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Macro Matters: The revenge of geography

The internet is fuelling rising global populism and digital protectionism 

The internet is the defining meme of globalisation.

There are no boundaries and we cannot conceive of a world without it. The largest companies globally are increasingly associated with technology, and big data is the mountain they all mine today for their global profits.

But this poster child and its borderless model are under threat. Today, it is fast becoming another battleground of protectionism and populism, while cash-strapped governments look to tap into the digital gold rush. The result is the emergence of boundaries and the erosion of global business models.

It is the revenge of geography.

The internet is largely viewed through an American prism, not surprising, given its history and the predominance of US firms.

But today, only 8.5% of internet users – 287m people – are in the US, compared with 21.4% (721m) in China and 13.7% (462m) in India. Europe – even without the UK – has 64m users more than the US today. That differential will accentuate further in coming years as penetration levels in emerging markets catch up with the developed world.

The growth and rising clout of these nations as internet hubs reflects a huge geographic shift. It also changes the nature of the debate over the governance and culture of the internet, given the different economic priorities, commercial interests, cultural sensitivities and socio-political landscapes.

global internet users compared with of world population for top 10 countries

In this environment, the unwritten organic constitution of the internet cannot survive. The question of who owns it is increasingly coming to the fore, especially as it intrudes onto economic development, societal norms and security concerns.

China has already set up the ‘Great Firewall’ of China, which limits access to politically

unpalatable websites, screens search results and the like. In the developed world, the US and UK have clashed with tech firms, as they seek access to private information, backdoors into popular platforms and a weakening of encryption standards in the name of combating terrorist threats.

“We have owned the internet. Our companies have created it, expanded it, perfected it in ways that [Europeans] can’t compete”

Barack Obama

Deeper social clashes are also emerging. In October 2015, the European Court of Justice struck down the 15-year-old Safe Harbor data transfer agreement that allowed US firms to transfer EU personal data to the US for processing. In September 2015, Russia passed a data localisation law requiring companies to store data on Russian citizens on Russian soil, and further strengthened enforcement powers in January 2017.

These decisions were the direct consequence of, in particular, the Edward Snowden revelations of widespread tapping by US intelligence agencies, which accentuated tensions and bled trust.  

But efforts to control the flow of data also reflect the fundamental tensions of geography in a globalised world, as countries worry about political stability, the boundaries of their rule of law, obligations to citizens, and unknown threats to the existing order.

Today, there is a growing sense of fragmentation and state intrusion across the internet. Beyond geopolitics, however, these efforts to impose the constraints of nationhood also threaten to leech protectionist sentiment and economic nationalism into the digital sphere, with governments using legislation to limit digital trade and – consciously or not – favour local industries.

In 2015, Canada banned foreign providers from bidding on its new email platform for federal organisations, and introduced a requirement for support personnel to be Canadian citizens, pointing to a national security exception. In 2013, the US banned the departments of justice and of commerce from buying IT systems “produced, manufactured, or assembled” by entities “owned, directed, or subsidised by PRC [People’s Republic of China]”. Europe has outlined plans to create a new “digital single market” simplifying rules for operating across EU borders, although also including new regulations for online “platforms”.

There are commercial imperatives hidden within, alongside purer security and privacy concerns. In a world looking to technology for future economic growth, nurturing local industry is now key to economic development. China’s Great Firewall successfully sheltered local titans like Sina Weibo and Baidu from foreign competition.   

The collective impact is a wave of emerging digital protectionism. There is now a growing cost of localisation and storage – regardless of location – coupled with growing policy, political and litigation risks. Added to this mix are the ramifications of incipient populism in the real world. As technology reshapes the global economy, governments are struggling with the socioeconomic fallout of disappearing jobs amid lacklustre economic growth. There is a dawning realisation that much of this digital economy sits beyond their fiscal grasp, resulting in growing clashes globally over the taxation of tech firms like Google.

Over time, these diverse fractious fights will eventually reduce flows of data and, in turn, digital trade. This would severely impair tech business models as first, they rely on mining and selling data in some form to generate revenues; and second, they minimise costs by picking the lowest cost and tax-efficient digital supply chain globally.

Although technical and cloaked in code, there is a digital tragedy of the commons unfolding today. As different nations grapple for their share of the digital pie, companies are being forced to localise, individuals are losing faith and the global nature of the internet – not to mention its potential – is fast disintegrating in the absence of any overarching care.

This digital clash between global and local – left unchecked – mirrors, threatens and accentuates the same risks as populist fervour and protectionism in the wider economy today.

We ignore digital protectionism at our peril.

Bob Swarup is principal at Camdor Global Advisors, a macroeconomic investment and risk advisory firm.
swarup@camdorglobal.com

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