Testimony to the U.S. Senate Subcommittee on Trade Regarding Censorship as a Non-Tariff Barrier to Trade

Overview

The U.S. lead in the digital economy is under threat as a growing number of countries enact overly restrictive and discriminatory laws and regulations around digital content they identify as illegal in ways that becomes barriers to trade. Explicit content review processes are the most visible aspect, but it also includes content distribution, Internet, and connectivity services as these play a crucial role in managing and controlling information, especially online. China is by far the worst offender. U.S. firms have lost significant revenue by being blocked or inhibited from accessing and operating in the Chinese market. The impact has been especially damaging given that for many companies’ their market access has been denied during a critical, formative period of economic growth in China. This has not only reduced U.S. company global market share but provided Chinese competitors with a protected market from which to launch competitive challenges in other regions, such as South America, the rest of Asia, and Africa. Alongside China’s other protectionist measures, this also means that a generation of Chinese consumers have grown up without knowing that their Internet and consumer experience is completely different than what is available in most other countries. They have little or no idea about Google, Twitter, Facebook, or other U.S. firms and their products, even as Chinese government officials and party “apparatchiks” use these platforms to spread propaganda in the United States.

The economic impact is not trivial. A host of U.S. industries and firms, in sectors ranging from Internet services to cloud computing, video games, and movies, have likely lost hundreds of billions of dollars in revenues due to Chinese censorship and related market restrictions. Importantly, these revenues would have supported innovation and job creation in the United States, while limiting Chinese firms’ ability to grow and capture global market share. While it is not possible to calculate an exact figure, ITIF conservatively estimates (based on market-share comparisons) that Google, which withdrew from the Chinese market in 2010, subsequently lost $32.5 billion in search revenue from 2013 to 2019, while Amazon and Microsoft’s cloud services (IaaS, which is restricted in China) lost a combined $1.6 billion over the two-year period from 2017 to 2018. As the China market continues to rapidly grow, these losses will also grow significantly. And it is important to remember that this was all during a time when China was already running significant trade surpluses with the United States.

U.S. firms and their increasingly digital goods and services are susceptible to non-tariff barriers in the form of both at-the-border and behind-the-border laws and regulations. The Great Firewall of China represents a rare case where U.S. digital exports face a barrier at the border. Meanwhile, behind this clear market access barrier, U.S. firms face a complicated, opaque, and changing regulatory framework tied to content moderation and information control that together makes for a very difficult and different business environment. Moreover, in many cases, China’s approach to censorship is unwritten, with enforcement often being arbitrary and delegated to private firms. This is in large part a conscious decision to avoid WTO sanctions which would be much easier to put in place if the rules are on paper. Ever changing political sensitivities in China make it even more challenging to figure out what is expected of foreign firms. As we recently saw when China blocked NBA games, the Chinese Communist Party (CCP) is also increasingly assertive in punishing foreign firms for actions or speech that occurs outside of China. Censorship is obviously a major factor in China’s decision to prohibit foreign firms from operating in key sectors (for example, by not giving them licenses or allowing foreign equity stakes in local firms) and through onerous, unpredictable, and discriminatory content-review processes, such as for video games and movies. Taken together, China’s approach to censorship is clearly restrictive and discriminatory towards foreign firms and their goods and services.

Because China (and other countries) rely on a range of legitimate public policy goals to provide a justification for their approach to censorship—such as public safety, morals, cybersecurity and national security—the United States and other governments have been reluctant to challenge Chinese practices. Trade-related concerns over censorship are also just one of many issues in the U.S.-China trade relationship. While the primary motivation for censorship may be political, by making life hard or simply keeping U.S. firms out of China, the government gets the added benefit of supporting China’s innovation mercantilism strategy by protecting local firms from foreign competition. Over time, this has greatly re-shaped trade and market dynamics in China to the detriment of U.S. firms and the U.S. economy.

Whatever the stated motivation for its approach to censorship, China sees it as essential to achieving the most important goal of all—regime stability. But the implications go far from China’s domestic politics. Chinese President Xi Jinping has outlined his vision for “cyber sovereignty,” a concept in which each country is free to set its own rules and exercise absolute control of the Internet within its own borders. Thus far, the United States and other countries that support an open and rules-based global digital economy have failed to respond to the situation in China where it has enacted a censorship system that acts (whether intentionally or inadvertently) as a non-tariff barrier to trade (as in China). Other countries view the “China model” of digital development as a success and one they want to replicate, in part, because it has used censorship for political and economic ends. At the multilateral level, the trade rules of the global economy (as under various World Trade Organization (WTO) agreements) allow countries to enact restrictions based on a range of broad exceptions for public morals, public order, privacy, and national security. But when those are used as disguised barriers to trade, as is clearly the case in China, then trade rules at the WTO and elsewhere should provide a clear path for countries to challenge the misuse of these exceptions.

Some U.S. policymakers exacerbate the impact of Chinese censorship and mercantilism by calling for U.S. firms to leave or stay out of China by saying that it’s immoral to do business there. In many companies’ case, they rightly say that the U.S. companies would have to comply with Chinese censorship rules. But while telling companies like Google to stay out China might allow advocates to assert moral authority, it would have no actual beneficial effect on free speech and human rights: China’s Internet users would still face a censored Internet. Yet it would give companies like Baidu (the main Chinese search engine company) the vast Chinese market, and they would use those revenues to continue innovating and expanding into markets all around the world, ultimately taking market share and jobs from American technology companies.

There should be no doubt that it is in America’s long-term economic and security interests that U.S. companies sell as many goods and services to China as possible. Every dollar’s worth of digital and physical exports from the United States to China is a dollar that Chinese firms do not make—and it is a dollar American firms can use to reinvest in R&D and support employment in the United States. We should be encouraging, rather than berating, U.S. firms to engage in the Chinese market (not including, obviously, selling directly to the Chinese military) for we are locked in a critical competition for global technology leadership with them. Walking away from the China market only gives China a leg up in that competition. It is time that our policy vis-à-vis U.S. information services and digital content exports to China be based on national interest, not national moralizing.

None of this means that the U.S. government shouldn’t continue supporting human rights, free speech, and democracy around the world—it most clearly should. Congressional representatives, U.S. government agencies, and successive U.S. administrations have dedicated funds and attention to how censorship affects these issues over the last decade. Whether this is the State Department’s global Internet freedom programs, U.S. government advocacy on Internet governance at the International Telecommunications Union, or U.S. government membership of the Freedom Online Coalition of likeminded countries, all these ensure that U.S. values are being promoted. The point here is that the onus should be on the U.S. government to keep leading the case to promote U.S. values around the world.

This testimony provides a detailed analysis of censorship in China, including how it uses the Great Firewall and other censorship-related restrictions to prohibit market access and trade. I will explain how this censorship is a significant and growing non-tariff barrier to U.S. trade, how it has negatively affected a number of leading U.S. firms and sectors, and by extension how it impacts U.S. jobs and the U.S. economy. I will then provide a conservative estimate as to the large and growing impact censorship has had on search (Google) and cloud (Amazon), and the limited utility of trade law to challenge Chinese censorship. It then provides recommendations for U.S. policymakers to pressure China to revise its approach to censorship, even if it doesn’t cease the practice, so that it doesn’t act as a model of digital protectionism that other countries try and replicate, and so that it provides meaningful market access to U.S. firms.