Bits by bytes: digitalisation and the reshaping of trade policy

In late 2025, we published a comprehensive analysis of the UK’s trade policy landscape: UK Trade Policy: An Independent Review. We encourage interested readers to look at the full report for more detail. Each chapter, listed below, can be read independently, with both an executive summary and key recommendations provided.

• Ch.1: UK trade and economic performance
• Ch.2: What do we know about UK trade policy
• Ch.3: Domestic dimensions of UK trade policy
• Ch.4: International dimensions of UK trade policy
• Ch.5: Trade and economic security
• Ch.6: Trade and the digital transformation
• Ch.7: Trade and sustainability
• Ch.8: Trade, employment and gender

In this series of blogs, we summarise each chapter, with this one summarising how economic security objectives intersect with trade policy.

If you are reading this blog on a smartphone or similar device, you are benefiting from trade policy and trade rules in action. The device itself is the product of global value chains underpinned by the cross-border flow of goods, services, intellectual property, and data secured by several decades of liberalisation, underpinned by trade rules. The same holds true for the innovation behind the software enabling you to search for – and summarise – this blog. And your ability to connect to the internet. And to pay for your mobile plan. That you haven’t noticed the role of trade policy and trade rules in all of this is a tribute to the fact that they have worked.

While trade and trade policy have contributed to the rise of digitalisation –by which we mean the centrality of information and communication technologies in economic activity– it is also true that digitalisation has reshaped trade. Around a fifth of global trade consists of digitally-delivered services and digitally-ordered goods. Of the remaining four-fifths, a large part is accounted for by activities, notably services, that are heavily digitalised, because of their dependence on Information and Communication Technology (ICT) inputs.

Digitalisation is particularly relevant to the UK. Firstly, the UK is a highly service-oriented economy, and, in contrast to other major economies, services dominate UK trade. And, as seen in Figure 1.1, the UK has a higher share of digitally-delivered services.

Secondly, the UK scores highly on indices of revealed comparative advantage in major digital-intensive sectors such as financial services, business services, and ICT services. Specialisation in these sectors, and their growth, thus has the potential to deliver substantial growth dividends.

Trade policy in relation to digital sectors is therefore important. It is also increasingly complex. At a domestic level, trade policy intersects with matters of market structure —which give rise to questions regarding competition and how to address market power —as well as questions related to the governance of data flows and privacy.

Countries, including the UK, are moving towards a more activist industrial strategy in ICT sectors, partly to capture more value from emerging technologies such as AI and quantum, and also in response to concerns about economic security. This last point reflects developments at an international level. Namely, that the deep integration that has both driven digitalisation and been driven by it has led to questions about whether the interdependencies that result from such integration create risks. This is particularly the case with technologies and products that are both central to modern economic activity and also have critical strategic applications. In addition to AI and quantum, this includes activities and sectors such as biotechnology, semiconductors, and cybersecurity. Such concerns have led countries to rethink approaches to cooperation on trade and to consider more restrictive policy stances.

The current overarching policy framework for digital sectors in the UK is set by the 2025 Modern Industrial Strategy, which strategy identifies eight priority sectors, one of which is “Digital and Technologies”. This heading includes the following technologies or products: artificial intelligence; engineering biology; advanced connectivity technologies; quantum technologies; semiconductors; and cybersecurity. Of the other priority sectors, a number, such as financial and professional services, are heavily digitalised.

The overall logic followed by the strategy is that the UK has a revealed comparative advantage in digital sectors and that interventions should correct market failures that inhibit the emergence and growth of these sectors. Of such interventions, public funding is a major element. An important part of such funding is to support R&D, and the scale-up and commercialisation of new technologies. The Digital and Technology Plan notes that annual R&D spending is to reach £22.6 billion by 2029/2030.

Besides R&D, another focus of public spending is the provision of soft and hard infrastructure.  The former includes a focus on data, which the Industrial Strategy identifies as a “resource” that underpins innovation and productivity growth, notably through the role that data plays in the development of AI. It accordingly proposed the creation of a National Data Library. On the hard side, the focus is on computing infrastructure. This is not an area in which the UK has in the past demonstrated obvious strengths: in global computing value chains, the UK’s specialisation has generally been in relation to intellectual property and services. The attention given to computing hardware may reflect concerns about economic security and also a sense that economies of scope may, in the future, mean that the development of emerging technologies will take place in locations in which physical infrastructure is sufficiently established.

Another plank of domestic policy geared to correcting market failure relates to regulation. On this front, three elements stand out: approaches to regulating digital markets under the Digital Markets, Competition and Consumers (DMCC) Act 2024; approaches to data regulation; and approaches to AI regulation. The common thread across these different domains is an attempt by the UK to steer a middle course between what it considers to be a prescriptive approach, based on ex-ante regulation, pursued by the EU, and a more laissez-faire approach adopted by the US. It is questionable whether this is tenable in the face of an increasingly fraught relationship between the US and the EU on tech, and in particular a willingness by the US to link broader aspects of trade, including tariffs, to the willingness of its partners to follow a lighter touch approach to regulation and the enforcement of competition rules. In any event, finding the right regulatory settings is a complex undertaking that needs to balance various objectives and social preferences. The recent decision by Open AI to pause investment in Stargate – an AI infrastructure joint venture with several other businesses – citing regulatory uncertainty as one reason, highlights both the need to set the regulatory framework, but also the UK’s exposure to “gaming” by investors.

Digital sectors are a central focus of the UK’s international positioning on trade. This follows from the comparative advantage that the UK enjoys in digital sectors, and the role of digitalisation in services, which dominate UK exports. The prioritisation is evident both in the Trade Strategy and the Free Trade Agreements (FTAs) negotiated by the UK. Most of these have explicit chapters on digital trade, including the FTA with India, which is significant given the latter’s historical reticence to agree to rules on digital trade. In some cases, the UK has gone further, either by negotiating a bespoke agreement (the Digital Economy Agreement, or DEA, in the case of Singapore), and non-binding partnership agreements in the case of Japan and Korea.

Across this range of agreements, some core elements stand out. The first are commitments to preserve free flows of data and proscribing data localisation measures. The UK’s position is that such commitments are both in its and its partners’ interests. This is balanced by rules enabling the protection of personal data. A second is to avoid duties on electronic transmissions. These provisions have taken on more importance since the failure of World Trade Organization members to agree to an extension of the rolling moratorium on e-commerce duties. Both sets of commitments are found in most FTAs, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), but not in the FTA with India, for which prohibitions on data localisation and on duties cross long-held (political) “red-lines”. A third set includes provisions to safeguard business and consumer interests, including online safety, cybersecurity, and prohibitions on the forced disclosure of source code.

The UK has sought to use FTAs to deepen institutional and regulatory cooperation on digital matters, including emerging technologies such as AI. In practice, provisions on such matters are found in FTAs with countries that already share a certain degree of commonality with the UK in terms of institutional arrangements and policy outlooks (Singapore and Australia, notably). Having said that, even if institutional and regulatory commitments are found in preferential agreements, their application is likely to be much broader simply by virtue of the fact that one cannot typically implement a regulatory framework (e.g. a risk-based approach to AI regulation) solely in respect of one partner.

Consequently, one of the matters raised by such deep cooperation is how such commitments square with the domestic regulatory reform process. For example, the UK entered into commitments with Singapore via the DEA on various principles underpinning AI regulation well in advance of setting its domestic framework. Though the DEA commitments seem reasonable and could align with the overall policy framework, this (along with other aspects of digital commitments) raises questions of appropriate policy sequencing, and thus of scrutiny.

A final observation is that the treatment of digital economy matters in the UK-EU Trade and Cooperation Agreement is not as deep as in a number of other FTAs to which the UK is party, notably the CPTPP, and FTAs with Japan, Australia and Singapore. This is striking given the previously high levels of UK-EU integration, and the potential benefits to both of closer integration (e.g. by combining the UK’s deep pools of skills with those of the EU and the scale offered by the EU market).