India-EU trade mustn’t stumble on digital sovereignty

Last week, the European Union (EU) witnessed a surge in digital policy activity that could impact trade ties with India. On 17 February, the Digital Services Act (DSA), which mandates increased safety compliance for online platforms, took effect. Also, on 21 February, the EU brought out a white-paper on ‘How to master Europe’s digital infrastructure needs’ advocating economic protection for its communication industry. Meanwhile, digital trade is a key part of the India-EU Free Trade Agreement (FTA), which saw its seventh round of negotiations conclude last week.

The EU’s policy agenda centres on the concept of ‘digital sovereignty,’ or the desire to enforce its legal authority in cyberspace. This push for more regulatory levers, however, seems at odds with efforts to accelerate digital trade. For instance, the DSA requires online businesses that target EU customers to adhere to new obligations such as transparency mandates linked to algorithmic decision-making, and requires them to naviUS gate a complex maze between national regulators and the European Commission. Many Indian internet companies will struggle to comply and may simply walk away from EU markets unless they have significant business interests at stake.

Similarly, the white-paper on EU communication infrastructure advocates more regulation of cloud and other digital services on the premise that exercising sovereignty through heavy-handed licensing is the only way for the EU to compete with foreign players. This approach echoes its ‘2030 Digital Compass’ strategy which aims to reduce dependence on US and Chinese tech through regulation. Despite this regulatory zeal, only four European firms rank among the top 25 digital companies globally.

The EU’s attempt to diversify trade relations via FTAs isn’t easy to reconcile with its domestic rule-making. It seeks market access to India on one hand, and wants to raise the EU’s entry barriers on the other. FTAs can sometimes help resolve such contradictions. For instance, it can enable the free flow of data between the two jurisdictions, as the UK-India FTA is likely to do, despite differences in data protection standards. However, the EU’s hyper-vigilant regulatory and judicial oversight, designed to European citizens and protect the common market, turns an ambitious agreement elusive for two reasons.

First, EU courts tend to limit the types of exceptions to domestic rules that FTAs can enable because of an institutional preoccupation with legal sovereignty. This was evident in the annulment of the US-EU ‘Privacy Shield’ agreement by the European Court of Justice in 2015 on concerns about American surveillance laws. The Privacy Shield was meant to help bridge the gap in standards for data protection between the US and EU. Expansive legislation like the DSA, which seeks to further extend the EU’s digital sovereignty over digital businesses, will likely trigger more judicial intervention in cyberspace, thus creating uncertainty for trade and investment.

Second, the EU has catalysed a global race to regulate digital markets using an ex-ante approach. Indian policymakers are already contemplating similar ways to regulate competition in digital markets via legislation akin to the EU’s Digital Markets Act. But attempts to pre-empt harms in fast-evolving and heterogenous digital markets will inevitably complicate trade negotiations because states will forecast the future differently. As it is, India has historically maintained a cautious stance in negotiating international agreements involving services.

So what is the equilibrium here? The fact that both the EU and India see digital technology as a driver of economic progress could help find common ground. Indian software and services can undergird a resilient ‘Industry 4.0’ in Europe. A capable India can help drive a digital transformation in Europe, which large industrial economies like Germany and France sorely need. Also, the European consensus on pre-emptive regulation of digital markets is beginning to fray, as recently seen in Germany and France delaying an EU law to govern artificial intelligence (AI) over consecure cerns of over-regulation stifling innovation.

Therefore, India must boldly advance the interests of its growing digital economy without obsessing about regulatory space. To do so, it should reconsider its reflexive urge to govern digital markets based on a European template of ex-ante regulation. There are plenty of opportunities to simultaneously trim regulatory fat. For instance, a new empirical study by Esya Centre, a thinktank, points towards an expectation among firms that the implementation of India’s new data protection law may cause “considerable operational and technical burdens.” Forthcoming data protection rules can easily help rationalize operational aspects.

Given these considerations, India should aim to inspire the EU’s digital policymaking by designing more innovation-friendly regulations and pushing Europe to liberalize its digital markets. This will let Indian products and services thrive in Europe. India must also abandon its historical defensive posture in trade negotiations and begin proactive advocacy on behalf of its digital startups. The EU, on its part, must find ways to collaborate with India to reduce its dependence on Chinese hardware and American software. This requires a flexible policy strategy that will help the EU stay relevant in the digital space.