Protectionist Trade Policies
The Future is Digital
Sven Verleun
Master Thesis, June 2019
Master Thesis
S.L.J.M. Verleun
Student Nr.: 11929588
MSc Political Science
Track: Political Economy
Graduate School of Social Sciences
University of Amsterdam
Preface
In front of you lies a Master Thesis examining a nascent form of protectionism: Digital
Protectionism. It has been written to meet the graduation requirements of the MSc Political
Science (track: Political Economy) curriculum educated by the University of Amsterdam.
Introducing people to the topic of digital protectionism has led to many raised eyebrows. We
tend to think of physical trade when thinking of protectionism. Instead, digital protectionism
includes barriers to digital trade, for example those making it harder to transfer data across a
nation-state's borders. As the digital aspect of international trade becomes increasingly more
significant than it is already, digital protectionist measures will move to the forefront of trade
negotiations worldwide. Global powers like the United States and the People's Republic of
China are diametrically opposed on this issue.
Therefore, I personally believe that we’re currently standing at a crossroad that can take us two
ways. Either the worldwide free flow of data will remain as such, or we will see the
balkanization of the internet as we now know it. Former Alphabet CEO Eric Schmidt has
already predicted that the internet will split up in two around 2028. I share his anxiety.
Stakeholders from all sectors should thus work together to prevent such a situation, while still
establishing sustainable and appropriate forms of digital governance.
I hope that this study contributes to the latter process and overall knowledge on this topic by
providing a deeper understanding of the impact that digital protectionist measures have on
businesses operating across borders. I would like to express my gratitude to the eleven
stakeholders from six different multinational corporations who have participated in this study.
Without their knowledge and input, I would have never been able to finish this paper.
Last, but far from least, I would like to thank my supervisor Dr. Krapohl for his knowledgeable
support and academic guidance throughout the process.
Sincerely,
S.L.J.M. (Sven) Verleun
Statement of Originality
This document is written by S.L.J.M. Verleun, who declares to take full responsibility for the
contents of this document, including possible aberrations.
The author declares that the text and the work presented in this document is original and that
no sources other than those mentioned in the text and its references have been used in creating
it.
The University of Amsterdam is merely responsible for the supervision of the work and not for
its contents. Therefore, it cannot be hold accountable for the content produced by the author of
this thesis.
Table of Contents
Preface
5
Statement of Originality
6
1. Introduction
14
2. Literature Review
17
2.1. Defining (Digital) Protectionism
17
2.1.1. Protectionism
17
2.1.2. Digital Protectionism
18
2.2. Privacy Regulation or Protectionism
18
2.2.1. Protection(ism)?
19
2.2.2. Walking a Thin Line
20
2.3. Non-tariff trade barriers
20
2.3.1. Defining Non-tariff Trade Barriers
21
2.3.2. Protectionism in Disguise
21
2.3.3. Competitiveness
22
3. Theoretical Framework
24
3.1. An IPE Perspective: Mercantilism
24
3.1.1. Traditional Mercantilism
24
3.1.2. Innovation Mercantilism
24
3.2. National Champions
25
3.2.1. Defining National Champion Policy
25
3.2.2. Advancing through Digital Protectionism
26
3.3. Barriers to Digital Trade
28
3.3.1. (Data) Localization Requirements
30
3.3.2. Data Flow Restrictions
32
3.3.3. IPR Infringement
33
3.3.4. National standards and burdensome conformity assessment
33
4. Methods
36
4.1. Research Philosophy
36
4.2. Research Design
37
4.3. Case Selection
37
4.3.1. Whirlpool
39
4.3.2. Philips
39
4.3.3. Haier
39
4.3.4. IBM
40
4.3.5. SAP
40
4.3.6. Alibaba Cloud
40
4.4. Data Collection
40
4.4.1 Semi-structured Interviews
40
4.4.2. Interviewees
41
4.4.3. Interview Tools
43
4.4.4. Desk Research
43
4.4.5. Handling Confidential Data
43
5. Market Contexts
45
5.1. United States
46
5.2. European Union
47
5.3. People's Republic of China
49
5.4. Markets in Perspective
50
6. Household Appliances Industry
52
6.1. Whirlpool
52
6.1.1. Non-tariff Barriers
52
6.1.2. Whirlpool’s Competitiveness
55
6.2. Philips
55
6.2.1. Non-tariff Barriers
56
6.2.2. Philips’ Competitiveness
57
6.3. Haier
57
6.3.1. Non-tariff Barriers
57
6.3.2. Haier’s Competitiveness
59
7. Cloud Computing Industry
61
7.1. IBM
61
7.1.1. Non-tariff Barriers
61
7.1.2. IBM’s Competitiveness
63
7.2. SAP
63
7.2.1. Non-tariff Barriers
63
7.2.2. SAP’s Competitiveness
65
7.3. Alibaba Cloud
65
7.3.1. Non-tariff Barriers
65
7.3.2. Alibaba Cloud’s Competitiveness
67
7.4. Comparing Cloud Computing MNCs
67
7.5. Comparing Industries
68
7.5.1. The Significance of Privacy
68
7.5.2. Core versus Supporting Role of Data
69
8. Conclusion & Discussion
70
8.1. Testing the Hypotheses
70
8.1.1. Domestic Competitiveness
70
8.1.2. Global Competitiveness
70
8.2. Answering the Research Question
71
8.3. Limitations
71
8.4. Future Research
73
8.5. Theoretical and Practical Implications
74
References
76
Appendices
91
Appendix A: Semi-structured Interview Guide
91
Appendix B: Examples of Messages sent through LinkedIn
93
Appendix C: List of Interviewees
95
Appendix D: Search engines used and databases accessed for secondary data
96
List of Tables
Table 1. List of barriers to digital trade and their respective descriptions
28
Table 2. List of barriers to digital trade and their potential effects on market and
trade, followed by whether or not US businesses in 2014 assumed protectionist intent
30
Table 3. Search strings used to search for knowledgeable professionals on LinkedIn
42
Table 4. Summarized overview of the different market contexts
51
List of Figures
Figure 1. Case Selection
38
List of Appendix Tables & Figures
Table C1. Overview of all Interviewees
95
List of Abbreviations
AI
Artificial Intelligence
BI
Business Intelligence
China
People's Republic of China
CIO
Chief Information Officer
DTRI
Digital Trade Restrictiveness Index
EU
European Union
FDI
Foreign Direct Investment
GDP
Gross Domestic Product
GDPR
General Data Protection Regulation
IP
Intellectual Property
IPE
International Political Economy
IPR
Intellectual Property Rights
MNC
Multinational Corporation
NTB
Non-tariff Barrier
NTM
Non-tariff Measure
OECD
Organization for Economic Cooperation and Development
SPS
Sanitary and Phytosanitary
TBT
Technical Barriers to Trade
US
United States
USITC
US International Trade Commission
WTO
World Trade Organization
1. Introduction
Economic policy built upon the notion of liberalizing trade has enjoyed widespread popularity
among policy makers during the past decades (Simmons & Elkins, 2003). Although its
relationship is far from undisputed, a majority of economists worldwide are in agreement when
it comes to the positive effects of trade liberalization on economic growth (Wacziarg & Welch,
2008).
However, after this long period of liberalization, protectionist trade policy is now
making its comeback in the twenty-first century (Enderwick, 2011; Chaisse, 2017; The
Economist, 2018). Many scholars have turned towards the events of 2016 seeking to find a
potential tipping point from multilateral cooperation to increased protectionism (Boon, 2017;
Hu & Spence, 2017; Cox, 2017). The latter presented itself in the form of two major
globalization pushbacks, the election of President Trump in the United States (US) and Great
Britain's vote to leave the European Union (EU) (Dholakia & Atik, 2017).
While the news cycles nowadays mostly discuss the trade war on goods between the
US and China, a nascent distinctively different form of protectionism is currently looming over
our heads. Although physical goods are still central to trade negotiations, estimates have shown
that data flows already contribute more to global gross domestic product (GDP) growth
compared to physical trade in goods (Manyika et al., 2016). Harvard Business Review (2018)
is convinced that the significance of cross-border data flows will only further increase. They
conclude that 'as every business becomes a data business, the future of globalization rests
increasingly on cross-border flows of data rather than goods' (Harvard Business Review, 2018,
p. 1). Considering often heard phrases like 'data is the new oil' (The Economist, 2017), does
this then also mean that whoever holds the most gains the most?
A number of countries seem to think so and have acted alike by implementing policies
to restrict the free movement of data between countries (Cory, 2017). Discussing China's digital
protectionist measures, the Financial Times (2018) has stated that such measures should be
perceived 'as great a threat as barriers it puts up for physical goods' (p. 1). According to Harvard
Business Review (2018), such measures have caused data to start 'deglobalizing'. This has most
likely led to the fact that a call for China to ease its restrictions on the free movement of data
is at the center of current trade talks between the US and the Middle Kingdom (Wall Street
Journal, 2019a).
Former Alphabet CEO Eric Schmidt takes it one step further and predicts that the
internet will most likely split in two parts by 2028 (Bloomberg, 2018a). One part being an open
authoritarian collective led by China (CNBC, 2018a). A development like this would have an
insurmountable impact on global trade. Therefore, more and more countries are putting digital
trade barriers on the trade policy agenda (World Trade Organization, 2018).
It seems evident that understanding the full scope and development of digital
protectionism is of great value to both the academic and professional world. Up until now,
extant literature has focused mostly on identifying and defining the issue. Although research
has touched upon the potential macro-economic effects of it, a more detailed assessment of the
day-to-day impact on businesses has yet to be performed. This study therefore builds upon
Aaronson (2018) her framework of digital protectionism by applying it to three markets that
differ distinctively in levels of digital protectionism. Namely, the United States (US), the
European Union (EU), and the People's Republic of China (China). It is interesting to study
digital protectionism in relationship to these markets for a number of reasons.
First, while the US has no digital protectionist measures in place, China is leading the
way in terms of putting up digital barriers to trade. In comparison, the EU functions as the
middle-way example because it has implemented the General Data Protection Regulation
(GDPR), which some scholars argue has digital protectionist characteristics (Georgiadou, De
By & Kounadi, 2019). It is interesting to examine whether or not businesses operating in these
markets are impacted in different ways following these different market contexts. In doing so,
this is one of the first studies to provide a comparative view of the issue of digital protectionism.
Second, extant literature has identified potential effects of digital protectionism and a
number of scholars have built upon this by establishing that its effects are negative. However,
previous research has mostly focused on US businesses. Therefore, a perspective from other
markets has remained absent. It is interesting to examine if in the case of a US business being
disadvantaged by Chinese digital barriers to trade, this subsequently provides advantages for a
Chinese competitor or merely constitutes the former.
Third, the rapidly changing nature of the regulatory environment surrounding digital
trade, in particular data flows, forces the academic world to adapt a similar pace. This in order
to remain relevant in the overall debate. Looking at the current trade war between China and
the Unites States, one is once more confronted with the turbulent characteristics of these
markets. This is to a large extent also reflected in the market contexts relevant to this research.
Digital protectionism is an evolving concept and this paper aims to contribute to its overall
understanding by studying the most recent developments and their effect on globally operating
businesses.
Summarizing, digital protectionism is on the rise and seems to have a deglobalizing
effect on international trade. Based upon existing knowledge, it is expected that businesses
operating across borders are impacted dramatically by this policy shift. However, the exact
effects of digital protectionist measures on businesses have yet to be uncovered. If digital
protectionism has the undesirable effects many scholars state it to have, foreign businesses
should be disadvantaged in relationship to their domestic competitors when operating on a
particular market. It raises the question whether these domestic businesses thus have a
competitive advantage following digital protectionist measures. To examine whether or not
this is the case, the following main research question is formed:
RQ
M: How do digital protectionist measures influence
the competitiveness of domestic industries?
By answering this research question, this research contributes to the extant literature in various
ways. First, this research addresses digital protectionism which can be considered to be a
nascent research topic. Existing research within this field has up until now focused mainly on
defining its scope instead of providing detailed assessments of its effects. Therefore, this study
contributes to extant literature by examining how businesses are affected by digital
protectionist measures.
Furthermore, this research's practical relevance is two folded. First, it contributes to the
ongoing debate on how to respond to countries implementing digital protectionist measures by
providing insight into how it affects businesses. The WTO is currently uncertain how to
approach these measures and, in the meantime, nation-states are including provisions and
regulations in bilateral trade negotiations. A more in-depth understanding of the actual effects
will benefit both processes, leading to better applicable regulations.
Second, this research could be of great practical relevance to businesses operating
across borders. Especially those with a data-sensitive operational structure are expected to be
curious about how their business will be or is affected by a country's digital barriers to trade.
In order to build upon existing literature in this field, chapter two will provide a
literature background after which the third chapter introduces a subsequent theoretical
framework. Based upon this, relevant hypotheses will be formulated. The fourth chapter
outlines the methodology used while performing this study, after which the fifth, sixth and
seventh chapter discuss the results that followed from applying these research methods.
2. Literature Review
This chapter contains a literature review which will serve as a point of departure for this study.
Starting with defining the concept of digital protectionism, the following paragraphs include
extant literature on protectionism, non-tariff barriers, and specific literature on how businesses
are affected by protectionism in general.
2.1. Defining (Digital) Protectionism
This paper its goal is by no means to engage in the ongoing debate regarding the precise
definition of digital protectionism. Both scholars and policymakers have yet to reach common
ground on the latter and find it extremely difficult to do so. However, before discussing extant
literature and moving forward, it is important to establish a single working definition of digital
protectionism to be used in this research.
2.1.1. Protectionism
In order to establish a single working definition of digital protectionism, it is important to first
briefly cover the overarching topic of protectionism. Wolfe (2012) stresses that the latter is ‘a
political and economic concept, not a fact or a precise legal term' (p. 779). Although this is
indeed the case to a certain extent, a number of scholars have defined both protectionism and
the form it appears in. Starting with Wolfe (2012) himself, who defines protectionist policies
as those 'encompassing a deliberate government choice to protect certain sectors by using a
variety of trade instruments in the long term' (p. 779).
Second, largely in line with Wolfe (2012) his definition, Fouda (2012) defines
protectionism as 'an economic policy of restraining trade between nations, through methods
such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive
government regulations designed to discourage imports, and prevent foreign take-over of local
markets and companies' (p. 1). Considering today's political context, Fouda (2012) also adds
that protectionism as a policy is closely aligned with an anti-globalization sentiment.
A third account, by Abboushi (2010), defines protectionism as 'the sum of government
trade policies intended to assist domestic producers against foreign producers in a particular
industry, by means of raising the price of foreign products, lowering cost for domestic
producers, and limiting foreign producers’ access to the domestic market' (p. 387).
More recently, the Swedish National Board of Trade (2016) has published their
perspective on protectionism in the twenty-first century. In agreement with Wolfe (2012), the
board also stresses the lack of one clear-cut definition and the variety of definitions circulating
in both the academic and professional field (Swedish National Board of Trade, 2016).
Following their performed study, the Swedish National Board of Trade (2016) eventually
concludes that protectionism has two core elements, '(1) discrimination and (2)
trade-restrictiveness' (p. 10), discrimination being the leading element in defining protectionism.
Concluding, protectionism has multiple different characterizations but scholars agree
on several aspects of it, amongst them: the restraint of trade, the protection of domestic markets,
and discrimination of foreign operators.
2.1.2. Digital Protectionism
In discussing protectionist measures affecting the digital economy, many refer to data
protectionism as being the overarching concept at play. However, this paper is in agreement
with Vadcar (2018) who states that 'digital protectionism is not just about data protection' (p.
4). Therefore, in order for this research to cover the full spectrum of digital protectionism, it is
important to use a definition that does the same.
Seeking the latter, one has to turn towards the US. The US was one of the first
nation-states to publicly address the issue of digital protectionism. Up until today, it has also been the
only nation-state to define it (Aaronson & Leblond, 2018). The US International Trade
Commission (USITC) has defined digital protectionism as barriers or impediments to digital
trade, including censorship, filtering, localization measures and regulations to protect privacy
(USITC, 2013). The latter part of this definition will be further discussed in the next paragraph
of this literature review, considering its significant role in capturing the potential protectionist
motives of such measures.
Concluding, although the term 'data protectionism' is often used as well in this
particular context, this research will follow the definition as formulated by the USITC (2013).
Digital protectionism encompasses barriers or impediments to digital trade, including
censorship, filtering, localization measures and regulations to protect privacy (USITC, 2013).
2.2. Privacy Regulation or Protectionism?
The latter part of the USITC (2013) definition is subject to debate across a variety of academic
fields. Are regulations to protect privacy always designed with the goal of protecting citizens’
privacy in mind? Since most of this body of literature focuses on specific measures such as
data localization requirements or data flow restrictions, that particular body of literature is
included in the theoretical framework and used to derive hypotheses from.
The following sub-paragraphs will provide an account of extant literature discussing
opposing views from a more birds-eye perspective, without going further into detail on the
motives behind specific measures. Due to the long-lasting recent wave of trade liberalization,
most of the literature on this issue was found to be relatively outdated.
2.2.1. Protection(ism)?
The literature on this manner goes as far back as Eger (1978) who asked himself the question
whether emerging restrictions on transnational data flows should be treated as privacy
regulation or non-tariff trade barriers (NTBs). Eger (1978) noted that although it might not be
the original intent behind such restrictions, nation-states had gained the potential to maintain
and protect their 'national sovereignty' over the flow of information by implementing these
restrictions. In other words, implementing such measures provided nation-states with a foot in
the door for when they would like to close that same door later on. Interesting enough, Eger
(1978) at that time already labeled this, and warned for, a new form of protectionism.
Short of a decade later, Pinegar (1984) addressed the exact same question when
examining the privacy protection acts in place at the time: privacy protection or economic
protectionism? Pinegar (1984) came to a more conclusive verdict and stated that 'the
protectionist impact and, in some instances, motive of data protection laws is repugnant to the
free market system’ (p. 188). Pinegar (1984) stated that 'there can be no question that, either
intentionally or consequentially, these laws (particularly the Austrian Act and others granting
protection to legal entities) are effective non-tariff barriers to the free flow of commercial and
other information' (p. 187).
Placing the latter notion in perspective, Regan (2003) argues that ‘the American
business perspective, which interprets privacy and data protection policies as non-tariff trade
barriers that interfere with the free flow of information, is rooted in Americans’ inherent
distrust of government regulation of internal business operations, their preference for market
solutions to consumer complaints, and the value of information to a market economy’ (p. 266).
All in all, there has never been a real consensus on this issue. Departing from subjective
and legal approaches makes it increasingly difficult to formulate a distinction between
protectionism and measures aimed at enhancing citizens' privacy. Kuner (2015) agrees with
the aforementioned scholars in terms that severe restrictions on the free flow of data threaten
our freedom and should be resisted. On the other hand, Kuner (2015) also states that it is simply
too easy to label every single restriction protectionist. Blume (2000) stresses that while
transborder data transfer has become a lifeline for multinational corporations, data protection
has also become 'an important part of the rule of law in the information society' (p. 442).
2.2.2. Walking a Thin Line
Following Blume (2000), Kong (2010) therefore states that the challenge lies in simultaneously
protecting the free global data flow and implementing effective data protection. Rubin (2015)
agrees and stresses the importance of privacy and surveillance while maintaining a form of
data sovereignty. Kuner (2015) his contradictory claims show how difficult it is to distinguish
between protectionism and privacy protection.
In line with this, Ogaranko (1996) states that while governments and international
bodies often state that regulation regarding transborder data flows is implemented for the
protection of personal privacy, national security or national sovereignty, the same bodies will
seldom admit that the rationale behind these regulations is one of national economic welfare.
Those subject to such regulations, often businesses, will accuse the same bodies of hiding their
protectionist objectives behind privacy regulations.
Concluding, while some see every single restriction as a deliberate strategy to protect a
domestic economy and force out foreign competition, others are more sympathetic towards the
privacy aspect of such restrictions. However, all scholars agree upon the fact that these
regulations do have the ability to function as NTBs. No scholar questions this ability. Before
moving into a certain direction, it is important to discuss the workings of NTBs and their effects
on business.
2.3. Non-tariff Trade Barriers
As found by Pinegar (1984), regulations effecting the free flow of data have the potential to
function as NTBs. Ever since the worldwide decline of tariff barriers, more and more
nation-states have turned towards NTBs, also described as non-tariff measures (NTMs), in order to
restrict trade of a certain good or service (Ray, 1987; Li & Beghin, 2017). Baldwin and Evenet
(2009) have argued that protectionism has appeared in murkier forms since. This has made it
increasingly difficult to examine whether or not measures implemented by a nation-state are
protectionist or not. This paragraph defines NTBs and discusses how they could function as
protectionism in disguise, concluding with an indicator to measure whether or not this is the
case.
2.3.1. Defining non-tariff trade barriers
According to the Organization for Economic Cooperation and Development (OECD) (2019),
NTBs 'comprise all policy measures other than tariffs and tariff-rate quotas that have a more
or less direct impact on international trade' (p. 1). Distinguishing between technical and
non-technical measures, the OECD (2019) describes the former as measures including 'regulations,
standards, testing and certification, primarily sanitary and phytosanitary (SPS) and technical
barriers to trade (TBT) measures' (p. 1), and the latter encompasses 'quantitative restrictions
(quotas, non-automatic import licensing), price measures, forced logistics or distribution
channels, and so on' (p. 1).
2.3.2. Protectionism in Disguise
It is important to note that NTBs are not necessarily protectionist measures. Measures like
product standards and certifications are often implemented ‘to overcome market failures and
to protect the health of domestic consumers’ (Grundke & Moser, 2019, p. 144). Contrary to
being protectionist, product standards can just as well be an anti-protectionist measure (Marette
& Beghin, 2010). However, as found by Eger (1978), NTBs do have the potential to serve
protectionist objectives. Therefore, extant literature has extensively studied the effects of NTBs
on trade, aiming to examine whether certain measures can be seen as protectionism instead of
regulatory efforts.
A recent study performed by Grundke and Moser (2019) has shown that a number of
product standards put in place by the US should be seen as hidden protectionism. Although
implemented to protect the health of US citizens, these product standards thus seem to serve a
different purpose in practice. Performing a similar study, Marette (2016) shows that something
as simple as a mandatory product label can function as a protectionist measure. This is
exemplary for how difficult it is to trace the true objectives behind NTBs.
In cases involving physical goods, nation-states must therefore show that implementing
NTBs is not a form of disguised protectionism (Cadot, Malouche, & Saez, 2012). However,
since trade agreements regarding digital trade are either outdated or non-existent (Burri, 2017),
it is more difficult to examine whether or not NTBs put in place can be a form of protectionism
in disguise. Therefore, it is important to examine regulations involving the digital economy in
order to find whether or not such measures can also be seen as a form of hidden protectionism.
Extant literature so far has examined some of the macro-economic effects of a number
of regulatory efforts concerning the free flow of data. Most literature has focused on data
localization requirements and data flow restrictions. Up until now, literature has been in
agreement when it comes to the economic effects of such NTBs being negative. Although this
does not mean that no single business is able to profit from these NTBs being in place, on
aggregate, the global economy loses (Bauer, Lee-Makiyama, Van der Marel, & Verschelde,
2013; Ferracane, Kren, & Van der Marel, 2018a; Chander & Le, 2014).
Therefore, while acknowledging that an NTB is not necessarily protectionist, this paper
argues that NTBs to digital trade are most likely a form of protectionism in disguise. In order
to examine whether or not this is the case, this paper studies the effects of a number of NTBs
on businesses operating across borders. However, before doing so, an indicator to do so should
be defined.
2.3.3. Competitiveness
This chapter has shown that there is a thin line between NTBs focused on protecting citizens’
privacy and protectionism. The previous paragraph has shown that NTBs to digital trade can
function as protectionism in disguise. In order to find out whether an NTB is either protectionist
or not, this study focusses on the competitiveness of businesses as a leading indicator. As
reflected in the main research question, this paper will examine whether or not digital
protectionist measures affect the competitiveness of firms operating across borders.
Chikán (2008) defines firm competitiveness as ‘a capability of a firm to sustainably
fulfil its double purpose: meeting customer requirements at profit. This capability is realized
through offering on the market goods and services which customers value higher than those
offered by competitors’ (p. 24). This paper follows Chikán (2008) his definition of firm
competitiveness and aims to examine whether or not the competitiveness of businesses
operating across borders is affected by digital protectionist measures.
If a business is not able to meet its customer’s requirements and make a profit while
doing so, due to the NTBs described in the following chapter, digital protectionism is found to
be in place. Considering the example of a foreign business operating on or aiming to enter a
domestic market, digital protectionism would thus lead to a competitive advantage for the
foreign business’ domestic competitor. Defining competitive advantage, Porter (1985) describe
this as that what makes an entity's goods or services superior to all of a customer's other choices.
According to Porter (1985), there are two ways a business can create a competitive
advantage, either through a cost advantage or differentiation advantage. The former is in place
when a business provides the same goods at a lower cost. A differentiation advantage is in
place when a business provides better goods than its competitors (Porter, 1985). These two
forms of competitive advantage will be taken into account when assessing the competitiveness
of a business throughout this study.
Concluding, this chapter has shown that regulations on the free flow of data can
function as an NTB, effectively resulting in digital protectionism. In order to examine whether
or not this is the case, this study will use ‘competitiveness’ as a leading indicator. The following
paragraph explains how these dynamics have, in theory, led to the emergence of a new form of
mercantilism. Furthermore, the next chapter will introduce a theoretical framework including
specific NTBs to digital trade.
3. Theoretical Framework
The theoretical framework will start with addressing one larger theoretical perspective on the
issue, mercantilism. Second, it will discuss why nation-states would resort to such measures,
after which this chapter will zoom in on the framework of Aaronson (2018) who identified a
number of digital barriers to trade. From then onwards, derived from a wide body of literature,
every NTB will be discussed in detail. This chapter will conclude with forming the two
hypotheses central to this paper.
3.1. An IPE Perspective: Mercantilism
Approaching the issue of digital protectionism from an international political economy (IPE)
perspective, a dominant view is the development of a new type of mercantilism. Before
discussing this, it is important to briefly address the key characteristics of this economic theory.
Therefore, the following subparagraph will discuss 'traditional' mercantilism after which the
subparagraph thereafter addresses innovation mercantilism.
3.1.1. Traditional Mercantilism
Prior to the adoption of liberal values across the world, mercantilism was the dominant
economic rationale built upon by many modern nation-states in Europe from the sixteenth to
the eighteenth century (LaHaye, 2017). Its foremost policies include a favorable balance of
trade, protection of domestic industries, boosting local employment, species accumulation, and
manipulation of exchange rates to keep exports competitive (Blitz, 1967).
3.1.2. Innovation Mercantilism
Today's version of mercantilism goes by the name of 'innovation mercantilism', implemented
by countries that aim to 'use distortive, protectionist trade policies to achieve the
innovation-based economic growth they seek' (Ezell, Atkinson & Wein, 2013, p. 4). A major goal of this
is to lead in terms of technological innovation by making it harder for foreign competitors to
enter the market and profit from an innovation ecosystem (Atkinson, 2014). China is currently
the best example of a nation-state found to have implemented such a policy (Nager, 2016).
As many scholars believe that the amount of data a country generates is critical to its
innovation capacity when it comes to fields as artificial intelligence (AI), one can thus consider
China's 1.3 billion citizens to be a gold mine. Through a number of measures, the Chinese
government seems to focus on keeping that amount of data inside of its borders. Herewith
Considering the technological nature of data, it is expected that the Chinese state does
so first and foremost in order to protect its technological giants. In doing so, it aims to create a
need for Chinese large technological firms to ‘rely on the state’s key projects to develop major
technological and equipment policies’ (Atkinson, 2012, p. 23). Such a strong relationship
between a digital protectionist nation-state and its leading businesses gives away a policy of
knowingly creating national champions.
Taking into account the theory of innovation mercantilism, this paper therefore argues
that nation-states implement digital protectionist measures to create, protect, and advance the
national champions of the twenty-first century. The following paragraph defines national
champions and explains how digital protectionism can help to create, protect, and advance
them.
3.2. National Champions
Taking into the account the increasing significance of digital ‘goods’ (Chakravorti, Tunnard,
& Chaturvedi, 2015), this paper argues that NTBs impacting the digital economy are
implemented by nation-states in order to protect the national champions of the twenty-first
century. One can think of today's Chinese tech giants like Alibaba and Tencent as examples of
the latter (Wall Street Journal, 2019b). This digital age is already being ruled by large
(technological) corporations competing on the global market. Extant literature has shown the
role of data in the fierce competition between these corporations.
In short, national champions can be described as ‘large companies protected and
supported by the state’ (Financial Times, 2019, p. 1). This paragraph defines the industrial
policy of building such national champions and discusses how digital protectionism can
advance the development of these national champions.
3.2.1. Defining National Champion Policy
This paper by no means intents to join the fierce debate focused on industrial policy and the
creation of national champions. It is however important to define such policies before further
outlining this paper's argument that digital protectionism is part of a larger industrial policy
stance. Soete (2007) defines industrial policy as 'structural policies designed to strengthen the
efficiency, scale and international competitiveness of domestic industrial sectors' (p. 273). It
typically contains 'an element of national champion and of self-reliance in bringing about
economic growth and development' (Soete, 2007, p. 273).
Spector, Chapsal and Eymard (2009) find that 'national champions may be created or
protected in a number of ways, such as by the granting of state aid, the encouragement of
domestic mergers, or the opposition to a takeover of a domestic company by a foreign company'
(p. 11). In addition to this, Noland and Pack (2003) further specify examples of industrial policy
instruments which include: 'credit directed at specific sectors with below-market interest rates
for long-term and working capital, sectorally differentiated profit taxes, subsidized electricity
rates, research and development subsidies, control of the entry and exit of firms, export targets,
and highly differentiated tariffs and nontariff barriers' (p. 10).
In light of this paper, the latter example of NTBs is the most relevant industrial policy
instrument. The previous paragraph has shown how regulations on the free flow of data can
function as NTBs and end up being protectionism in disguise. The following paragraph
discusses how national champions can be created, protected, and advanced through digital
protectionism.
3.2.2. Advancing through Digital Protectionism
Now the industrial policy of creating national champions has been defined, this paragraph
explains how (digital) protectionism plays a role in creating, advancing, and protecting national
champions. First, why would a nation-state want to promote the emergence of national
champions? The main argument in favor of policies promoting this follows from strategic trade
theory. Brander and Spencer (1985) show that, from a national perspective, policies promoting
national champions are efficient. Because of increasing returns to scale, the domestic firm can
extract monopoly rents on the foreign market, as long as national governments do not take into
account the welfare of foreign residents (Brander & Spencer, 1985).
Therefore, Falck, Gollier and Woessmann (2011) state that 'governments acting on
behalf of their respective citizens should promote competition at home, but encourage
monopolies of their national firms abroad' (p. 6). Herewith executing a typical
beggar-thy-neighbor policy. This means that by creating and maintaining national champions, nation-states
also risk 'escalating global protectionist measures and beggar-thy-neighbor responses' (Spector
et al., 2009, p. 14). Enderwick (2011) thus finds the creation of national champions to be a
form of global protectionism, entailing protectionist policies focused on more than merely that
within a nation-state's borders.
Tracing back the justification of such industrial policy in Europe during the seventies
and eighties, Soete (2007) points towards its strategic nature as the leading argument. Soete
regarding industrial policy: a technological one, a trade one and an industrial cluster one. In
light of this paper's topic, the technological one is the most relevant one. At the time, politicians
defined this technological angle as 'access to some products or technologies would contain a
long-term strategic advantage' (p. 276). However, Soete (2007) discusses the lack of success
that such policies endured during the eighties. This was mainly due to the fact that 'new
inventions and innovations are continuously subject to “creative destruction” and that
knowledge is difficult to contain within firms and countries' (Soete, 2007, p. 276).
Fast forward to the twenty-first century and this paper agrees with the latter, a variety
of technologies have become public goods on a global scale. While reading this paper, you
could upload a random photo to Google's Free Vision app (Google Cloud, 2019) and get back
a full image analysis based upon AI technologies, all within seconds and for free. This involves
advanced technologies that were only available to a select group of corporations years ago.
Today, everyone has access to them. One might wonder, what is then the rationale behind
digital protectionism if these digital technologies have become widespread anyway.
The answer is relatively straightforward. One can have access to a complete refinery
facility but without oil, there is no money to be made. Taking into account the popular notion
that data can be compared to oil, the rationale is easy to find. While access to complex
algorithms and technologies have become a public good, data is far from there yet. Instead,
data is in the hands of large corporations like the earlier mentioned examples of Facebook and
others. Those large corporations are headquartered within a nation-state's borders and thus
subject to its regulations. Concerning industrial policy, nation-states can thus be incentivized
to protect data generated within its borders. As stressed by Casalini and González (2019),
‘conditioning the flow of data or mandating that it be stored locally can be motivated by the
desire to use a pool of data to encourage or help develop domestic capacity in digitally intensive
sectors, a kind of digital industrial policy. This can reflect a view that data is a resource that
needs to be made available first and foremost to national producers or suppliers’ (p. 14).
Taking into account the statement by Falck et al. (2011) that nation-states should
'promote competition at home, but encourage monopolies of their national firms abroad' (p. 6),
this paper therefore argues that the technological strategic rationale behind the industrial policy
of creating national champions is more relevant than ever. The only difference is that today's
competitive advantage lies in the data required to further develop businesses, not in the
technologies themselves.
For example, Caruana and Cannataci (2007) argue that ‘in restricting flows of personal
data to third countries, the EU is in fact protecting its local data processing and data
warehousing industries from foreign competition given that, in the absence of such restrictions,
data could be exported, processed more cheaply in some third country and then re-imported,
or stored securely and economically in a data warehouse in such third country, without any
difficulties’ (p. 105). The follow paragraph discusses a number of measures nation-states can
implement when resorting to digital protectionism.
3.3. Barriers to Digital Trade
This paragraph discusses actual digital protectionist measures implemented by nation-states
that have the potential to affect businesses operating across borders. In doing so, this research
builds upon a framework introduced by Aaronson (2018) as shown in Table 1. Being the
leading scholar in the field of digital protectionism, Aaronson (2018) has established a
framework listing and describing eight different barriers to digital trade, one of them being a
tariff barrier and seven NTBs.
Table 1: List of barriers to digital trade and their respective descriptions, adopted from
Aaronson (2018)
Barrier to Digital Trade
Description
Tariff barriers
Tariffs on digital goods
-
Non-tariff trade barriers
Localization requirements
Must conduct digital trade activities within country or require
use of local content, like hardware or software
Data flow restrictions
Must keep certain types of data in local servers or process it
locally
IPR infringement
Cybertheft of intellectual property, free file sharing websites
National standards and
burdensome conformity
assessment
Requirement to divulge source code
Filtering/blocking
Block access to certain sites or filter/block services like
Net neutrality
Relates to management of internet traffic: all services must be
treated the same regardless of size. Forbids paid prioritization
of content or throttling of content
Cybersecurity risks
Inadequate cybersecurity can undermine trust and reduce
willingness to use internet. Too much can distort trade, yet
may be justified under trade ‘exceptions’.
However, not all of the by Aaronson (2018) identified barriers to digital trade are relevant to
the scope of this research. Therefore, it is important to examine what barriers are implemented
by the three markets central to this study: The United States, the European single market, and
the People's Republic of China. In this case, the US functions as the low-level barrier situation,
the EU as the middle-level barrier, and China as the high-level barrier situation.
Table 2 shows Aaronson (2018) her assessment of the barriers to digital trade based
upon survey data collected from US businesses in 2013 and 2014. Following her results, this
study will focus on four NTBs. Considering its straightforward impact on trade, the tariff
barrier will not be assessed. The effects of the NTBs are less clear and Aaronson (2018) states
potential market and trade effects that could be the consequences of such barriers. Aim of this
study is to derive hypotheses from her preliminary findings and test those in today's situation.
The NTBs that are selected were marked by US businesses as having protectionist intent
sometimes or always, as can be found in Table 2.
Filtering/blocking and net neutrality will not be assessed because of the fact that
Aaronson (2018) did not find any potential of protectionist intent behind these measures. Last
but not least, cybersecurity risks will also be excluded from this study due to a constraint in
time and space. Throughout the course of performing this literature review, the topic of
cybersecurity has been found to be part of a whole other body of literature. Next to this, its
unclear definition makes it difficult to operationalize this barrier. China for example states that
cybersecurity risks are the sole reason for implementing nearly all of their barriers.
Cybersecurity risks can be seen as an elusive umbrella term that would interfere with the
hypothesis derived from the other better-defined barriers.
Table 2: List of barriers to digital trade and their potential effects on market and trade,
followed by whether or not US businesses in 2014 assumed protectionist intent, adopted from
Aaronson (2018)
Barrier to Digital Trade Market/trade effect
Protectionist intent
Tariff barriers
Tariffs on digital goods
Discriminating, trade-distorting
Yes
Non-tariff trade barriers
Localization
requirements
May restrict trade, may restrict access to
markets
Yes
Data flow restrictions
Often rationalized to protect privacy or
security. May restrict trade, may affect
firm’s ability to adopt the most efficient
technologies,
may
create
missed
opportunities for business/innovation
Sometimes
IPR infringement
Not always due to government actions
but often due to inadequate governance.
Can discourage investment and data
flows
Sometimes
National standards and
burdensome conformity
assessment
Raise costs, may be discriminatory, may
make it harder to enter new market
Yes
Filtering/blocking
Equivalent of a border wall: spills-over
into other markets, and may affect
internet stability and generativity
No
Net neutrality
Raise costs of some providers
No
Cybersecurity risks
Raise costs and impedes market access
Sometimes
Note: Non-tariff barriers that will be included in this study have been underlined.
