China’s restrictions on the internet and the ICT sector are tightening, with over 50 measures targeting this sector implemented just in the last decade. The rationale for these restrictions is not merely about shielding the country from foreign competition or security threats, but also to defer politically challenging reforms. Much of the rationale behind such digital protectionism is historically unprecedented and uniquely Chinese.
This paper explores the policy framework applied to the digital sector in China. More often than not, China’s digital mercantilism is interlinked with non-commercial objectives, such as public order, fiscal governance and national security, making them more difficult to reform or to negotiate. China’s technology restrictions protract many economic and political reforms, but inaction also comes at a cost: Digitalisation is necessary to spur consumption, improve industrial productivity and revitalise the Chinese economy.
China short-term and long-term needs are an unsolvable digital dilemma – to borrow the words of the ancient historian Livy: China is unable to neither bear its ills nor its cure. On one hand, deferring market reforms worsens a dangerous economic slowdown that would destabilise the country. On the other hand, reforms could severely limit a governance model that is needed to maintain stability.
1. Introduction: China’s digital dilemma
With more than 700 million internet users, a foreign exchange reserve of 3 trillion USD, leading manufacturers like Huawei and Lenovo, and the emergence of online services like Baidu, Alibaba and Tencent, China has all the components to become a global player in the internet economy. Yet it is not. Although the Chinese economy is overall more open since its accession to the World Trade Organisation in 2001 and its entry into the open trading system, there are still important exceptions: The internet economy and the ICT sector are but an intricate web of regulations which are increasingly tightening.
China imposes more trade and investment barriers, discriminatory taxes, and information security restrictions than any other country by a vast margin. Moreover, China’s legal and technical infrastructure for online censorship remains pervasive and blocks not just politically sensitive content, but also the majority of foreign commercial platforms and intermediaries. China’s rationale for these restrictions is increasingly complex, and not merely about shielding the country from security threats or foreign competition. In some cases, restrictions are deemed necessary to defer challenging reforms: The Chinese economy is constantly on the verge of market failure that is avoided through government interventions and short-term restructuring. A user-driven internet economy hampers the ability to deploy such short-term fixes, forcing the Chinese leadership to deal with the underlying causes. In other words, opening up the internet brings about many belated structural reforms.
Although China’s technology restrictions allow the Chinese leadership to protract economic and political reforms, inaction also comes at a cost: Further digitalisation is necessary to spur consumption, improve industrial productivity and revitalise export competitiveness. China’s engine for economic growth – ample labour supply and investments – has already run its course. Demographics are putting an upward pressure on wages, while investments (eclipsing nearly half of China’s GDP) are ending up in non-productive use.
This is why China is in a dilemma the Roman historian Livy famously described as “unable to neither bear its ills nor its cure”. On one hand, opening up its digital economy necessitates a number of destabilising reforms, especially if they entail fiscal decentralisation or changes in its constitutional structure; on the other hand, deferring reforms worsens the dangerous economic slowdown, that is certain to lead to social unrest too.
China’s trading partners – the leading online service and technology exporters in Europe, Japan and the US – are caught in a similar Livian dilemma: As it stands, China’s trading partners lack any effective leverage against China’s digital protectionism besides “reciprocity” – i.e. closing their own economy in retaliation. However, such cause of action is contrary to the long-term goal of integrating China and the emerging markets into an open economic order.