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.
2. The rapid evolution of digital barriers
Sixteen years after China’s entry into the WTO, the Chinese business environment is inarguably improving, and the use of mobile and internet services has improved social and commercial interactions within China. This development is evident from a number of trade and business metrics (e.g. the World Bank’s Doing Business index). However, this progress is contrasted by an increasingly intricate web of regulations that inhibit foreign participation in the China’s digital economy, and discrimination of online services compared to their brick and mortar equivalents.
This increasing number of discriminatory measures is symmetrical across the value chain, from upstream to downstream – from infrastructure and mobile equipment that carries the digital backbone to downstream online services, apps and the cloud – and the measures affect production as well as usage by public and private sectors.
Figure 1: Number of measures restricting ICT and digital trade in China, 1985-2016
Source: Digital Trade Estimates Database, May 2017
As evident, the number of barriers against the ICT and the online market is substantially increasing (figure 1). Some of the measures actually pre-date the time of public commercial use of the internet and before a proper ICT structure (with the use of PCs, broadband and mobile networks) took hold of the economy. Such regulations were designed for an offline world, but provided legal ground for later invented technologies. For example, the State Security Law (passed in 1993) provides the state security organs with access to any information or data held by an entity in China whenever they deem it necessary. Without doubt, the scope of the State Security Law has grown exponentially in the digitalisation era.
However, the majority of the restrictions in China were introduced in the last decade, as 54 (out of 76 identified in total) were implemented after 2007, with 27 new measures in the last three years alone, where the majority concerns usage and transfer of electronic data (Figure 2). Other commonly used policies in the regulatory toolbox relate to national standards and intellectual property rights (IPRs), as well as restrictions on tariffs, trade defence and internet content access. Fewer measures are found in business mobility and competition policy. But the number of measures alone does not always provide a full picture of the actual restrictiveness applied.
Figure 2: Number of discriminatory measures currently in force in China, 1985-2016
Source: Digital Trade Estimates Database, ECIPE, May 2017
Regardless of the policy field the restrictions occur, some objectives are recurring to justify these restrictions. A common objective relates to the implementation of a national industrial policy, with a clear goal to encourage the emergence of national champions. Although the history of Asian industrialisation shows that such protectionism tends to be phased out, as competitive producers emerge and the economy transitions into export orientation, China’s case may be different: Not all of China’s national champions are destined for export orientation. Some policies are intended to protect purely inward-looking state-owned enterprises (SOEs) and public investments by various investment vehicles controlled by provincial and municipal governments.
China has also a number of measures with the objective to support public safety and morals, especially for the public use of the internet. Such restrictions have a long history in China, going back to government control of publishing and trade in printed matter, traditionally retained to control public opinion. Moreover, the fourth recurring objective is national security – which has justified the enactment of an increasing number of measures affecting supply of equipment, software and services into China’s business and government sector.
 Article 11 of the State Security Law stipulates that “where state security requires, a state security organ may inspect the electronic communication instruments and appliances and other similar equipment and installations belonging to any organization or individual”. In addition, Article 18 stipulates that “When a State security organ investigates and finds out any circumstances endangering State security and gathers related evidence, citizens and organizations concerned shall faithfully furnish it with relevant information and may not refuse to do so”.