Technological and Economic Decoupling in the Cyber Era

IMF Working Papers, November 20, 2020

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The COVID-19 pandemic has accelerated the shift toward digital services.
The race for technological and economic leadership has intensified, creating risks of decoupling that could set back trade and growth and hinder recovery from the worst global recession since the Great Depression.
The paper studies conditions under which a country may erect barriers—banning imports or exports of cyber technologies—and thereby promote decoupling or deglobalization.
A well-known result: banning imports may be optimal in monopolistic sectors, such as the digital sector.
Novel result: banning exports can also be optimal, and in some cases superior, because it can prevent technological diffusion to a challenger that may eventually become the global supplier, capture monopoly rents, and pose cybersecurity risks.
Export or import bans impose deleterious costs on the global economy.
Conclusion: fostering international cooperation, including in the cyber domain, could be key to avoiding technological and economic decoupling and securing better livelihoods.

Import bans can be optimal in monopolistic digital sectors to protect domestic firms and market power.
Export bans can be optimal by:
- Preventing technological diffusion to potential challengers.
- Avoiding the emergence of a challenger that becomes the global monopolist and captures monopoly rents.
- Mitigating cybersecurity risks associated with diffusion of sensitive cyber technologies.
Both import and export bans generate global economic losses despite potential strategic benefits to the banning country.

Banning exports or imports contributes to technological and economic decoupling or deglobalization.
Such decoupling would likely set back trade and growth and hinder recovery from the current recessionary shock.
The net effect balances strategic domestic gains (monopoly protection, security) against deleterious global economic costs.

Prioritize international cooperation to reduce incentives for erecting import or export bans in cyber technologies.
Develop cooperative frameworks in the cyber domain to:
- Reduce the probability of harmful technological decoupling.
- Mitigate cybersecurity risks through shared standards, norms, or agreements.
- Preserve global trade and growth prospects while addressing legitimate national security concerns.

Technological and Economic Decoupling in the Cyber Era, Daniel Garcia-Macia and Rishi Goyal, November 20, 2020.