Emergent Digital Fragmentation: The Perils of Unilateralism

06/28/2022

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Simon J. Evenett and Johannes Fritz | CEPR

Policymakers are flying blind as they shape and nurture the digital domain. The last inventory of government intervention affecting this critical vehicle for opportunity and growth was published four years ago. Much has happened since. No official institution has a global mandate to track policy intervention in the digital domain.

Nothing good comes of this evidence gap. Officials learn less from the prior choices of peers. Patchy information reinforces the tendency of officials to retreat into silos, resulting in state initiatives that don’t take into account the complexities of an evolving, multi-faceted digital domain which exists in a world with extensive cross-border ties. Accountability is diminished too.

This is a recipe for poor public decision-making. Policy incoherence at home coexists with international regulatory divergence. Mistakes matter in the digital domain. Heavy handed regulations stifle commercial initiative, hamper deployment of digital technologies, and limit the contributions to national employment and economic growth. A fragmented internet and global digital economy denies users choice, diminishes the incentives for innovation, exacerbates trade tensions between governments, and increases the risk of numerous crises.

This report fills the evidence gap. It adopts a comprehensive view of the policies affecting the digital domain and their cross-border repercussions. A whole-of-supply-chain approach is taken, drawing in policy decisions affecting upstream activities that support the digital economy (e.g. the mining of Rare Earths), midstream activities (e.g. developments in the critical semiconductor sector and in hardware and software), and downstream activities (e.g. platform businesses and digital delivery to customers).

Drawing upon two extensive inventories of public policy intervention, the Digital Policy Alert and the Global Trade Alert, this report delineates the global policy landscape towards the digital domain. Evidence on legal and regulatory developments—such as those relating to the governance of data, content moderation, and taxation— is presented along with information on resort to trade and investment policy changes and subsidy policies so as to provide a comprehensive perspective. Information on over 15,000 policy and regulatory developments were used in compiling this report. The principal findings are:

  1. Governments have gone into regulatory overdrive in digital sectors since the start of 2020. 
    • Together, European and G20 governments took 1,731 legal and regulatory steps. Fifty-five percent of those steps have already translated into state action—41% are in the pipeline.
    • The three most active areas of state intervention are data governance, online content moderation, and competition law enforcement.
    • Resort to state intervention is accelerating. The first quarter of 2020 saw 71 regulatory developments; the first quarter of 2022 saw 217.
  2. Regulatory heterogeneity is growing, posing an evergreater risk of digital fragmentation.
    • Particular concerns arise concerning rules on the storage, use, and transfer of data, with China, the European Union, India, Russia, and the United States going off in different directions.
    • Divergent regulatory approaches to online content moderation—including demands to takedown material posted on the internet—are emerging.
  3. Commercial policy developments over the past decade have erected more and more barriers between national digital sectors.
    • A third of global trade in digital economy goods currently faces market access barriers.
    • Digital economy sectors saw twice as much discrimination against foreign firms than world goods trade overall, as measured by the ratio of discriminatory to reform measures implemented.
  4. Subsidy races are breaking out in the digital economy, most notably in the semiconductor sector.
    • Looking across sectors, states tend to substitute digital trade barriers for subsidies. Consolidation of public finances after COVID-19 is likely to result in further digital fragmentation as governments resort more to trade and investment barriers.
  5. With no global playbook to guide policymakers and regulators, burgeoning unilateral state action in the digital domain remains uncoordinated, stokes trade tensions on topics from corporate taxation through to competition law enforcement, and chills crossborder corporate deployment of digital technologies.

The perils of unilateral governance action are becoming clearer. Officials around the globe must intensify efforts to develop shared understandings on sound principles to regulate and nurture their economies’ digital sectors. Worthwhile efforts to negotiate a plurilateral accord on e-commerce need to be wrapped up and a more ambitious work programme launched at the WTO. Bilateral and regional initiatives to align policy and regulation (such as the Indo-Pacific Economic Framework), as well as the negotiation of more digital trade chapters in regional trade agreements, are useful stepping stones to counter emergent digital fragmentation.

GTA29_-_Emergent_Digital_Fragmentation

To read the full report from CEPR, please click here.