We are meeting on the subject of innovation in a city and a hotel named for a 13th century Christian saint. It is mostly right that we do so. But not entirely.
Francis of Assisi lived at a time of economic and social upheaval—just, so it appears, as do we.
He is among the most beloved of spiritual figures, known in legend for his great affinity for animals and nature. But, the great British academic Diarmaid MacCulloch also describes Francis as “maddeningly eccentric” and notes his “almost pathological nonconformity.” Whether that describes us and our endeavor here I leave to your judgment.
Born to wealth, Francis utterly rejected it. Here we have a serious departure. We are here in an unapologetic effort to increase wealth.
Francis was a mystic who exhibited the courage of his convictions to a logical extreme, living a life of profound austerity. Here the comparison is mixed. As I will have occasion to note, we are not depending upon mysticism—we know what should be done without any extraordinary visions--but we do need to maintain faith with APEC’s convictions.
Most important, Francis was a great innovator, who founded a major religious order, effectively introducing a new business model, despite himself. This is where the congruence in strongest.
I will advert to Francis only once more. The actual point of my remarks is this: effective innovation policy requires free trade.
The benefits of innovation are obvious. Innovation creates jobs, new companies, and new opportunities for economic growth. Small- and medium-sized businesses can access foreign markets and integrate into global supply chains thanks to innovation. Innovation brings healthcare and education to the farthest reaches of our countries, improving the quality of our lives. Innovation helps us face up to global challenges, like climate change, and lets us realize a vision of a cleaner, greener planet. Innovation is the lifeblood of today’s global economy. A lifeblood that pumps through economies local and global, and companies big and small.
Innovation almost sounds mystical. If we just adjust our consciousness, achieve a higher cosmic outlook, all will be better. But there is nothing mystical about it. Innovation is only possible through concerted and deliberate policies. Policies adapted to a country’s resources and development, its immediate and long-term goals, and global economic opportunities.
Across the Asia-Pacific and around the world, economies are developing innovation strategies and launching innovation ministries or offices. The United States has an innovation agenda of its own. President Obama issued a new innovation strategy this year that is designed to produce rapid, broad-based, and sustained economic growth. Through these strategies and other similar exercises, economies are beginning to look at a wide range of policies to bolster innovation capacity. Policies affecting trade, technology, competition, intellectual property rights, procurement, taxes, education, and research and development all contribute to innovation.
But our innovation policies will not succeed if our thinking is constrained within our nation’s capitals or our nations’ borders. Today’s successful innovations should not be limited to only local or national application. They should transcend boundaries, cross borders, and embrace the world as a whole. They need to be available everywhere. And to experience bigger overseas markets and to foster global trends, bigger sales, and more jobs. If, that is, they are good enough. Because innovation should be tested by competition from foreign markets. Because competition produces better ideas, better products, and better companies.
In U.S. laboratories and board rooms, our innovators know the realities of innovating in an open economy. They know that as much as one-half of U.S. productivity growth derives from openness to foreign technology acquired through trade, licensing, and direct investments. They know that exporters use technology more intensively and have higher rates of innovation than non-exporters. Our innovators know that openness to imports has a direct positive impact on their productivity, and forces them to specialize in what they do best. Exposure to foreign innovative products allows domestic companies to build upon other innovations. As technologies undergo local adaptation new innovations are produced.
Our innovators also know the realities of innovating in closed economies. They know that closed economies stifle their potential. Firms not engaged in trade are less likely to adapt new technologies. In a closed economy, innovators get stuck with a beta model, while their open economy competitors move to a 2.0 or a 4G world. Without competition from abroad, firms spend less on innovation. They do less research. Governments that erect trade barriers to protect industries also have an outsized negative impact on the economy.
We know the facts. We know our economies and our societies need innovation to thrive and grow. We know that innovation policies can foster creativity, and we know that innovation thrives best in an open global economy. In these facts and these realities lie our challenge. How do we shape innovation policy that harnesses and grows the benefits of innovation? How do we design a regulatory and policy environment that promotes innovation and free and open trade and investment? Our challenge is to realize effective, non-discriminatory, and market-driven innovation polices that do not distort global markets.
Meeting this challenge is at the heart of this conference, and meeting this challenge is at the center of the United States’ APEC host year. The United States has approached our host year recognizing that the global economy has evolved in recent years. It has become increasingly obvious in the Asia-Pacific and elsewhere that trade rules are becoming out of synch with the realities of the business environment. Too often, trade policies remain focused on addressing tariff barriers, while non-tariff barriers are even bigger obstacles to businesses success in foreign markets.
Let me offer a current example of potential non-tariff barriers in the information and communication technology sector where I have spent most of my career. Cloud computing is a current innovation in the manner in which computing infrastructure and services are offered. It is by any measure very significant. Like virtually every ICT innovation of the last several decades, it offers enormous opportunities for economic growth and employment. And—a very important point—these opportunities reside principally with the customers of cloud services, not with the producers. In these circumstances, we would expect every economy to welcome cloud services without regard to the national origin of their producers.
But there are complications. One of the big ones is the limitations on trans-border data flows. These limitations are grounded principally on concerns about privacy. Privacy is a value that we seek to preserve in the face of potentially intrusive information technology. It is very important, however, that we not unnecessarily sacrifice the economic advantages inherent in cloud computing in our arrangements to protect personal privacy. Stated more directly, we should not let our quest for effective privacy mechanisms become a barrier to international trade in cloud services.
As it happens, this is an area where APEC has shown significant leadership. The APEC Cross Border Privacy Rules enhance the free flow of information by helping to maintain the individual’s expectation of privacy consistently as his or her data move across national borders.
The innovative approach to privacy adopted by APEC relies on public-private collaboration, with APEC-recognized third party Accountability Agents certifying private companies’ capacity to comply with the APEC Privacy Principles. Participating member economies need to have the legislative, regulatory, or contractual capacity to give effect to the APEC Privacy Framework, but the Cross Border Privacy Rules contain sufficient flexibility to accommodate the wide diversity of enforcement methods and legal authorities among member economies.
The Cross Border Privacy Rules represent a very pragmatic approach to the issue of privacy and cross-border data flows. We look forward to seeing this framework implemented in the months and years ahead.
The Obama Administration views APEC as the ideal forum for facing and resolving the challenges to the realization of effective, non-discriminatory, and market-driven innovation policies that do not distort global markets. APEC has the virtue of including a diverse group of significant and dynamic economies. APEC’s non-binding and voluntary environment provides flexibility that is also a virtue, giving us a real opportunity to consider new trade issues such as those raised by cloud computing and how we should go about solving them. And we are fortunate that APEC has a strong record of success both in achieving results in the Asia Pacific, as well as translating those results to a broader, multilateral context.
Recognizing our challenges and the advantages of APEC’s 21 economy forum, last year our Leaders’ instructed APEC officials to design a trade agenda appropriate for the 21st century. APEC leaders asked us to address the next generation trade and investment issues, key to today’s innovators and tomorrow’s global industries. We were tasked to look beyond tariffs, duties, and quotas, and to examine the phalanx of issues unique to today’s economy.
We began by identifying three next generation trade and investment issues that we will seek to address through specific and substantive outcomes. That includes how to promote effective, non-discriminatory, and market-driven innovation policy. Trade Ministers in selecting this issue recognized that innovation policy and trade is important to consider if we are to advance objectives to strengthen and deepen regional economic integration and promote knowledge-based economies through our trade agendas.
The United States and Japan have put forward a proposal for Leaders’ consideration and agreement. It would advance a series of policies, related to non-discrimination, investment, transparency, standards, intellectual property, information technology, and telecommunications. In our view, adherence to these policies, and promotion of them through our trade agreements, is the best way to answer the question how to promote innovation without distorting global markets.
Given our innovation imperative, the United States is not relying on APEC alone to move our economy forward. We are complementing our APEC work with initiatives designed to promote innovation and free and open trade and investment. We are moving four separate initiatives forward.
First, we are working bilaterally with key economies to ensure that we do not implement policies aimed at providing preferences to local technologies and to articulate foundations for services trade that are based on innovation. We have agreed with the EU on a set of “Information and Communications Technology Services Trade Principles,” covering information flows, use of spectrum, promotion of cross-border trade, and bringing down barriers to cloud computing. We are working with other key economies to join this initiative.
Second, we are also furthering key provisions in our trade agreement negotiations – including the nine country Trans-Pacific Partnership trade negotiations – that will have an impact in this area, including those related to strong IPR protection, technology choice, preventing technology-based discrimination, ensuring the free flow of information and promoting negative lists for services.
Third, we have concluded the Anti-Counterfeiting Trade Agreement (ACTA) as a strategic partnership to advance international support for IPR enforcement with Australia, Canada, the European Union, Japan, Korea, Mexico, Morocco, New Zealand, Singapore and Switzerland.
Finally, we continue to work to advance key related objectives in the Word Trade Organization, including by actively working to extend the customs duties moratorium and laying the groundwork for expanded commitments in ICT services.
In closing, let me advert one last time to St. Francis. He conceived a new way of doing something he thought was important. And his successors, who were more attuned to organizational imperatives, improved upon it. In fact, they are the ones to whom we more properly should ascribe the creation of a new business model. Regardless of where the credit should go, the fact is that they produced one of the most important innovations of the High Middle Ages.
And so, on balance, it is very appropriate that we discuss innovation policy in this city and this hotel. Given the stakes, we need to achieve the same degree of success as Francis and his successors.