PARIS SCIENCES & LETTRES (PSL)
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The rise of digital protectionism

While nationalist policies are undergoing a revival, globalization should find new paths through the digitization of the economy. Since they are either immaterial or dematerialized, the flows supporting global business escape restrictive practices. But digital globalization also entails digital protectionism. Protectionism is perhaps not as incompatible with the digital world as we think!

8
January 2018
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Executive Summary

While many observers agree that another globalization is coming, it is also another form of protectionism. Its manifestations are diverse. They are primarily about data protection, but one can also mention requirements for locating computer facilities, disclosing computer source codes (computers' operating systems) or discriminating treatment of digital products (music, video, software, e-books) transmitted electronically. It is when technological change offers opportunities for the redistribution of economic power that the temptation for protectionism is strongest. One of the solutions to this digital protectionism could come from new technological advances. The fact that an increasing number of players need digital rules that respect the balance between innovation, security and regulation, while ensuring user confidence, could also be a powerful bulwark. Translated with www.DeepL.com/Translator

When commercial exchanges result in services, data flows and dematerialized goods, they bypass physical boundaries and traditional barriers to trade such as tariffs, standards or technical regulations.

Today these intangible flows are growing exponentially.

The transformation of globalization by digital technology

Trade in services has increased by 5% in Q2 2017 (compared to Q2 2016), according to the WTO. With the digitization and transformation of their value chain, companies have already largely shifted their activities from products to services. They have strengthened their service offering with different business models. And the obligations concerning local content or implementation in exchange for access to the foreign market encourages them to do so.

Similarly, data flows have increased tenfold in a decade, according to McKinsey Global. As a powerful source of value creation, data will experience strong growth in cross-border trade. Startups, which depend on models based on connectivity, should better withstand these protectionist barriers. As for digital platforms, their levers of development (network multiplier effect, power of algorithms, ability to grow fast and status of first entrant) have protected them from protectionist practices.

Lastly, this new globalization also entails a globalization of collective intelligence: knowledge and know-how will be at the heart of exchange channels of the future. As pointed out by Gilles Babinet, open space or artificial intelligence platforms integrate knowledge contributions from countries such as China and Iran, despite their being closed to the Western Internet.

Digital technology allows to bypass local regulations in order to penetrate foreign markets. But if new business models are more resilient to trade barriers, it is because they access consumers directly and partner with them thanks to new payment models (sales based on use or transactions).

In the digital age, a firm’s resilience will greatly depend on its position as a global leader. Digital platforms, both American (GAFAM) or Chinese (BATX), have well understood this simple fact. Amazon and Alibaba, both e-commerce players, are racing to become the world’s leading distributor within the next decade. As for Baidu, it seeks to cover 99% of the world’s population with its geolocation maps: over 100 million cars in the world are already using them. However, new globalization also entails new protectionism.

Protectionism 2.0

While many observers agree that another globalization is under way, it is equally true to say that protectionism is embracing new forms. This shows in different ways: in the first place, in terms of data protection.

Several domestic regulations around the world are working to regulate the transfer of data abroad. According to Nigel Cory, in May 2017, 34 countries had adopted legislation to protect the international transfer of data: personal data (including health) and public data but also tax, accounting and financial data. However, such restrictions could reduce the GDP of EU or BRIC countries by 0.7% to 1.7%. While the protection of personal data is legitimate, the borderline between protection and protectionism is tenuous when it comes to other types of data (commercial and industrial).

In addition, data flows obey more or less strict regimes. Martina F. Ferracane has established a simple and enlightening taxonomy, ranging from the absence of restrictions on cross-border flows to the total ban on transfer, including the obligation to store or process data locally (via cloud servers, Internet servers and data centers).

Digital protectionism is not just about data protection.

But digital protectionism is not just about data protection. It is also about localization requirements of computer installations, disclosure of computer source codes (computer operating systems) or the discriminatory treatment of digital products (music, video, software, e-books) transmitted electronically. These questions also join the issue of net neutrality recently questioned by US lawmakers.

Finally, commercial flows of goods can be impacted by restrictions on data from the moment products include services, software and other connectivity applications (embedded goods). In any case, some practices, which often prove difficult to distinguish from protectionism, exclude intermediate sized-companies from foreign markets or introduce additional costs (rise in prices of cloud services).

Without even mentioning the legislation adopted in the name of cybersecurity, laws prohibiting the access to the Internet and social networks, such as the Great Firewall of China, or designed to severely restrict the use of anti-censorship software or VPNs (Virtual Private Network), the digital age hardly resembles the idea of freedom that comes to mind, as Mark Leonard reminds us.

A digital agenda on e-commerce

The best defense against this new protectionism could come from technological advances. The fact that a growing number of actors need digital rules that respect the balance between innovation, security and regulation, while ensuring the trust of users, could stand as a powerful bulwark. We welcome the agreement reached by European countries to legislate on any unjustified geo-blocking, allowing European consumers to buy online in another country without being geolocated. In addition, several countries support, within the framework of the WTO, the principle of a digital agenda on e-commerce, the lowering of barriers in order to stimulate trade. The challenge is to regulate, protect and promote without being protectionist.

At the end of the day, regardless of the form it takes – whether new or old – protectionism does not change its aims:

1/ Support the emergence of national operators by giving them time to develop competitive products or services: when controlling Internet users for political reasons, China also protects its territory for Alibaba and JD.com, national champions of e-commerce.

 2/ Create high standards that other countries will be forced to respect if they wish to access the market: this is what we are currently witnessing with ambitious data management and data security measures that also aim at setting the digital rules of tomorrow.

The temptation of protectionism is strongest when technological evolution offers opportunities for the redistribution of economic power. Irrespective of the country in which it is implemented, protectionism is used to enter the digital age and reconfigure productive systems in order to join, or remain among, the leading industrial powers.

Corinne Vadcar
Senior Trade Analyst, Institut Friedland