The Worst Innovation Mercantilist Policies of 2017

Unfortunately, as the global race for market share in the digital economy and high-tech sectors intensifies, many countries continue to turn to “innovation mercantilism”—a strategy that uses trade-distorting policies to advantage local technology firms and production activities. While this modern protectionism typically relies on behind-the-border regulations, not tariffs, to protect local firms, the objective and impact remains the same—to either replace foreign goods and services with local ones or to unfairly promote exports, or both. These destructive, “beggar-thy-neighbor” tactics involve forcing companies to transfer the rights to their technology or to relocate their production, research and development (R&D), or data storage activities. Internet-based services, electric vehicles, biopharma products, and computers and electronics are common targets. In 2017, Brazil, China, Indonesia, Russia, and Vietnam headed the list of countries fielding the world’s worst innovation mercantilist policies.

Innovation mercantilist practices do not just damage other economies and businesses; they damage the entire global innovation system, leading to less overall innovation and productivity growth. Moreover, they often do not even help the countries embracing such practices, particularly over the long run. Such policies lead countries to neglect the greater opportunity to spur greater sustainable growth over the long term by raising the productivity of all sectors of an economy, not just by spurring the growth of or creating more high-tech ones.

This fifth annual report documents what the Information Technology and Innovation Foundation (ITIF) views as the world’s worst innovation mercantilist practices proposed, drafted, or implemented in 2017. Policies were chosen based on their detrimental effects globally, so some nations have more than one policy included, due to the policy’s widespread impact.

Summary of the Worst Innovation Mercantilist Policies of 2017

Data, Information Communication Technology 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.

Internet-Based Services

• Brazil: Brazilian policymakers are considering a range of restrictive and discriminatory measures to over-the-top (OTT) services that distribute videos over the Internet, including discriminatory taxes and 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.

Electric Vehicles

• China: Enacted new rules that force foreign firms to transfer all the critical intellectual property needed for new energy vehicles (EV) to local partners as a condition for market access.