Diverging incentives for reforming China’s restrictions on digital innovations
| Date | 02 October 2017 |
| Pages | 259-280 |
| Published date | 02 October 2017 |
| DOI | https://doi.org/10.1108/JCEFTS-06-2017-0016 |
| Author | Martina Francesca Ferracane,Hosuk Lee-Makiyama |
| Subject Matter | Economics,International economics |
Diverging incentives
for reforming China’s restrictions
on digital innovations
Martina Francesca Ferracane and Hosuk Lee-Makiyama
ECIPE, Brussels, Belgium
Abstract
Purpose –This paper aims to investigateChina’s policy on digital trade with the objective to highlight the
rationalesbehind such policy.
Design/methodology/approach –China’s policy on digital trade is assessed by analysing the main
regulationsimposed in the country in the period from 1985 to 2016 thathave an impact on digital trade.
Findings –It was found that there aremore than 70 measures imposed today that have a negative impact
on digital trade. The measures are diverse and can be justified with several policy objectives, namely,
industrial policy, public order and national security, and these support China’sfiscal and state-owned
enterprisestructure.
Originality/value –This paper analyses China’s policy on digital trade from a new perspective and
providesinsights on the rationales behind this policy.
Keywords Trade policy, Internet, National security, Data flows, Digital trade
Paper type Research paper
1. Introduction: China’s choices in opening up for digital innovations
With more than 700 million internetusers[1], a foreign exchange reserve of US$3tn[2], China
has reached the critical mass to become a leading nationin the internet economy. China also
has one of the highest rates of growth in R&D expenditure[3], and is home to some of the
leading manufacturers such as Huawei and Lenovo (joined by the emergence of online
services like Baidu, Alibaba and Tencent). China has nearly all the components to also
become an innovation leader in this market space, but it still lacks an open economic
exchange of trade and investmentsin the sector.
Cross-border trade and investments is a key determinant for innovation structures and
capabilities: Onodera (2008) and OECD research have established that imports are an
important channel for technology transfer, thanks to more diverse technology sourcing,
whose importance is also increasingwith convergence in the digital technologies. Increased
competition (and decreased rents) can lead to a decrease in the resources available for
innovation, but competition generally increases incentives to innovate, while creating
spillover effects from increased investments, through worker mobility, spin-offs and
backward or forward linkages.
The link between innovationand trade is particularly relevant for China. Despite the fact
that the Chinese economy is overall more open since its accession to the World Trade
Organisation (WTO) in 2001[4], the internet economy and the information and
communication (ICT) sectorare still exceptions. Comparatively, China imposes more market
and import restrictions on digital innovations than any other country, and it does so by a
vast margin in terms of the number of regulations enforced[5]. Restrictions are tightening,
especially owing to cybersecurity-related measures[5], while China’s legal and technical
China’s
restrictions on
digital
innovations
259
Journalof Chinese Economic and
ForeignTrade Studies
Vol.10 No. 3, 2017
pp. 259-280
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-06-2017-0016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
framework for state control of internetcontent remains pervasive, and these measures block
a substantial share of foreigncommercial platforms and intermediaries[6].
In this paper, we argue that China faces economic incentives to further facilitate cross-
border trade, leading to more digital innovations that in turn spur consumption, improve
industrial productivity and revitaliseexport competitiveness. The economic imperative in a
time where economists seefurther digital advancement is critical when its current engine for
economic growth –labour supply and investments –has already run its course[7], as
demographics are putting an upward pressure on wages, while investments (eclipsing
nearly half of China’sGDP)[8] are not put to their most productive use (Wu, 2016).
But there are also very strong and complex rationales for remaining restrictive towards
digital innovations. It is self-evident that transitional economies (like China) require more
state interventionsand restructuring and are more prone to market failure than more mature
and technologically advanced economies. A user-driven economy driven by the internet
hampers the ability to deploy marketinterventions by the state, and this could be deemed as
potentially destabilising if they entail fiscal decentralisation, or it is perceived as exposing
China to internal or externalthreats to its constitutional structure.
2. The rapid evolution of digital restrictions in China
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 several trade and
business metrics (e.g. the World Bank’s Doing Business and OECD indices)[9]. However, this
progressive liberalisation is contrasted by an increasingly intricate web of regulations that
inhibit China’s digital economy –typically against foreign participation in the
commercialisation and production by foreign entities, or restrictive against use of digital
technologies overall and by discrimination of online services compared to their brick-and-
mortar equivalents. ECIPE Digital Trade Estimates database (2017) catalogues both categories
of restrictive practices, from which we draw observations details in the following sections.
Firstly, the number of barriers against digital innovations and the internet are
substantially increasing (Figure1). The majority of the restrictions identified in China were
introduced in the past decade:54 measures (out of 76 identified in total affecting the Chinese
digital economy) wereimplemented after 2007, with 27 new measures in the past three years
Figure 1.
Number of measures
restrictingICT and
digital tradein China,
1985-2016
JCEFTS
10,3
260
To continue reading
Request your trial