There is a trade war on the horizon and it has nothing to with Donald Trump’s steel and aluminium tariffs. The White House is now considering punitive measures against China for its alleged theft of intellectual property (IP). This comes on the heels of an investigation by the US trade representative’s office. It raises an important question, one that has been debated in India as well in recent years: Does digital protectionism work?
The success of Japan’s automakers and South Korea:
- The success of Japan’s automakers and South Korea’s electronics chaebolnotwithstanding—both protected by their governments for many years—the macroeconomic consensus on protectionism in conventional industries is well established.
- It slows innovation and productivity growth, leads to inefficient capital allocation, limits consumers’ options and promotes crony capitalism, among its many sins. But the digital sector is a different kind of beast.
- Its linkages and value flows are unique.
China protectionist regime:
- In 2000, China’s ministry of public security laid the foundations of this protectionist regime with the Golden Shield Project for blocking politically sensitive information.
- They have also created the domestic digital infrastructure for the “little dragons”—the next generation of Chinese tech firms. The cumulative effect is that China now has a fair shot at taking the lead in critical future technologies, from Artificial Intelligence to electric vehicles.
It has evolved considerably since then: web censorship;
- keeping companies like Facebook and Twitter out of the country entirely;
- forcing foreign firms to form joint ventures with Chinese partners and transfer IP; and
- government support for Chinese firms making strategic acquisitions abroad.
The debate in India:
- The debate in India has pointed to why at least some aspects of such protectionism might seem attractive. Network effects raise the stakes for competition in the tech space.
- This has led international companies like Amazon and Uber to engage in what rivals have pejoratively dubbed capital dumping.
- Then there are issues of user privacy and taxation commensurate with value added in India.
- Similar debates are taking place elsewhere, particularly in the European Union.
The protectionist trap:
- India is not China.
- China’s unique political and economic models make its policies inimitable.
- Its economic heft has incentivised foreign companies to grin and bear it.
- The digital economy has yet to mature.
- The medium- to long-term effects of protectionist policies on innovation and growth may far outstrip any short-term benefits.
- For one, data is increasingly critical in a host of conventional industries, from manufacturing to drilling.
- Onerous data regulations and compliance burdens could cause damage there.
- Even in the case of China, analysts at the European Centre for International Political Economy have calculated a 1.1 percentage point hit to gross domestic product.
- Multiple studies have shown the importance of innovation clusters. Foreign competition that brings innovation capital helps build those clusters.
- India must adopt a nuanced approach while the US and China slug it out.
- Concerns such as user privacy should be addressed, but collateral damage must be avoided.
- Taxonomy of data would be useful, with commercial and industrial data treated differently from private data.
- Public sector research and development, meanwhile, has been a catalyst for private sector innovation from the US to Israel.
- At both the Central and state levels in India, governments could do much more in this respect.
- Creating the appropriate ecosystems for innovation will have a far larger pay-off than withdrawing into the protectionism the Narendra Modi government has shown in other sectors of late.