Key Takeaways

Contents

Key Takeaways 1

Introduction. 2

Development, Technology, and Trade Realism: Ensuring Alignment 3

The U.S. International Development Finance Corporation: Mission, Criteria, and Funding. 4

Geopolitical Competition, Free Riders, and IP and Digital Trade Barriers 6

Foreign and Tech Policy Realism: Connecting Tech and Trade Barriers With Development Financing 9

Recommendations 10

Conclusion. 11

Appendix 12

Endnotes 14

Introduction

Development financing is an important tool not just to promote U.S. foreign policy goals, but also to support U.S. exports and competitiveness, including competing with China. For decades, the United States held the view that it could afford to provide aid to nations around the world even if their policies harmed U.S. companies and the U.S. economy. After all, keeping nations out of the Soviet orbit trumped U.S. competitiveness concerns, especially since the United States was unrivalled in its techno-economic dominance. But those days are gone, and U.S. development policy needs to reflect that times have changed. The United States is now a vastly weaker techno-economic power than it was during the Cold War, meaning that the longstanding practice of putting foreign policy interests ahead of economic and trade policy interests now is untenable.[1] This is particularly true as many nations around the world, not just China, use a host of systemically unfair economic and trade policies to gain advantage over the United States and its firms.

It is time for U.S. development policy to reflect this new reality and be structured to no longer blithely reward nations that are acting against U.S. techno-economic interests. Nowhere is this more necessary than in the operations of the Development Finance Corporation (DFC), which provides financing to support U.S. business projects in foreign countries.

The problem is that, as the DFC currently operates, recipient countries can have their cake and eat it too—they can benefit from DFC financing while enacting trade barriers that put U.S. firms and products at a competitive disadvantage, including via weak intellectual property (IP) protection and barriers to digital trade. This is despite the fact that the DFC is ostensibly supposed to give preference to projects in countries that comply with international trade obligations. To address this problem, Congress should explicitly require that the DFC stop providing financing to nations that enact systemically unfair trade and IP policies that harm U.S. interests.

In 2018, Congress created the DFC by merging two foreign aid agencies to improve U.S. economic statecraft in offering an alternative to Chinese development, especially China’s “Belt and Road” initiative.[2] DFC chief executive officer Scott Nathan recently stated that “good development is good foreign policy” and “that’s in our [the United States’] national interest.”[3] Good development can indeed be good foreign policy—but not if it rewards nations that are explicitly and unapologetically acting against U.S. economic interests.

Fully aligning U.S. development, trade, and technology interests and tools is important now that the United States is no longer the world’s techno-economic hegemon. Many of the countries that will be impacted by fully aligning DFC lending criteria with U.S. trade and technology policies are not major markets, the cumulative effect of tightening lending criteria will add up to help U.S. firms and their workers compete globally on fair and equal terms.

This report details the importance of aligning development, technology, and trade interests as part of a shift in U.S. foreign policy toward greater techno-economic realism.[4] It then analyzes the DFC and its operations and identifies the types of IP and digital trade barriers that U.S. firms face in DFC recipient countries. Next, the report details the DFC financing that goes to countries that have enacted IP and digital trade barriers. Finally, it concludes with recommendations for how Congress should require the DFC to add trade barriers to its list of evaluation criteria to ensure beneficiaries are providing fair and open access to U.S. firms as part of their engagement with the DFC.

A summary of the recommendations:

▪ The administration and Congress should create mandatory criteria to assess trade and technology barriers in potential partner countries, incorporating reporting and advice from the departments of State, Commerce, and USTR, including the Special 301 Report on barriers to IP and the National Trade Estimate on trade barriers.

▪ Congress should use the DFC’s reauthorization process before the end of fiscal year 2025 to make the necessary changes to ensure the DFC is fully aligned with U.S. techno-economic interests.

Development, Technology, and Trade Realism: Ensuring Alignment

Congress created the DFC to better compete with China over investment, infrastructure, and private-sector engagement in developing nations. Given this, the DFC may not suffer from the same ideological anchors that affect other U.S. development agencies. Many have idealized views of development policy as an altruistic tool and of development assistance as an end in and of itself. However, the DFC still falls short of where it needs to be in terms of alignment with U.S. trade, technology, and geostrategic interests.

The DFC and other U.S.-supported development efforts—including multilateral and regional development banks, USAID, and the Millenium Challenge Corporation—still largely ignore unfair trade practices that harm U.S. commercial interests.

Several factors contribute to this lack of alignment. For one thing, U.S.-supported development organizations and officials still see the United States as the undisputed techno-economic leader, so they undervalue the harm that other countries’ unfair trade practices do to the U.S. economy. Moreover, idealists want development financing to be altruistic and don’t want it to be so closely tied to U.S. commercial interests. To oversimplify this process, the State Department drives U.S. aid policy, not the Commerce Department, making the aid subservient to foreign policy goals, not U.S. commercial and competitiveness goals. With global competition for advanced and strategically important industries intensifying—especially competition between the United States and China—the United States can no longer afford to maintain an attitude of noblesse oblige. Time to put U.S. interests first, or at least give them equal weight.

The U.S. International Development Finance Corporation: Mission, Criteria, and Funding

The DFC is the U.S. government’s development finance institution that uses financial tools to promote private investment in less-developed countries, including in the energy, healthcare, critical infrastructure, and technology sectors. In FY 2023, the DFC made $9.3 billion in new investment commitments (up from $6.8 billion in FY 2021), resulting in a total projected portfolio of over $40 billion (up from $32.8 billion in FY 2021). FY 2023 commitments spanned 132 new projects in mainly low-income and lower-middle-income countries.[5]

The DFC’s cooperation with America’s private sector is not incidental, but rather central to its operations. Support provided by the DFC must be in addition to private sector capital and resources, which otherwise wouldn’t be mobilized without DFC support. The DFC seeks to support partners’ economic development, U.S. economic interests, and U.S. foreign policy aims.[6] The DFC provides the developing world with financially sound alternatives to China’s, providing support for a diverse range of countries, sectors, and initiatives, including for energy infrastructure, food security, transportation, health, and climate change. For example, as it relates to digital technology and connectivity, the DFC provided a $300 million direct loan to Africa Data Centres to support the development, expansion, and operation of seven data centers in South Africa, Kenya, and other countries. It also provided financing to help Africell expand affordable mobile voice and data services in the Gambia, Sierra Leone, Uganda, and the Democratic Republic of the Congo.[7]

In 2019, the DFC assumed the functions of and replaced the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority. The DFC’s authorities exceed those of its predecessors, including a higher lending cap ($60 billion, compared with OPIC’s $29 billion cap) and a longer authorization (seven years, while OPIC’s was often a year).

The DFC is authorized to provide:

▪ direct loans and loan guarantees of up to $1 billion for terms between 5 and 25 years, subject to federal credit law and other requirements, for projects and funds;

▪ political risk insurance coverage of up to $1 billion against losses due to political risks (e.g., currency inconvertibility, expropriation, and political violence) and reinsurance to increase underwriting capacity;

▪ equity investment in specific projects or investment funds, with exposure limited to no more than 30 percent per project and 35 percent of overall DFC exposure; and

▪ feasibility studies and technical assistance to support project identification and preparation, with the DFC aiming to require cost-sharing by those receiving funds.

The DFC’s mission is to advance American foreign policy and commercial competitiveness. It must prioritize support for low- and lower-middle-income economies; however, it can support activities in upper-middle-income economies if it supports U.S. economic or foreign policy interests. The DFC must give preference to projects involving U.S. persons as project sponsors or participants, as well as projects in countries complying with international trade obligations and embracing private enterprise.[8] Yet, this trade criteria is not as clear, detailed, thorough, and mandatory as other criteria.

Figure 1: DFC approved financing of up to $300 million to Africa Data Centres[9]

At the moment, the DFC projects must use environmental and social impact, worker rights, and human rights, among other criteria. For example, the DFC ensures its assessment of worker rights is consistent with other U.S. government agencies and programs. It accepts the determinations made by the president for the purpose of the GSP program. Through USTR, the Trade Policy Staff Committee (TPSC), chaired by USTR and made up of representatives from the U.S. Department of State, U.S. Department of Labor, and other U.S. government agencies, advises the president as to which countries should be designated as GSP beneficiaries.[10] Likewise, should the president determine that a country’s GSP beneficiary status be withdrawn, suspended, or limited, the DFC implements the determination with respect to its own programs. If a country’s GSP beneficiary status is withdrawn for failure to meet the statutory worker rights standard, the country becomes ineligible for DFC programs.[11]

Petitions can be submitted to the DFC at its annual public hearing to reexamine whether the status of any such country should be changed on worker rights grounds. If the DFC makes the determination that a petition for review of a country’s status merits a formal review, it consults with, at a minimum, the U.S. Department of State, U.S. Department of Labor, and USTR to carry out a review. The DFC may use multiple instruments to inform its country practices review, including the U.S. Department of State’s Annual Country Reports on Human Rights Practices; reports, observations, and recommendations of the International Labor Organization independent consultants’ country practice reviews; information received through the DFC’s public hearings; and consultations with labor organizations. But these criteria are about helping the foreign nations, not about helping U.S. commerce and competitiveness. They are still grounded in the old, Soviet-era U.S. development model.

The DFC’s financing services are in demand, so adding a criterion for trade barriers would not substantially alter the economic opportunities it provides U.S. firms. For example, the DFC’s 2023 funding commitments nearly doubled what it provided in 2020.[12] The DFC’s growing operations have come even as it applies its existing human rights, environmental, and worker rights criteria. If adding a new trade barrier criterion cut off projects to the worst offending countries, DFC funding could be deployed elsewhere to support nations that are playing by the rules.

The main reason to add criteria for IP and digital trade barriers is to give the DFC and other U.S. government agencies a new tool to apply pressure to get recipient countries to make policy changes. It’s a matter of putting recipient countries on notice that, should they persist with these anti-U.S. policies, their ability to benefit from the DFC and other preferential development and trade programs will be limited. The goal would be for the U.S. government to use DFC funding and other tools to target the worst-of-the-worst offenders with the goal of reducing the number of recipient countries that are listed in respective U.S. government reporting on technology, trade, human rights, environmental, and labor rights issues.

Geopolitical Competition, Free Riders, and IP and Digital Trade Barriers

IP and digital policies are critical factors in trade and innovation for advanced technology sectors. Just as global trade has gone digital and high tech, so has protectionism. Countries enact discriminatory behind-the-border regulations to disadvantage U.S. firms and their high-tech products in favor of local ones. Weak IP rules and digital trade barriers have existed in many DFC recipient countries for years. However, they’ve become increasingly important given the growing competition between U.S. and Chinese firms in advanced technology sectors.

Firms in innovation-based industries depend on intangible capital, with much of it embodied as IP. Strong IP rights spur innovative activity by increasing the appropriability of the returns to innovation, thereby enabling innovators to capture more of the benefits of their own innovative activity. By raising the private rate of return closer to the social rate of return, IP addresses the knowledge-asset incentive problem, allowing inventors to realize economic gains from their inventions, thereby catalyzing economic growth. In addition, as they capture a larger portion of the benefits of their innovative activity, innovators obtain the resources to pursue the next generation of innovative activities. While addressing IP issues in individual markets is great in and of itself, it would also send a broader signal from the United States that it will continue pushing for strong IP rules, in part, to support its advanced technology sectors. In addition to the trade implications, stronger IP laws are also a precondition for domestic economic growth and productivity.[13]

Policies that weaken IP and are a barrier to digital trade impact the ability of U.S. firms to enter and compete in foreign markets. Large markets enable firms to sell more. This matters because advanced technology sectors usually have high fixed costs for design and development, but relatively low marginal costs for production. In other words, the cost of the first product is extremely high, while subsequent items are much less costly. In these industries, larger markets better enable firms to amortize those fixed costs over more sales, so unit costs can be lower and revenues for reinvestment in innovation higher. Firms in most advanced technology industries therefore need to compete globally. If they can sell in 20 countries rather than 5—thereby expanding their sales by a factor of 4—then their costs increase disproportionally less. In addition, as they capture a larger portion of the benefits of their innovative activity, innovators obtain the resources to pursue the next generation of innovative activities. Each dollar of exports matters to the United States in its competition with China.

Figure 2: A DFC investment in Chiratae Ventures International Fund IV LLC supports further investments in multiple technology companies, including Agrostar, which offers an agri-tech platform for farmers[14]

The United States needs to do better to connect its development and aid programs with trade and technology barriers, as these barriers are spreading to more countries and sectors. This is happening as the WTO and its rules continue to slide toward irrelevance.

With regard to problematic IP policies, DFC recipient countries such as India and Indonesia have been on USTR’s “priority watch list” for over a decade, with India’s patent policies being particularly problematic. The threat of patent revocations, the lack of presumption of patent validity, and the narrow patentability criteria under the Indian Patents Act impact U.S. firms across different sectors.[15] In Indonesia, there continues to be widespread piracy and counterfeiting, and concerns regarding IP enforcement remain, including lack of enforcement against counterfeit goods, the lack of deterrent-level penalties for IP infringement in physical markets and online, and ineffective border enforcement. Indonesia also requires forced technology transfers for pharmaceuticals and other sectors, in addition to its restrictions related to motion pictures. For example, although Indonesia took steps in 2016 to allow 100 percent foreign direct investment in the production of films and sound recordings, as well as in film distribution and exhibition, the country has issued implementing regulations to the 2009 Film Law that, if enforced, would further restrict foreign participation in this sector.[16] These broad and varied problematic IP policies are symptomatic of policies found in other DFC recipient countries.

Digital protectionism—using forced local storage requirements; discriminatory licensing, product review, and certification processes; discriminatory and unwarranted digital service taxes; digital local content requirements; and censorship as a non-tariff barrier—is spreading, including in DFC recipient countries. For example, the number of forced local data storage requirements—a concept known as data localization—more than doubled recently, from 67 in 2017 to over 144 in 2021. DFC recipients Turkey (5 percent of DFC total funding), South Africa (3.2 percent), Indonesia (0.5 percent), Pakistan (1.5 percent), and India (11.2 percent) have all enacted major digital trade barriers that impact U.S. firms, technology, and trade.[17]

Many of these same countries not only benefit from DFC funding while enacting barriers that harm U.S. firms and trade, but also have benefited from the United States’ Generalized System of Preferences (GSP) tariff-free market entry program.[18] For example, in 2019, nearly $3 billion of Indonesia’s exports benefited from GSP duty-free access, representing 13.6 percent of the country’s total exports. Indonesia has enacted and is considering further, major digital restrictions, including a digital services tax and digital duties on imports of digital content. Similarly, in 2019, $346 million of Pakistan’s exports benefited from GSP, representing nearly 9 percent of its total exports to the United States. This despite these barriers contravening the GSP’s requirement that they provide reasonable and fair market access to U.S. firms and their goods and services.[19]

Digital protectionism has already cost the United States, but it’ll cost America even more if DFC and other developing recipient countries are allowed to get away with enacting barriers to trade that impact U.S. firms and their products. U.S. digital exports to developing countries such as Brazil, Kenya, Indonesia, Nigeria, the Philippines, Thailand, South Africa, and elsewhere will only grow with the digitalization of the global economy. However, this future trade potential will be cut off if these countries are allowed to enact barriers to U.S. digital trade. For example, U.S. digital trade exports to Indonesia were worth $222 million in 2021, nearly a 90 percent increase since 2010. In 5 or 10 years, this figure will likely be some multiple of this—if U.S. firms and products are treated fairly. The DFC and other aid, development, and trade programs provide the United States with considerable leverage. It’s time for the United States to use it.

Foreign and Tech Policy Realism: Connecting Tech and Trade Barriers With Development Financing

There are 32 DFC recipient countries that are either listed in USTR’s 2023 Special 301 review of the global state of IP rights protection and enforcement, its 2023 National Trade Estimate (NTE) report, or both due to references to their use of data localization policies (as a proxy for digital protectionism).[20] The appendix contains the full list. The Special 301 report is congressionally mandated and reflects the administration’s resolve to encourage and maintain enabling environments for innovation, including effective IP protection and enforcement, in markets worldwide, which benefit not only U.S. exporters but also domestic IP-intensive industries. USTR has misguidedly changed its usual analysis and listing of digital trade in its 2024 NTE report.[21] Therefore, this report uses the 2023 NTE as a proxy for a more accurate assessment of digital trade barriers in U.S. trade partners. The Information Technology and Innovation Foundation’s (ITIF’s) report “How Barriers to Cross-Border Data Flows Are Spreading Globally, What They Cost, and How to Address Them” complements this listing given its own comprehensive listing of data localization policies around the world.[22]

DFC recipient countries listed in the Special 301 report represented just over half of the DFC’s total financing in 2022. This equaled 415 contracts worth $14.4 billion in 2022. DFC countries listed in the NTE report represented 43 percent of DFC financing in 2022. The largest offenders were India (accounting for 11.4 percent of total DFC funding), Brazil (5.5 percent), Turkey (3.7 percent), Mexico (4.4 percent), Kenya (3 percent), South Africa (2.7 percent), Nigeria (2.4 percent), and Guatemala (2.1 percent). (See table 1.)

Table 1: Top 12 countries by share of DFC funding

Recommendations

The DFC plays a useful role in competing with Chinese development financing. But it needs to do so in ways that do not reward nations with policies that harm American techno-economic interests. Congress should use the DFC’s congressional reauthorization in 2025 to press it and, regardless of which administration is in office, make reforms to its mission and operations to ensure the DFC is fully aligned with U.S. commercial interests. Congress has considered other reforms to the DFC, including improving how the DFC makes equity investments and expanding the group of countries it can work with.[23] As part of this, Congress and the administration should enact the following recommendations.

Make Trade and Technology Barriers Explicit DFC Program Criteria

DFC projects are supposed to support U.S. foreign policy goals using criteria for environmental, worker rights, human rights, and other related interests. However, Congress and the administration should create an explicit criterion for the DFC to assess a country’s trade and technology policies and the extent to which they unfairly and negatively impact U.S. interests. Techno-economic criteria should be added to ensure DFC projects are fully aligned with U.S. interests. Just as the DFC follows GSP for assessments of a country’s human and worker rights performance, so too should it work with USTR and the Commerce Department in deciding whether countries are abiding by IP and digital trade criteria. It should refer to USTR’s Special 301 report and National Trade Estimate Report for details about each country’s performance on IP and digital trade restrictions.

Congress Should Act and Not Depend on the Administration

The Biden administration’s response to digital protectionism and weak IP has been lackluster, to say the least. USTR Katherine Tai has not only done little to stop the spread of digital protectionism, but by calling for “policy space” in withdrawing from efforts to negotiate new digital trade rules at the WTO and within the Indo-Pacific Economic Framework, she has made it easier for China and others to enact barriers to digital and high-tech trade. None of Tai’s justifications for reversing the United States’ long-standing leadership on Internet governance and digital trade stand up to scrutiny.[24] And the administration has pushed for weaker IP rules in a number of areas, including pharmaceuticals.

Congress should not leave it to any administration to make the necessary changes to ensure the DFC is fully aligned with U.S. interests and goals vis-à-vis geopolitical and tech competition with China. It should use legislation to change the DFC’s mission and create explicit criteria for IP and digital trade barriers.

Conclusion

The United States needs to more clearly and directly tie development programs to trade and technology barriers and U.S. techno-economic interests. U.S. aid recipients shouldn’t be able to freeload and benefit from multiple U.S. programs (and U.S.-supported institutions like the World Bank) and still be allowed to enact systematic barriers to target U.S. firms and jobs. Former USTR Robert Lighthizer demonstrated how useful it is to use unilateral U.S. trade and aid programs to affect change in major emerging economies, making digital trade barriers a central feature of GSP reviews of India, Indonesia, Thailand, and Kazakhstan, leading to concrete changes in some of these countries.

It’s time Congress and the Biden administration do the same, starting with the DFC by adding explicit criteria for trade and technology barriers, including weak IP regimes and digital trade barriers. Taken together, the DFC and other USAID and development financing give the United States considerable leverage to encourage countries to provide fair and open market access to U.S. firms, given how they benefit from U.S. engagement and support. These reforms would ensure that U.S. firms are able to gain greater global market share, something that is critical to winning the competition with China over advanced technologies and improving market access around the world.

Appendix

Table 2: DFC funding recipients listed in USTR’s 2023 Special 301 report, National Trade Estimate, or both due to their use of data localization policies

Endnotes