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Digital protectionism – the new face of an old problem

Date: September 04, 2017

Category: Opinion piece

Author: Gary Lynch

Gary Lynch, CEO of GS1 UK, looks at why digital protectionism matters and why it could prevent a new era of global trade unless we act now

More people are exporting via the web. Online shopping is set to overtake the high-street in the next four years as Alibaba claims Walmart’s crown as the world’s largest retailer. Trade has gone digital. The Boston Consulting Group calculate the internet economy (including e-commerce and online services) will make up 5.3% of GDP of G20 countries this year. Even the manufacturing of goods is moving online via 3D printing – this technology will eventually allow products to be created by a bank of robots in their country of sale, rather than in factories in the developing world. Theoretically, this could be a huge step forward in free trade. You can’t put import duties or tariffs on emails. At GS1 UK, we’re working with ecommerce platforms to enable the expansion of digital led exporting, by supporting simpler trade and borderless growth. We want to make it easier for small businesses to trade overseas via online markets. If this rise in digital free trade does occur, McKinsey argue we could see global flows of goods, services and capital more than triple from the $26tn in 2012 up to $85tn by 2025 – bringing huge economic benefits to the entire world.

A 21st century challenge

So, the technological future is bright? Well, not quite. Digital protectionism looks set to be the 21st century’s Corn Laws – a defining debate which will shape the world’s trade. Digital protectionism occurs when countries introduce conflicting rules on internet use – limiting trade and data flows across borders. Think China’s firewall censoring the internet – forcing users to search with Baidu rather than Google. This firewall means Chinese businesses are unable to access news sites like Bloomberg or the Economist, as well as western social media sites such as Facebook and Twitter. This restriction of information could hinder business success. By regulating data flows across borders, the World Economic Forum has argued digital protectionism could cause significant economic damage and prevent innovation. This splinternet is growing in importance as online trade increases.

The debate over digital protectionism is only in its infancy, but its fast becoming a source of fierce international disagreement. Since 2012, there have been more than 1,000 cases of jurisdictional problems for businesses trading online, caused by legislative changes brought in by governments and courts.

One of the key areas of dispute has been the spread of data across borders, with many countries now considering restrictions on data flows. Russia’s parliament has passed a law requiring tech firms such as Google to keep Russian user data within the country. Brazil has also considered similar legislation. While there are security benefits to these policies, the economic costs from digital protectionism are substantial. A splintered internet would restrict the internet’s ability to be a source of innovation, and make it much harder for companies to expand their business overseas – hitting SMEs and start-ups particularly hard. Small businesses need to be able to trade with confidence and reach more customers around the world, if they are going to benefit the wider economy.

The spectre of regulations, censorship and hacking

We’re already seeing digital protectionism hinder trade deals. The European Union is in the process of introducing new strict data protection and privacy laws, which would have serious consequences for America’s tech giants. These new regulations, along with the EU’s fierce anti-trust laws and their crack down on tax loopholes, put Silicon Valley on a collision course with Brussels. The EU recently fined Google €2.4bn for abusing its market dominance, although this pales in comparison to the €13bn tax hit they dished out to Apple last year. The disputes between some of American’s largest corporations and the world’s largest trading bloc will undoubtable create a steep hurdle for any future transatlantic trade deal.

It’s not just privacy legislation and censorship which will cause digital trade problems. U.S. Steel has previously accused Chinese state hackers of stealing trade secrets in the manufacture of high-tech steel to benefit Chinese steel companies. U.S. Steel later withdrew their case, but it highlights that outdated intellectual property laws, often written in the 19th century, may not be fit for purpose with threats from cyber-crime and hacking. Creating new legislation, suitable for a digital age will almost certainly become a contentious international debate.

Preventing digital protectionism

Digital protectionism matters to the global economy. The rise of regional content blocking, combined with the need for companies to comply with diverse, often conflicting national regulations means digital protectionism is pushing up the cost of trade. These costs could soon filter from the digital to the real economy. When we surveyed our members, 13% of businesses already think digital protectionism is a threat to global trade which governments need to tackle. Analysts at the European Centre for International Political Economy found that for both China and the EU, introducing restrictions on the free flow of data could cause a 1.1 percentage point hit to the GDP growth rate – to put this in context, the EU’s economy only grew 1.9% in 2016. As awareness increases, and more are affected by these barriers to trade, the proportion of businesses demanding action looks set to increase.

It’s important for the future of Britain’s small businesses these barriers to trade are limited. To prevent an era of digital protectionism, we need global agreement. But creating an inter-governmental organisation would take decades, and any agreement is likely to be unacceptable to the internet registrars, coders and engineers who currently run the internet. Perhaps what is needed is a “multi-stakeholder” model? Something like the model used in the creation of the internet, or closer to home, how GS1 standards were created – with global agreement – to give us what we know and love today, a common language for business and trade used by over 2 million companies across the globe.

Gary Lynch

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