China Among World’s Worst “Innovation Mercantilists” for Fifth Consecutive Year, Subverting Competition in Key Industries

January 22, 2018

WASHINGTON—In the global race for market share in the digital economy and key high-tech sectors, many countries continue resorting to “innovation mercantilism” to create unfair advantages for their local firms and industries at the expense of foreign competitors. This practice subverts the global trading system and undermines overall innovation and productivity growth, according to an annual report released today by the Information Technology and Innovation Foundation (ITIF).

In the fifth edition its “Worst Innovation Mercantilists” report, ITIF, a leading science and tech-policy think tank, documents the world’s most egregious examples of innovation mercantilist policies that were proposed, drafted, or implemented in 2017. The report finds Brazil, China, Indonesia, Russia, and Vietnam among the year’s worst offenders. This is the fifth consecutive year China has earned a place on the list, a dubious distinction that it alone has achieved.

“When countries impose protectionist policies in high-value, high-tech sectors, they damage the entire global innovation system. The United States must lead by taking action against them,” said ITIF Trade Policy Analyst Nigel Cory, the report’s author. “The Trump administration has taken steps in the right direction by increasing pressure against China. But in the absence of a concerted effort by an international coalition, innovation mercantilism will put the broader global trading system at systemic risk.”

According to the report, the worst innovation mercantilist policies of 2017 include:

For Data, ICT Hardware, and Cybersecurity Policies

Brazil: Brazil’s Central Bank is considering a proposal to force all banks and financial firms to store financial data locally.

China: Enacted a new cybersecurity law that is vague, intrusive, burdensome, and discriminatory against foreign tech firms and their goods and services. This includes extensive forced local data storage requirements, the exposure of sensitive intellectual property (IP), and discriminatory security reviews of information communication technology (ICT) hardware and software.

Colombia: Enacted new data protection rules about the international transfer of Colombian citizens’ personal data that will impede data flows, while the country pursues the misguided policy that countries should be responsible for enforcing the privacy regulations of foreign countries.

Vietnam: Proposed a draft cybersecurity law that introduces intrusive and discriminatory “security reviews” of critical information infrastructure and a requirement for firms in these sectors to store data locally.

For Internet-Based Services

Brazil: Brazilian policymakers are considering discriminatory OTT (over-the-top) regulations for Internet-based audio/visual services, including a local content requirement (for video).

Indonesia: Enacted a broad, vague, and discriminatory regulatory framework for OTT Internet-based services, including forcing firms to set up a local office, hire local staff, produce local annual reports, and store data locally.

Russia: Enacted a new law that includes stringent ownership restrictions that essentially precludes foreign firms from offering videos via Internet-based OTT services (or limits them to working as minor partners).

Thailand: Considered burdensome, restrictive, and discriminatory regulations of OTT Services.

For the Burgeoning Electric Vehicle Sector

China: Enacted new rules that force foreign firms to transfer intellectual property for new energy vehicle (EV) to local partners as a condition for market access.

Policies were chosen based on their detrimental effects globally. Due to their widespread impact, some nations have more than one policy included.

Instead of innovation mercantilism, the report encourages nations to promote policies that focus on enabling and encouraging innovation and productivity in all industries across their economies. 

“Innovation mercantilist policies invariably backfire and hurt the offending countries, particularly over the long run. The perpetrators miss opportunities to spur greater sustainable growth by raising the productivity of all sectors of their economies,” Cory added. “To maximize innovation, the global trading system must protect large-scale markets, limit nonmarket-based competition, and ensure strong IP protection.”

Read the report.