China’s Digital Protectionism and Mercantilist Policies Rank Among the World’s Worst for Sixth Consecutive Year, Undermining Trade and Competition in Key Tech Sectors

January 28, 2019

WASHINGTON—As countries compete for jobs, market share, and leadership in advanced technology industries, there is a growing trend toward digital protectionism and other forms of “innovation mercantilism,” a strategy that relies on behind-the-border regulations to create unfair advantages for local technology firms at the expense of foreign competitors and the global trading system.

In the sixth edition of an annual report on these issues, the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy, ranks the 10 worst cases of innovation mercantilist policies that were proposed, drafted, or implemented in 2018. According to the report, the worst policies were found among eight nations and regions: China, Europe, Kenya, India, Indonesia, Italy, Saudi Arabia, and Turkey. China earned a place on the list for the sixth consecutive year, with two new mercantilist policies, a dubious distinction it alone has achieved.

“More countries are following China’s model of digital protectionism in enacting an ever expanding range of behind-the-border regulations which discriminate against foreign tech firms, products, and services,” said ITIF Associate Director for Trade Policy Nigel Cory, author of the report. “Such policies are a dangerous and growing threat to the potential for an open, rules-based global economy, especially as it relates to digital goods and services. Ultimately, these policies impair innovation and productivity growth around the world.”

According to the report, the 10 worst cases of digital protectionism and innovation mercantilism in 2018 included:

  • China: Enacted a new standardization law that shuns international principles and best practices and could be used to favor local tech firms and their products.
     
  • China: Enacted a new law which could potentially force firms to store data only in China if it is related to privately funded, commercially focused research.
     
  • Europe: Attempted to introduce a mercantilist digital services and digital profits tax that would have targeted U.S. tech firms almost exclusively.
     
  • Kenya: Considered forcing local data storage for sensitive personal data as part of a draft “Data Protection Bill”—which also included other mistaken policies, as Kenya follows the European Union (EU) approach to data privacy.
     
  • India: Enacted e-commerce regulations that specifically target and discriminate against foreign firms.
     
  • India: Enacted unnecessary and discriminatory local data storage requirements for payment data.
     
  • Indonesia: Enacted changes that allow it to enact tariffs on imports of digital products, such as downloads of movies, e-books, and software.
     
  • Italy: Enacted rules to discriminate against video-on-demand streaming services to protect cinemas.
     
  • Saudi Arabia: Enacted forced local data storage for various categories of data as part of its Cloud Computing Regulatory Framework.
     
  • Turkey: Enacted forced local data storage for publicly listed firms.

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

In eschewing innovation mercantilism, the report identifies three key factors countries need to maximize innovation: ensuring the largest possible markets; limiting nonmarket-based competition; and ensuring strong IP protection.

Read the report.