Avoiding a fractured digital global economy

Digitalisation accelerated during the pandemic as societies adjusted to social distancing through rapid responses in healthcare, education and service delivery. The digital economy is the new economy, underpinning productivity growth, development and prosperity globally. Sources of innovation and technological progress are increasingly diffuse with the emerging world and China becoming important sources of new technology. But a global governance deficit and geopolitics are contributing to a digitally divided global economy.

Strategic rivalry between China and the United States is leading to digital decoupling and contributing to a more fragmented digital global economy. Different standards are being set in Europe, the United States and China.

The Asia Pacific includes China, the United States, and countries that are proactively engaged in rule-making. East Asia is the most data rich region in the world. There are shared global interests and common challenges, as well as huge potential productivity and growth gains, that should encourage agreement on principles and rules to govern the digital economy — and dialogue and cooperation for confidence and trust building along the way.

Middle powers like Australia and Japan will need to find creative solutions and groupings that are inclusive. ASEAN must also be at the centre of finding multilateral solutions and keeping regional arrangements open and outward oriented.

Digital protectionism is on the rise, fuelled by the lack of multilateral rules and norms, interest in promoting home-grown companies and geopolitical rivalry.

Since much of the digital economy has the features of a public good, barriers are detrimental for economic growth and development. A digitally divided global economy will affect supply chains, productivity, people’s livelihoods and the growth potential of economies, including those at the technological frontier.

There are major security challenges around data privacy, use and sharing, as well as cyber security. These are risks that are not uniquely posed by China and their mitigation and management will determine the pace of technological progress globally.

There are system differences between countries, with diversity across governments, economies, approaches to data privacy and ownership, governance regimes, and attitudes to international trade and investment. A multilateral digital governance regime will allow governments to set their own policies and retain sovereignty while multilateral rules can limit discrimination, promote transparency and predictability, and constrain governments from protectionist policies.

Rulemaking for the digital economy has progressed in bilateral and regional agreements like the Australia–Singapore Digital Economy Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This bottom-up approach will increasingly have to be guided by multilateral principles to avoid lowest common denominator outcomes by building trust across different countries through technical and economic cooperation.

Multilateral initiatives include Japan’s Data Free Flow with Trust initiative at the G20, which had Chinese and American sign-on, and the WTO’s e-commerce plurilateral initiative. Progress in the Asia Pacific can help shape multilateral initiatives.

The practical way forward is for middle powers to mobilise governments, technical experts and business through regional groupings like APEC to promote economic cooperation on digital trade facilitation and regulatory coherence. APEC should create interoperability with other regimes.

Regional cooperation on the digital economy will have to comprehend a wider range of issues than traditional trade issues in existing agreements, including trusted access to data, protecting privacy and security, competition policy, and formulating norms to govern artificial intelligence and fintech.

Risk can be managed and mitigated with competition, technical solutions and agreed principles and rules. Introducing more competition takes time and needs to be done with governance that identifies and reduces risk within and across borders. This will require international cooperation and experience sharing.

Platforms that rely on large numbers of users and network effects will be punished by users and lose market share quickly if they breach the trust of consumers — provided the market is competitive and switching costs are not prohibitive. Platforms in any country have incentive to protect the data of their users and maintain trust through cyber security and transparent terms and conditions. That incentive can be enhanced with appropriate governance.

Hardware bottlenecks and choke points can be alleviated by competition. Concentration of the production and supply of semiconductors, strategic materials and other technologies are all risks that can be alleviated or avoided with increased competition. Avoiding vertical integration of production and allowing competition, including from foreign companies, in each stage of production will support alternative suppliers and shift risk to private enterprises.

Increased competition, including between China and the United States, under agreed multilateral rules instead of bans for strategic, security or protectionist reasons will lift innovation and productivity and reduce risks borne by governments and societies. Agreed principles and rules can lead to competition that leads to measures to outperform other countries instead of undermining them.

Domestic laws are important for protecting against data misuse or privacy breaches by foreign and domestic actors. Clear, consistent and enforceable domestic laws around privacy and market integrity requirements and compliance testing with serious penalties are an important protection against cyber risk. Experience sharing between countries can help get policies right.

There’s an urgency in guiding multilateral digital principles to avoid a fractured global system. As the G7, G20 and other groupings discuss ways forward, middle powers can shape global outcomes most effectively with progress in the Asia Pacific that builds an inclusive and workable cooperation agenda.

This article was written by Shiro Armstrong, Associate Professor at the Crawford School of Public Policy; Rebecca Sta Maria, Executive Director of the APEC Secretariat, Singapore; and Tetsuya Watanabe, Vice President of the Research Institute of Economy, Trade and Industry (RIETI), Japan, and Visiting Professor at the Graduate School of Public Policy, The University of Tokyo.  They are co-authors of the joint expert report Towards an Asia Pacific Digital Economy Governance Regime.

All views expressed are those of individual authors and do not represent the views of the institutions to which the authors are attached.  This article was published by the East Asia Forum.