Managing Rivalry in the Digital Era through Peaceful Competition

Digital technologies and big data have fundamentally altered economic relationships, and with them geoeconomics and geopolitics.

Firms in the new technologies/digital space have characteristics that are different from the traditional model of manufacturing-based growth. Participants face high upfront costs and associated with this, high risk of failure. But once success is achieved, it is sweet — marginal costs of reproduction are zero or near-zero, and if protected by any form of intellectual property (IP), profits are economic rent. There is a first-mover advantage that is accentuated if product or industry standards are developed concomitantly.

Standards, the technical and process “handshake” that provide conformity across diverse products, production and distribution, are the underappreciated ground game here. For example, the standardization of the dimensions of the shipping container through ISO 668 in 1968 is credited as one of the principal drivers of globalization. In the information and communication technology sector, between 1998 and 2012 alone some 435 consortia were created to develop and lock in standards.

Finally, success in this area is underwritten by economies of agglomeration and geopolitical strategy. In the high-tech sector, “clustering,” be it of firms, talent, finance or support services, coupled with an active national strategy to nurture and build out the sector, is key to understanding the winners and “the ‘collective’ character of innovation.”

An economy with these characteristic features has implications for domestic economic and social policy, and for international relations.

Globally, our digital infrastructure is undergoing a sweeping transformation. Whereas the first wave of internet expansion featured the proliferation of open networks, we are now in the midst of a digital arms race. The competition between software stacks, data-collection capacities and digital business models is creating clashes across developed and emerging economies, and within democratic and authoritarian countries alike. At issue is the core architecture of the digital economy itself.

Questions about digital governance are central to how we reconstruct our post-pandemic world. The spread of digital technologies and the coronavirus are both manifestations of an era of undermanaged hyper-globalization, and the pandemic has deepened the economic, geopolitical and technological divide between the United States and China.

Governments emerging from the current economic shock will be in dire need of revenue. And after the society-wide lockdown, technologies that have become deeply embedded in our lives more or less overnight will need to be scrutinized. Policy makers are taking a hard look at issues such as data privacy, surveillance technology, the inequities embedded in algorithms and the integrity of our information ecosystem.

The internet was once defined primarily by an absence of centralization. But now what matters most are concentrations of data and computational capacity. The platform economy, artificial intelligence (AI), the surveillance state and quantum computing all demand large-scale data sets, and all entrench centralized nodes of influence.

These new capacities are revolutionizing every economic sector that matters, from financial services, media and public health, to transportation and agriculture. Having been built on top of the new digital infrastructure, computational capacity and AI-driven analytics now power the global economy.

Yet they are also concentrating decision making and expanding the power of those who control the data. This new reality poses difficult policy challenges because it produces winner-takes-all economic outcomes, concentrations of influence that circumvent democratic institutions and national sovereignty, unanticipated national- and human-security threats, and entirely new geopolitical blocs.

Whereas the industrial economy was dominated by the production, trade and consumption of tangible goods, the digital economy is built on the production, collection and protection of information. It operates according to an entirely new system of incentives for production and innovation, and of the capture and distribution of financial gains (Orol 2018). More often than not, the source of value lies not in production or exchange, but in IP rights. Indeed, IP is now the world’s most valuable asset, accounting for 84 percent of the total value of S&P 500 companies (Berman 2019).

China, for example, built a firewall to protect major tech champions such as Baidu, Tencent and Alibaba, and is now helping them expand their reach globally through its Belt and Road Initiative, even furnishing other authoritarian governments with high-tech tools to help them maintain social and economic control. As Chinese soft power extends to the shipment of medical supplies during the pandemic, we are seeing a convergence of the country’s strategic and digital infrastructure aims.

The United States also has aggressively championed its own tech companies — Facebook, Amazon, Google, Netflix, Microsoft and Apple, in particular — by securing favourable international rules about data sharing and collection, platform governance and IP (most recently through the Canada-United States-Mexico Agreement), while otherwise relying on a laissez-faire regulatory approach. Finally, the European Union, which does not have any globally competitive digital tech companies, has been leading on standards and regulation, data-rights regimes and competition policy, all of which it hopes to export as a mode of global influence and market creation.

Behind these rivalries are concrete issues that demand global governance. We need a forum through which to balance, and ideally reconcile, tensions between freedom of speech and privacy online, and now between privacy protections and the need for surveillance to track the spread of contagious diseases. Other points of contention include the governance of tangible and intangible assets, individual rights and collective protections, and incentives for innovation versus the need for appropriate regulation and adequate taxation.

The pieces in this series explore key issues in the governance of a data-driven economy and society, with an emphasis on how international cooperation (or lack thereof) might backstop national policies (or render them less effective).

Conclusions

Participants in the conference1 provided wide-ranging historical, technical and statistical analyses of the development of the digital economy, which illustrated:

  • the rapid, recent expansion of digital services and e-commerce globally (Tiberghien, Luo and Pourmalek; Lippoldt);
  • the resilience of the Chinese economy, the increasing importance of China as a global power in general, and in this field in particular, and therefore the limits to a “decoupling” or blocking strategy executed by the United States, European Union or other powers (Kruger, Rudd, Zysman); and
  • the increasing digital rivalry between China, the United States, the European Union and India (Rudd, Fay, Ernst, Mathur, Ciuriak and Penna), with measures and countermeasures being taken by the United States and China with the intention of achieving “technological supremacy and control over the digital economy” (Fay) but often with the unintended and perverse effect of damaging their own industries in the medium or long term (Ernst, Zysman).

Against this general background, participants expressed differing degrees of pessimism (Rudd, Zysman) or cautious optimism (Lippoldt, Fay) about the prospects for global cooperation in digital governance, with some contributions (Saran, Hathaway) emphasizing the need for the West to proceed from a position of strength or at least on the basis of a clear-eyed view of Chinese digital ambitions.

There was, however, an emerging consensus on a number of significant analytical conclusions. Participants broadly agreed on the following:

  • We have reached a stage in the evolution of digital technologies at which governments are increasingly concerned with digital governance in order to counteract what they see as the dangers of unregulated digital markets (for example, Penna, Ciuriak, Zysman).
  • This has resulted in the emergence of differing forms of national and international digital regulation (for example, Lippoldt, Gao, Zysman).
  • However, both globally and in individual jurisdictions, there remains a large “governance gap” in relation to e-commerce (Lippoldt), digital platforms and platform content (Lemos and Perrone), digital infrastructure (Tworek) and, in fact, in almost every aspect of the digital economy (Tiberghien, Luo and Pourmalek; Fay; Ciuriak; Zysman).
  • This governance gap is giving rise to inconsistency of regulation, lack of trust, the stifling of innovation and global inequities (Tworek; Lemos and Perrone; Tiberghien, Luo and Pourmalek; Lippoldt).
  • Efforts to close the governance gap are being impeded both by the geopolitical/geoeconomic rivalry between the United States and China, and by competing models of digital governance (Fay, Rudd, Ernst, Mathur, Penna, Zysman); this was described memorably by one participant as “a potentially toxic blending of geoeconomics and geopolitics” (Ciuriak).

Recommendations

Based on this emerging analytical consensus, participants made a range of recommendations about the most fruitful ways of beginning to address the global digital governance gap. So far as the general approach was concerned, there was a considerable degree of convergence.

The first point of agreement between participants — in some cases explicit (Tiberghien, Luo and Pourmalek; Lippoldt; Zysman), in others implicit — was that the scale, variety and complexity of the global digital economy, and the multitude of different existing international approaches to digital governance (with the Organisation for Economic Co-operation and Development [OECD]) already identifying 52 instruments of regulation administered by 24 international bodies), precludes any simple “solution.”

The second point emerging clearly from a large number of the contributions, and not contested by any participant, was that the current strategic rivalry between the United States and China (and, to a degree, the European Union and India) in this domain, as well as the marked differences in attitudes to domestic digital regulation in different countries and regions around the world, makes it necessary to approach the construction of any new, more coherent global system of digital governance progressively and in the spirit of defining areas of commonality, within which differing jurisdictions would be able to operate differing degrees and kinds of regulation (Gao — “tiered obligations…around a core set of commonly accepted basic principles”; Ernst — a “meta regime” to enable discussion where there is no agreement; Lippoldt — “confidence-building measures” in e-commerce and business processes; Lemos and Perrone — “a transnational framework that allows for some integration of local and domestic values, interests and cultural and social particularities but also maintains a degree of inter-operability”; Zysman — “a patchwork of market and social bargains, often covering some, but not all, regions…that…still allows global production systems and markets”; Tiberghien, Luo and Pourmalek — “a thin global framework…part of a larger multi-level and partly competitive effort to generate governance capacity”).

As a result of the consensus on these general points, although there was broad agreement on the desirability of what one participant called “a new institutional architecture that addresses the negative consequences of technologies and the socio-economic inequalities at the global level” (Penna), no participant put forward anything purporting to be a simple “blueprint” for global digital governance, and some participants (Lippoldt; Tiberghien, Luo and Pourmalek) recommended “multi-pronged” approaches. One participant (Zysman) advocated a progressive approach, beginning with a Trans-Atlantic partnership, with a gradual attempt thereafter to introduce Asian and other participation.

It was also widely suggested that, to support the establishment of any new architecture of governance, more transparent information was required at the global level. This was described by one participant (Mathur) as “a need for developing a common framework for measuring the digital economy,” and by another participant (Ciuriak) as a requirement for “a new quantitative framework for assessing the impact of international commitments suitable for the intangibles economy…taking into explicit account the value of data.”

However, with these caveats and qualifications, two distinct and specific (although by no means necessarily mutually incompatible) lines of development were proposed by differing (although overlapping) groups of participants:

  • Some (Gao, Ernst, Lippoldt, Ciuriak) argued that substantial progress toward more coherent global digital governance could be made within the existing framework of the World Trade Organization (WTO). The concept, here, would be to build on the WTO’s 1998 Declaration on Global Electronic Commerce, on the WTO Work Programme stemming from that declaration, and on the resulting WTO Joint Statement Initiative on e-Commerce — which now has 86 signatory countries (including the United States and China) that are collectively responsible for 90 percent of global trade. So far, the texts that have emerged from the Joint Statement Initiative deal with relatively uncontentious topics such as e-contracts and e-signatures, but Gao, Ernst, Lippoldt and Ciuriak all believe that more general agreements on e-commerce and other aspects of digital governance might follow in due course if effort is devoted to this process, notwithstanding the strategic digital rivalry between the United States and China.
  • On the other hand, some participants (Thibergien, Fay, Lippoldt) proposed that the Group of Twenty (G20) should establish a new Digital Stability Board (DSB). The suggestion was that this new board could be developed out of the existing G20 Digital Economy Working Group, and out of the progress that has been made by the OECD and the G20 on the taxation of e-commerce. The new board would mirror the Financial Stability Board, created following the 2008 financial crisis. Through a fully-fledged Digital Standards Working Group, the new DSB would coordinate “standard setting for digital technologies” in realms such as data control, the ethical use of algorithms and the inter-operability of digital platforms (Fay); and it might also “develop rules for co-existence similar to arms control agreements for the large part of the digital and AI economy that is going to be fully decoupled and fragmented” (Tiberghien, Luo and Pourmalek, with strong echoes of Rudd). In short, it would form the basis for a new global approach to digital governance.

This introduction draws on “A Post-COVID-19 Bretton Woods” by Rohinton P. Medhora and Taylor Owen (published by Project Syndicate); “Policy Choices in an Era of Intangibles — Where to Start?” by Rohinton P. Medhora (Economic Research Forum Working Paper); and “Rethinking Policy in a Digital World” by Rohinton P. Medhora (CIGI Policy Brief No. 143).

  1. Where a specific point is attributable to a participant, their surname is provided in brackets (and hyperlinked in first instance) after the point in question, in order to enable the reader to obtain more detail and to get more sense of the context by reading that participant’s full contribution in this series.

Works Cited

Berman, Bruce. 2019. “$21 Trillion in U.S. Intangible Assests Is 84% of S&P 500 Value — IP Rights and Reputation Included.” IP CloseUp (blog), June 4. https://ipcloseup.com/2019/06/04/21-trillion-in-u-s-intangible-asset-value-is-84-of-sp-500-value-ip-rights-and-reputation-included/.

Orol, Ronald. 2018. “The IMF Should Spark a Bretton Woods Moment for the Digital Age, Says Balsillie.” Opinion, Centre for International Governance Innovation, November 22. www.cigionline.org/articles/imf-should-spark-bretton-woods-moment-digital-age-says-balsillie/.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Authors

Rohinton P. Medhora is president of CIGI.

Sir Oliver Letwin is a visiting professor, King’s College London Policy Institute, and chair of the Project for Peaceful Competition.