Increasing Digital Protectionism Harms US Companies in China

July 11, 2019 Updated: July 11, 2019

WASHINGTON—There is a growing trend toward digital protectionism in the world and increasing barriers to free flow of data, particularly in China, that unfairly disadvantage U.S. firms operating overseas.

Over the past few years, countries such as China have been enacting a growing range of barriers to cross-border data flows as part of a broader strategy to control the flow of information. Such policies, however, are a dangerous and growing threat to the global economy, digital trade, and innovation, according to Nigel Cory, associate director at the Information Technology and Innovation Foundation, a Washington-based think tank.

Cory said that current World Trade Organization rules on e-commerce have become outdated and inadequate, as most of them were written in the mid-1990s when the internet was still in its infancy.

Because of that loophole, countries have developed different approaches to the issue of cross-border data flows and their roles in supporting digital trade.

China is the world leader in digital protectionism. The Chinese regime enforces “data localization,” which means companies can store personal, financial, health, mapping, and a wide range of other data only within China.

“What that means is that firms that deal with that type of data can’t transfer the data outside of China,” Cory explained.

That forces U.S. technology firms operating in China to either set up their own data centers or pay for local cloud storage services within the country.

“It adds an additional cost and an additional restriction on U.S. firms trying to operate in China,” Cory said.

There is another disadvantage for U.S. technology firms. Most companies rely on central IT services to run, for example, their software, data analytics platform, research programs, and cybersecurity protective services.

To operate in China, however, foreign companies need to split up their data centers, which increases costs and creates potential security risks, according to Cory.

“There’s a complete lack of reciprocity, in that China treats U.S. firms very differently from how the United States treats Chinese firms,” he said, adding that Chinese have been free to operate as they wished inside the U.S. market.

China has refused to relax its tight restrictions on data flows as the regime claims they are central to its national security and national sovereignty.

“This is one of the issues that has kept Google out of China,” Cory said.

“China’s approach to cross-border data flows is a major reason why Amazon is so severely restricted in how they can operate in China,” he added.

G-20 Summit

Japan, as the host of this year’s G-20 summit, tried to push world leaders to create a set of international rules enabling the free movement of data across borders.

Prime Minister Shinzo Abe floated the concept of “data free flow with trust” first in a speech at the World Economic Forum’s annual meeting in Davos, Switzerland, in January.

“I would like Osaka G-20 to be long remembered as the summit that started worldwide data governance,” Abe said at the time.

However, the G-20, which was held in Osaka on June 28–29, fell short of achieving any progress in promoting an international framework for data.

That’s because more countries are following China’s model of digital protectionism, according to Cory. India, Russia, Indonesia, and Vietnam are in favor of data localization.

“There are huge issues here,” he said.

In a speech during a special session on the digital economy at the G-20, President Donald Trump told world leaders, “The United States opposes data localization and policies, which have been used to restrict digital trade flows and violate privacy and intellectual property protections.”

“American success in the digital economy is based on the free flow of data, strong privacy and intellectual property protection, access to capital, and innovation,” he said.

Data flows are increasingly critical to global trade as they affect all sectors of the economy, including services, agriculture, manufacturing, and technology. They enable companies to connect customers and markets fast and at low costs.

The United States, home of tech giants such as Google, Apple, Facebook, and Amazon, has championed digital free trade and the free flow of data.

Follow Emel on Twitter: @mlakan
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