The missing trade war against China’s digital protectionism

Earlier this summer, the Trump administration took its first concrete step toward what some think could turn into an all-out trade war with China. The product that it put an import tax on? Aluminum foil. Like the Obama administration, which took action against China's subsidies to auto parts manufacturers and withholding of rare earth exports that are crucial to tech manufacturing, Trump seems focused on physical goods.

But China's main trade barrier against the US isn't on manufactured or raw goods; rather, it targets Google, Facebook, Microsoft, and the bulk of the multi-billion-dollar, fast-growing tech sector. Many of these companies have been facing market access issues in China for years due to the blocking or censoring of their digital content or tools, likely costing them billions in potential revenue.

"China's extensive use of digital trade barriers ... have reshaped the production and sales of many global tech sectors as they've been forced to either adapt to China's restrictive and costly requirements or avoid the market entirely," said Nigel Cory, trade policy analyst at the Information Technology & Innovation Foundation.

Unlike the flashpoint over aluminum foil, there has so far not been a single trade case against China for the blocking of websites, apps, or platforms by what is the world's biggest internet market. This digital protectionism has resulted in the creation of China's own tech superpowers -- Tencent, Alibaba, and Baidu -- which are now competing globally with their US counterparts. The new president has not yet shown any sign of taking on digital trade with China. Tech companies like Apple, Facebook, and Amazon either have been silent or are openly courting or complying with Chinese regulators.

As China's digital economic power grows, the question is whether that will change, as freedom-of-expression groups and, increasingly, the tech industry have been asking. The goal: ensure that digital trade and information flows as freely in and out of China as do lightbulbs, shoes, or any of the other Chinese-made consumer goods found in stores across the US. Otherwise, some fear that the Chinese model of the internet -- state control of information and access -- may be copied by other countries for censorship and protectionism purposes. At risk is nothing more than the future of the internet as a global public forum.

Not too long ago, many argued that the spread of the internet to authoritarian states like China would lead to greater democratization. In reaction, countries like North Korea and Cuba severely restricted their citizens' access to the web. China, however, was in the midst of opening its markets to global companies, and wanted to become a hub for manufacturing devices that would give internet access to the world. Blocking the web entirely was not an option.

The solution was called the Golden Shield Project, announced in 2000 by the Chinese Ministry of Public Security. Today, the project is more commonly known outside of China as the Great Firewall. It was an attempt to give China the best of both worlds: courting local innovation and foreign investment to make the country a hub for tech manufacturing without the pesky side effect of relinquishing too much of the Communist Party's near-monopoly on information.

What was initially the blocking of a few web pages that the Chinese government deemed sensitive, such as those about the Chinese occupation of Tibet or the Tiananmen Square Massacre, has turned into a massive filter between the Chinese web and the websites and apps of many foreign companies, news media, and NGOs. The Great Firewall has gotten progressively more sophisticated, and a major move came in 2009 when the growing social networks Facebook and Twitter were blocked, along with YouTube.

"Twitter and Facebook and other large social media apps, in the eyes of the authorities, simply cannot operate in China without censorship," said Charlie Smith, co-founder of GreatFire.org, a nonprofit that provides analysis and circumvention tools for the Great Firewall. "This has everything to do with protecting the party's grip on power ... Helping domestic companies may be an additional side benefit, but it is not the main reason."

Facebook and Twitter were blocked in June 2009, just days before the 20th anniversary of the crackdown on the pro-Democracy protests in Tiananmen Square, and alongside deadly riots in China's restive western province of Xinjiang.

Since then, the list of blocked sites and apps, as well as the number of restrictions on internet companies, has only grown, as has the Chinese digital market. Today, the vast majority of Chinese internet users are not just prohibited from searching about sensitive topics but can't share files via Google Drive, chat with overseas coworkers through Slack or post anything, sensitive or not, to Facebook or Twitter.

Yet according to Matthew Schruers, the vice president for law and policy at the Computer & Communications Industry Association, which counts Google, Facebook and Amazon as members, it is difficult to quantify how much China's trade barriers impact US companies.

"It's relatively easy to tell if a country is blocking bananas at the border and to calculate the scope of the banana market," said Schruers. "With digital trade, it is not always that straightforward. Sometimes services are not fully blocked, but they are throttled, and quality of service is diminished, or they are selectively filtered over time."

Still, the impact is real. In 2010, Google controlled 40 percent of the Chinese search market, but since it left the country (and was subsequently blocked), Chinese search traffic has gone to the local, censored alternative Baidu, which now controls a nearly 80 percent market share.

Since China joined the World Trade Organization (WTO) in 2001, the US has filed, and won, several trade cases against the world's second-largest economy. But these cases are focused entirely on physical products, like the December 2016 complaint about tariff rate quotes for wheat, rice, and corn. None, so far, address digital trade.

"Unfortunately, countries [like China] are able to enact barriers to digital trade, as there is a vacuum in terms of rules that deal with digital trade issues," said Cory.

This is a limitation in nearly all existing agreements governing trade, which mostly date from the pre-internet era. The WTO came into force in 1995, and its predecessor, the General Agreement on Tariffs and Trade (GATT), in 1947. Both focus on the trade of goods, not services.

"Existing rules at the WTO -- mostly agreed to in the mid-1990s, when the internet as we know it didn't exist -- have proven ineffective," said Cory.

That's why when the Chinese tried to block American-made auto parts from entering the country, the US quickly filed a complaint at the WTO and won. Yet when China blocks or throttles a US-based website or tool like Flickr, Pinterest or Instagram, there is little action.

"We're going to continue seeing countries restrict information access if they think there will be no trade consequences," said Schruer. "Not until a trade case is brought will these practices disappear."

One of the few opportunities to rework global trade, at least for the US, may have been lost when Donald Trump won the 2016 US presidential election. He campaigned against the Trans-Pacific Partnership (TPP), which was officially abandoned shortly after his arrival at the White House. The TPP, for all its faults, could have provided a basis for regulating the trade of digital services, at least among the 11 countries meant to be its original members.

"The e-commerce chapter of the TPP ... represented a major step forward in developing new rules to support and protect digital trade," said Cory. ITIF is still hopeful that even a TPP without the US could provide at least a framework for future global policy.

"If enacted -- even without the United States -- these rules will still cover a large part of the global economy, thereby going a long way toward establishing a new global norm for China and others at the WTO to work towards."

There is a flipside to this argument. In most of the world, the US digital giants -- Google, Facebook, Amazon, Microsoft and Apple -- control the so-called open web. To "Google" has become a verb in many languages, as has to "Instagram," "tweet" and "Snap." In most countries, one or more US companies dominate search, social media, chat or streaming, with some exceptions, like Korea (which has Naver) and Myanmar (Viber). While China's internet is not likely what techno-utopians had in mind in the late '90s and early 2000s, neither is the oligarchic corporate control of the internet in the rest of the world.

The only place where the US giants don't have a firm foothold in the market is China. While the origins of the Great Firewall may have been to protect the Communist Party, another impact has been to enable the growth of local internet companies. In China, you don't Google something, you "Baidu" it (百度). To tweet is to "Weibo" (微博), referring to the national Twitter alternative. The language reflects the power of these Chinese alternatives, which grew under the protection of the Great Firewall.

"Essentially, the absence of US tech companies allowed China's Internet companies to grow without strong competition and capture the lion's share of the domestic market," said Shanthi Kalathil, director of the International Forum for Democratic Studies at the National Endowment for Democracy.

The result is China's own digital giants -- Tencent, Baidu and Alibaba. In fact, this model of protectionism as a form of economic development is not new, and was used by some of China's neighbors to grow their economies.

"There are some parallels with Japan's protectionism of its auto industry, which runs very deep in its political and economic system," said Anindya Ghose, a China business expert at NYU's Stern School of Business.

Protectionism works only as long as you aren't held accountable or facing retaliation. Japan couldn't protect its auto industry forever, and in 1981 it was forced to accept quotas that limited its ability to freely export cars into the US. By then, however, Japanese companies were large enough to compete on a level playing field with US and European automakers. Toyota, which benefited greatly from pre- and post-1981 protectionist policies, is today the largest automaker in the world.

Korea followed a similar model for both its auto industry and its tech companies, like Samsung and LG. Countries that did not protect local industries have faltering national car industries -- case in point: Malaysia, whose automaker Proton was recently acquired by a Chinese competitor -- or are almost completely dependent on foreign companies setting up factories, as in Indonesia.

"The fact that Facebook, Google, Twitter, Instagram and YouTube are all blocked in China has no doubt benefited the tech titans of China, such as Baidu, Weibo and Tencent," said Ghose. Now these companies are so entrenched that they can not only compete with the US giants but lead on innovations.

The question is: What's next? China shows no sign of lowering its digital trade barriers. In fact, they are getting stronger and more widespread, as the crackdown on virtual private networks (VPNs) and a new cybersecurity law show.

Moreover, in the past few years, China has been pushing to transform internet governance in its own image, through an ideology of "internet sovereignty."

"China uses the phrase 'Internet sovereignty' as a broad framing device for all of China's activity related to the Internet," said Kalathil. This approach allows each country to govern its internal digital space as it sees fit, with little or no overarching global governance structures.

China's influence is massive -- it is already the world's biggest internet market, with an estimated 1.1 billion internet users in 2016 -- and other countries, like Russia, have expressed support for China's style of digital control.

"China wields tremendous power because of its market, and this allows it to dictate terms in a way that other countries without that same market cannot," said Kalathil. For example, WeChat, the most ubiquitous Chinese app, has nearly 800 million users and accounts for an astounding one-third of all Chinese user time on the mobile web. That gives it a powerful base from which to expand globally, as it has done with some success.

Other countries are looking to emulate the Chinese model, mostly because it has proven so successful at its original goal. The Communist Party is still in power, and China's economy is still growing. For authoritarian regimes like Thailand and Egypt, where social-media-driven protests have caused considerable stress to the ruling military juntas, the notion of controlling the domestic internet is enticing.

"China is exporting its great firewall to other countries," said Smith. "To think that other countries could easily replicate China's draconian censorship is frightening."

Tactics that were once features of the Chinese digital space are starting to become more common throughout the world. Internet shutdowns have taken place in Egypt, Ethiopia, Saudi Arabia, India (Kashmir) and several other countries in the past year. Distributed denial of service (DDoS) attacks pioneered by the Great Cannon are on the rise, targeting, for example, news media sites.

Meanwhile, in China, digital security measures tested in restive regions like Xinjiang and Tibet are being implemented all across the country, in what some are calling the "digital totalitarian state." Together with projects like the social credit system, Chinese authorities could ultimately gain complete control of all information flows from Chinese internet users. This control could even extend beyond China's borders.

"By exerting growing influence over the platforms for global speech, the Chinese government is shaping and controlling expression not only domestically but internationally as well," said Kalathil. "The international community -- not just governments, but civil society and the private sector as well -- should recognize that this phenomenon is well under way, and speak with one voice in support of core democratic values."

If the WTO or a US-less TPP can't open up digital trade barriers, then it may be time to fight fire with fire. We saw a taste of this earlier this year, when Russia, a supporter of internet sovereignty, blocked WeChat, the first major instance of China getting a taste of its own digital medicine. Could other countries -- perhaps the US, which used retaliatory measures to force, for example, Japan to accept car export quotas in the 1980s -- do the same?

"The US government could easily make WeChat inaccessible in the United States, creating a great inconvenience for Chinese who are living, working and studying in the country," said Smith. "However, this really goes against the idea of internet freedom and this is not a position that I would advocate. But as the situation gets worse in China, maybe it is time to try a different approach."

Meanwhile, tech companies may be contorting themselves to national requirements. Facebook, openly courting China for years, has already developed a censorship tool for the country, in a bid to get back into the market. Left unchecked, this could be the future of the internet: more Great Firewalls, with tech giants reworking their products for different countries to satisfy the government. It would be a far cry from the open, global internet many dreamed of not so long ago.