China and Russia Home to Some of the Worst Cases of Protectionism Subverting Innovation in 2016, Tech Think Tank Finds; Urges Trump Administration to Push Back With Tougher Enforcement

January 9, 2017

WASHINGTON—As the incoming Trump administration prepares to get tough on trade scofflaws, a new report from the Information Technology and Innovation Foundation (ITIF) shines a light on a number of countries—notably China and Russia—that have been seeking unfair advantage in high-wage, innovation-intensive industries by implementing protectionist and discriminatory policies. The findings come in the tech think tank’s annual list of the year’s 10 worst manifestations of “innovation mercantilism.” The report released today urges the new U.S. administration and the entire global trading system to push back with tougher trade enforcement.

“Every nation wants to be a leader in innovation because it can be a key path to economic growth,” said Nigel Cory, ITIF trade policy analyst and the report’s author. “Unfortunately, as this global race for innovation advantage intensifies, some countries are ramping up destructive, ‘beggar-thy-neighbor’ policies that tip market scales in favor of domestic production and domestic firms. What policymakers forget is that this doesn’t just hurt their economic competitors; it hurts the entire global innovation ecosystem—and often the very countries that put these policies in place.”

In its fourth year of publication, ITIF’s 2016 list of the worst examples of innovation mercantilism includes:

  • China: Introduced a cybersecurity law that imposes extensive requirements for international companies to store data inside China’s borders; establishes audits that discriminate against foreign technology products; and forces companies to disclose intellectual property and software source code.
  • China: Introduced cloud-computing restrictions that prevent foreign firms from operating in the Chinese market.
  • Germany: Introduced local data-storage requirements as part of a new telecommunications data law.
  • Indonesia: Introduced local data-storage requirements for Internet-based content providers.
  • Indonesia: Introduced a patent law amendment that undermines pharmaceutical intellectual property and forces life science companies to transfer ownership of their technology and relocate their production operations.
  • Russia: Introduced local data-storage requirements and mandatory encryption-key disclosure as part of a new telecommunications data law.
  • Russia: Introduced government procurement rules that ban the purchase of foreign software.
  • Turkey: Introduced a data-protection law with stringent data-transfer requirements that act as a de facto mandate to store data locally.
  • Vietnam: Introduced local data-storage requirements for Internet-based content providers.
  • Vietnam: Introduced a network-security law that forces companies to disclose encryption keys and source code to the government as a condition of market access.

Looking at the current report alongside previous editions, ITIF concludes that innovation mercantilism is only becoming more popular, especially when it comes to forced data localization. This trend also coincides with the growing vacuum that’s been created in the international trading system with the failure to update global trade rules as part of new trade agreements, such as the Trans-Pacific Partnership.

“China has the dubious distinction of being the world leader in innovation mercantilism,” said Cory. “Given the lack of consequences it has faced and the failure to update global trade rules in response, there’s a vacuum where more and more nations are emulating China’s approach. Stopping the spread of innovation mercantilism needs to be a top priority for U.S. policymakers and the global trading system as a whole if we are to maximize global innovation and spur prosperity worldwide.”

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