Will Asia’s digital integration be derailed?

| April 12, 2019

Whether over cybersecurity or multinational online services taxation, governments are growing increasingly distrustful of each other. The internet is not the globalist nirvana many expected. Instead, the digital frontier is where globalisation ends.

Chinese telecom giant Huawei’s global success raised a pertinent question: could a firm like Huawei resist coercion from Chinese authorities if asked to share the valuable information flowing through its international networks? A number of countries, including those typically friendly to trade with China — like Australia, Canada, Korea and New Zealand — have decided to limit Chinese suppliers like Huawei from building the coming 5G telecom networks on cybersecurity grounds.

Meanwhile, countries like Australia and France have also proposed national corporate income taxes on services like Google, Facebook and Amazon. The public perception is that these companies are avoiding tax because they pay taxes at their headquarters rather than in the countries where their customers are. But this is the established practice for all services exporters.

Neither taxing multinational corporations nor government espionage are problems specific to digitalisation. The digital economy is the history of globalisation repeating itself — on steroids. The internet of today is a myriad of overlapping jurisdictions and conflicting obligations. And so far, every piece of new technology that circumvents territorial jurisdictions — from bulletin boards to blockchain — have either been subjugated to national laws or banned.

Many of these unilateral efforts are spearheaded by China with its industrial policy promoting the internet and the digital economy to reinvigorate a slowing economy. For example, China plans to substitute foreign ICT vendors with domestic equivalents. Its online censorship also blocks all non-Chinese platforms and what citizens write in private messages could affect their ‘social credit score’— which in turn affect their loan applications or permission to travel. Chinese authorities are also making its entire digital environment ‘secure and controllable’. A new national intelligence law forces Chinese technology companies to cooperate with the Chinese intelligence agencies even when their equipment is sold overseas. The recent moves to block Huawei are in response to this law.

Ironically, other Asian countries are responding to China’s digital unilateralism by following the same path. To date, India, Cambodia, Indonesia, Brunei, Myanmar, Thailand and Vietnam have restricted public internet and social media access. Vietnam practices an even more restrictive form of data protectionism through a new cybersecurity law where online services must be incorporated in the country to remain accessible to its citizens.

But even the online cloud has a silver lining. The internet is opening up opportunities for more democratised and inclusive trade as micro-multinationals (small businesses in the least-developed countries) are able to operate while avoiding expensive investments overseas and bypassing Western distributors. Mobile networks are also relatively cheap to deploy: Even remote areas without basic sanitation are likely to have access to high-speed mobile broadband, and approximately 93 per cent of Asia’s population will live where high speed internet coverage is available by 2020.

East Asia is at the centre of these developments. It has overtaken North America as the most ‘data rich’ region. But Asia is already at the doorstep of the next big disruption. With 5G comes industrial applications that will lead to entirely digitalised manufacturing across Asian supply-chain networks through concepts like ‘Industry 4.0’ and ‘Society 5.0’.

This new world of trade comes with regulatory challenges. Corporate networks will contain not just documents, but provide overall operational control. Figuratively speaking, an entire business could be ‘copy-pasted’, including know-how, equipment settings and production details. These risks call for far-reaching supply-chain screening of software, hardware and other components that may shatter pan-Asian supply-chains. Privacy protection is another challenge as more than 10 billion data records may have been breached globally since the early 2000s.

The digital economy is also prone to market concentration due to strong network effects — users are generally attracted to services that can connect them to other users. Network owners can easily block new market entrants unless there are provisions that curb dominant telecom operators from blocking competing services. To date, only Singapore has such laws in Asia. In Indonesia, major local e-commerce platforms have also been partially or fully acquired by Chinese giants like Alibaba, JD.com or Tencent and there are concerns they may favour Chinese suppliers before local ones.

More generally, liberalising digital trade and e-commerce will require the difficult task of reforming fundamental rights and weakened control over public order. Recent trade agreements include exorbitant digital trade exceptions, including the ambitious rules under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11). And in January this year, more than 70 countries announced their intention to open negotiations for an agreement on e-commerce under the auspices of the World Trade Organization, including a prolonged moratorium on digital taxes.

But the recent trend of imposing discriminatory digital taxes makes any meaningful agreement a remote prospect: Previous attempts have shown the differences are often irreconcilable. Even the most like-minded allies tackle issues like cybersecurity, privacy and taxation unilaterally, rather than through judicial cooperation.

As the global trading system and the digital economy are closely interlinked, they are likely to fail together. Resisting a liberalised digital economy may postpone difficult political and economic reforms, but digitalisation is necessary to spur consumption and regain competitiveness. This is a dilemma where we are ‘unable to bear our ills, nor their cures’, to borrow the words of the ancient Roman historian Livy.

This article was published by the East Asia Forum.