprises more than 300 UK-headquartered companies, with over £1 billion invested in this sphere since 2013. The internet has been transformative for UK economic growth and the last decade has been dominated by digitalisation. The volumes of data being transmitted and stored has grown exponentially. One of the key impacts resulting from the COVID-19 pandemic is our increased reliance on digital tools. With the introduction of 5G, Internet of Things, cloud technology, on-demand and digital subscription services we expect the demand for data to increase.

What are the main barriers faced by UK businesses engaging in digital trade?

11. A number of countries have legislation requiring electronic commerce platforms to register locally and or use data centres located within their border. Setting up parallel data centres can add significant costs to business. China’s Cybersecurity law, for example, requires those who it deems to be “critical information infrastructure” providers to store data locally. These local storage requirements also apply to data regarded as sensitive[1]. Additionally, India has mandated all electronic payments providers to store domestic transactions only in India[2] and this has a potential knock-on effect on the provision of other services. Moreover, Vietnam requires online firms to store personal data locally and to establish a branch or representative office in Vietnam.

12. There are also countries that have implemented online advertising barriers which reduce market access. Vietnam, for example, significantly restricts the supply of online advertising. Vietnamese advertisers must contract with Vietnam-based advertising services providers to put adverts on foreign websites. And any foreign websites targeting Vietnam must be reported to the local authorities.

13. Some countries have introduced levies or taxes directly on online advertising. India, for example, introduced an “equalisation levy” in its 2016 Finance Act which is applied on non-residents at 6% for online advertisement and any provision for digital advertising space or any other facility or service for the purpose of online advertisement[3]. In Brazil, online advertising has been subject to heavy state-level taxation[4].
14. Online censorship or website blocking can also be a problem, and these can hurt businesses that rely on advertising to sell their goods and services. China, for example, is well-known for employing extensive internet controls, but significantly these restrictions can distort the market and favour domestic providers (i.e. Baidu, Alibaba & Tencent) over foreign ones.

15. The EU’s GDPR could also be regarded as a trade barrier to the free flow of data. This is more significant given the UK’s departure from the EU and the pending a data adequacy decision from the EU. In one regard, it is important for the UK government to continue to align with EU standards as the EU/EEA is a major source of personal data transfers. However, given its unilateral nature, relying on a data adequacy decision does create some legal uncertainty as this can in theory be withdrawn at short notice. Without a data adequacy decision from the EU, we could expect additional legal and compliance costs for businesses transferring data from the EU/EEA as they would need to implement Binding Corporate Rules for intra-corporate transfers and/or Standard Contractual Clauses between the data exporter and importer.

What opportunities does digital trade present for UK businesses?

16. According to our research[5], the digitalisation of UK advertising has been a true modern revolution that has created opportunities for people and businesses across the country. The UK is the largest online advertising market in Europe, and third largest in the world. According to 2018 figures, only the US and China spent more than the UK on online advertising. In terms of spending, the UK is well ahead of Japan and Germany. Relative to the size of the economy, UK online advertising expenditure is the highest in the world, at 0.63% of GDP.

17. The UK’s strong online economy has fostered the growth of many companies in the specialist advertising technology (ad tech) sector, which produces digital tools and services for the advertising industry. The UK ad tech sector comprises of more than 300 UK-headquartered companies, attracting more than £1 billion in investment since 2013.

18. These UK ad tech companies employ over 19,000 UK workers, almost four times as many as the largest advertising tech platforms in the UK, such as Google and Facebook, combined. More SMEs now advertise than ever - rising from 30% of SMEs in 2013 to 42% in 2017–as the opportunity to target consumers more effectively on a small budget has never been better.

How does the regulation of digital trade impact consumers?

19. Digital trade generates large amounts of consumer surplus or welfare. This is because the digital economy provides many free to use to services. Digital goods and services have zero marginal cost which allows for scalability, and rapid innovation has led to new digital goods and services being consumed[6]. Consumers can access more content through digital publications and on-demand, lower their cost of discovery through search engines, maintain relationships over long distances via social media, and have more choice through online marketplaces.

20. Therefore, we argue, unnecessary barriers or restrictions to digital trade can distort the market and reduce consumer welfare. As such, digital trade regulation should be focussed on facilitating digital trade through delivering real consumer benefit and building trust in the market.

What approach(es) should the UK take to negotiating digital and data provisions – including those concerning the free flow of data, protection for personal data, net neutrality, data localisation, and intellectual property– in its future trade agreements?

21. The UK should ensure that the global regulatory landscape around digital and data provisions remains compatible with international agreements on the protection of intellectual property rights, in particular the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the WIPO Copyright Treaty (WCT).

22. The UK’s negotiating position should be based on the principle of securing the widest possible market access for digital goods and services. This needs to be supported by the free flow of data, deliver real benefit for consumers and maintain strong privacy protections. More specifically, we think digital and data provisions should be built around the following principles:
1. High standards of personal privacy protection, in particular sensitive categories of personal data.
2. National treatment towards digital goods and services providers and abide by the principle of no prior authorisation.
3. Non-discrimination of digital goods and services.
4. Commitment not to impose customs duties on electronic transmissions.
5. No requirement for data localisation, mandatory disclosure of source code or other performance requirements in the delivery of digital goods or services.
6. Co-operation on emerging technologies, cyber security threats, online fraud and spam.
7. Strong consumer protections and routes to recourse.
8. Encourage the use and interoperability of digital contracts, electronic authentication and electronic signatures.

23. Any trade agreements must be future-proof and to that end it is important that any domestic legislation or policy takes a holistic and integrated approach that considers the impact it could have on digital trade and innovation. There may also be a need to consider the potential negative societal effects of emerging technology and therefore there may be a requirement for trade protection measures, particularly if there were significant distortions in digital trade flows or unintended consequences between the two Parties.

What does the UK-Japan Agreement indicate about the UK’s approach to digital trade and data provisions in future trade negotiations?

24. We broadly support the UK Government’s stated approach[7] of securing “cutting-edge provisions which maximise opportunities for digital trade across all sectors of the economy” and promoting “a world leading eco-system for digital trade that supports businesses of all sizes across the UK” in the UK-Japan free trade agreement.

25. According to our analysis of the UK-Japan FTA, the digital and data provisions in the agreement are largely based on the EU-Japan Economic Partnership Agreement (EPA)[8], but tries to go beyond in a number of areas, namely:

1. Interoperable electronic authentication and electronic signatures
2. Principles on access to and use of the Internet for e-commerce
3. Consumer protection
4. Personal information protection
5. Open government data
6. Non-localisation
7. Cryptography

26. A number of these provisions draw directly from the CPTPP e-commerce chapter. In some cases, the text is the same. It could be said that the UK-Japan deal creates a pathway for future CPTPP accession, potentially diverging from the EU’s privacy framework.

27. Generally, the new provisions in the UK-Japan deal are welcome, in particular language around cooperation on emerging technologies. But there are areas which we think are worth closer examination. Firstly, the principles on access to and use of the Internet for e-commerce appear to be an innovative approach to encourage net neutrality, but in reality, only tries to prevent non-discrimination between both Parties. There is nothing to stop either Party to adopt more stringent measures that are applied on a non-discriminatory basis.

28. Secondly, the EU’s approach to personal data is that it is a fundamental right and therefore cannot be negotiated under a trade agreement. In some ways we could regard the inclusion of personal information protection in the UK-Japan deal as diverging from the EU’s approach.

29. It is worth examining, therefore, how these provisions may affect the UK’s own data adequacy regime vis-à-vis Japan. The EU data adequacy framework is effectively a carrot and stick mechanism and could be withdrawn if the third party falls short of its required standards. The UK-Japan digital provisions seem to take a looser stance in that it explicitly recognises different legal approaches and only “encourages” the development of mechanisms that promote compatibility. Neither does it specify the standard of regulatory outcome. Hence, we think that this reduces the possibility that a UK data adequacy decision granted to Japan could ever be withdrawn and arguably makes a UK data adequacy decision largely redundant.

30. Thirdly, the measures on open government data are welcome but these are non-binding and seem aspirational at best.

31. Finally, it is worth noting the additional provisions listed under Article 14.59 Enforcement in the digital environment. The UK-Japan deal tries to limit the liability of online service providers for intellectual property rights infringement by the users of the online services or facilities. We note that this clause does not exist in the EU-Japan EPA.

What approach should the UK take towards renewing the WTO’s moratorium on customs duties on electronic transmissions?

32. The UK should support the renewal of the WTO’s moratorium on customs duties being applied to electronic transmissions whilst examining a permanent solution. OECD estimates that the opportunity cost in terms of forgone revenue due to the moratorium is low[9]. Custom duties distort trade and adds unnecessary costs to business which ultimately will be borne by the consumer. Hence, as costs are associated with lower output, this will result in lower productivity and reduced choice.

What objectives should the UK have when negotiating digital and data provisions during its accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)?

33. Given that the CPTPP is a multilateral agreement which 11 countries have signed and seven had ratified it, it will be difficult to introduce any changes to the main text. The UK could, however, use the CPTPP as benchmark and look to deepen trade links at a bilateral level with individual parties.

34. As highlighted earlier, the UK’s negotiating position should be based on the principle of securing the widest possible market access for digital goods and services, deliver real benefit for consumers, and incorporate strong privacy protections. CPTPP already contains provisions on non-localisation, no mandatory disclosure of source codes or algorithms and these should be preserved.

35. Finally, we hope that the UK Government will consult with business before the publication of its negotiating objectives for CPTPP.

Will the global increase in digital trade affect the environment in a positive or negative way? What steps can be taken to mitigate any negative environmental impacts of increased digital trade? 

36. The growing volume of digital transactions and data storage is likely to lead to an increased demand for data centres. Some experts have estimated that the energy consumption of the world’s data centres to triple over the next decade[10]. Some measures being undertaken include switching to renewable power sources and locating data centres in colder climates to reduce the energy required to cool facilities. There is another concern with use of rare earths in the manufacture of electronic devices especially smart devices and server equipment. The mining and processing of rare earths is extremely polluting and toxic. Whilst recycling rare earths is technically challenging, there is a generally agreement that more could be done and there is growing research in this area[11]

What domestic and international law is relevant to the Government’s approach to digital trade?

37. The Government should leverage its leadership in international fora such as the UN, OECD, Council of Europe, APEC, G7, G20, World Bank, IMF and other bodies to ensure that the fragmentation of the global regulatory landscape is mitigated, and that the global digital economy is supported by robust, technology-neutral, principles-based frameworks for privacy protection.

38. UK domestic law relevant to the Government’s approach to digital trade include inter alia:
1. the UK’s General Data Protection Regulation
2. Data Protection Act 2018
3. Privacy & Electronic Communications Regulations 2003
4. Communications Act 2003
5. Electronic Commerce Regulations 2002
6. Audiovisual Media Services Regulations 2020
7. Consumer Rights Act 2015 
8. The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013
9. Finance Act 2020 (Digital Services Tax).

39. Going forward, the Online Harms draft legislation and outcome of the Online Advertising review will likely affect or have some impact on digital trade.

40. Relevant international law include:
1. WTO’s General Agreement on Trade in Services,
2. UNCITRAL Model Law on Electronic Commerce 1996
3. UNCITRAL Model Law on Electronic Signatures 2001
4. United Nations Convention on the Use of Electronic Communications in International Contracts 2005
5. Various Free Trade Agreements

41. Relevant EU law includes inter alia:
1. General Data Protection Regulation 2016/679
2. E-Privacy Directive 2002/58/EC (This will eventually become e-Privacy Regulations)
3. E-Commerce Directive 2000/31/EC
4. Audio-Visual Services Directive 2010/13 and the Revised Audio-Visual Services Directive 2018/1808
5. Better Enforcement and Modernisation of Union Consumer Protection Rules Directive 2019/2161
6. Supply of Digital Content and Digital Services Directive 2019/770

42. The EU has recently introduced draft texts Digital Services Act, Digital Markets Act and a Data Governance Act which are likely to shape the EU’s position to digital trade and data.

43. Multilateral frameworks or guidelines
1. APEC Privacy Framework 2015.
2. OECD Guidelines Governing the Protection of Privacy and Transborder Flows of Personal Data (“Privacy Guidelines”) 2013.

10 February 2021

February 2021