Multilateral Cooperation and the Digital Economy
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Bibliographic details
- Authors: RISHI GOYAL, DANIEL GARCIA-MACIA
- Published: March 1, 2021
Key arguments and context
- Absent multilateral cooperation, the global digital economy could splinter, and everyone would pay.
- The race for leadership in digital technologies does not conform to traditional borders and intellectual property protections; the networked economy enables seamless cross-border collection of information and decision-making, enhancing economic efficiency while increasing risks from thieves, saboteurs, and spies.
- Digitalization and connectivity have sped up the diffusion of knowledge while simultaneously bringing new security threats.
- Technology wars are becoming the new trade wars, exemplified by import and export bans of 5G network technologies, semiconductors, social media platforms, and data-based security applications across multiple countries, and by restrictions on financial market access for foreign tech firms deemed to be security risks.
- The trend toward an increasingly digitalized and networked world has been accelerated by the COVID-19 pandemic.
Economic structure and market dynamics in the digital era
- Digital sectors exhibit a winner-takes-most dynamic rooted in economies of scale and scope; leadership in emerging technologies bestows outsize profits, global market shares, and the ability to set standards.
- The IMF World Economic Outlook has shown that a small fraction of highly productive and innovative firms has gained dominance and enjoyed large profits over the past two decades (IMF 2019). The phenomenon spans sectors and economies and is particularly acute in the digital sector.
- Macroeconomic analysis must integrate security considerations into economic policy because, in cyberspace, economic and security issues are blurred and lack effective domestic and international enforcement mechanisms (no “e-police” or “e-justice system”).
Findings from Garcia-Macia and Goyal (IMF staff working paper)
- Once key features of digital sectors are considered—large market power driven by scale economies, technology flows, and security risks—import and export bans can be rationalized from the point of view of an individual country (Garcia-Macia and Goyal 2020).
- Import bans:
- Motivation: to repatriate monopoly profits that would otherwise accrue to foreign firms.
- Cybersecurity vulnerabilities increase the attractiveness of banning imports.
- Potential downside: bans can halt inflows of technological knowledge and may be desirable only for countries with sufficiently advanced technological capacity and know-how.
- Historical note: trade economists have recognized that banning imports may be beneficial in monopolistic sectors.
- Export bans:
- Novel finding: banning exports can also be beneficial for an individual country in the digital economy.
- Mechanism: leaders may ban exports to forestall challengers from displacing them via international technology diffusion and domestic scale economies, thereby protecting future monopoly rents and reducing cybersecurity vulnerabilities.
- Export bans are harder to deter because they cannot be countered by trade retaliation; leaders would impose them irrespective of challengers’ responses.
- Retaliation dynamics:
- Import bans might provoke reciprocal bans, potentially producing worse outcomes for both countries; anticipation of reciprocity can deter import bans.
- Export bans are less susceptible to deterrence by retaliation, raising the risk of decentralized escalation.
Global costs and implications
- Trade bans by individual countries can cut off other countries from access to digital technologies or lead to inefficient decoupling into separate economic spheres.
- Costs are amplified when allies follow suit, increasing the risk of global rupture and adverse spillovers.
- Continued tech conflict could persist if monopoly rents remain large and cyber warfare becomes the central security arena.
Policy recommendations and forms of cooperation
- Leading countries should set up cooperative frameworks in several areas to reduce incentives for bans and to improve global outcomes.
- Intellectual property rights:
- Secure intellectual property rights across borders with minimum enforced standards to reduce concerns about misuse, forced transfers, or theft, diminishing incentives for export bans and allowing longer periods of diffusion and higher global welfare.
- Steps toward defining global standards should start with fostering cooperation in specific areas (example in source: international standard for electronic data interchange among financial institutions).
- Public–private interaction:
- Establish clear, transparent, and uniform rules on the interaction between the public and private sectors.
- Government partnerships with domestic cyber technology firms for national security purposes, including surveillance, should be clearly ring-fenced.
- Cybersecurity cooperation:
- Facilitate international cooperation on cybersecurity despite obstacles: competing interests, national security considerations, differences in judicial and criminal systems, and concerns over misuse by governments.
- Ownership and governance of digital firms:
- Facilitate foreign ownership and control of monopolistic digital goods firms to broaden sharing of rents, align incentives for better global outcomes, and discourage trade conflict.
- Preconditions: open financial or capital accounts to permit such ownership; governance arrangements to facilitate control; upholding foreign property rights; narrowly circumscribing areas subject to national security arguments.
- Regulatory coordination:
- If breaking up large domestic technology firms or regulating prices is considered, such actions should ideally be coordinated across nations to avoid disadvantaging coordinated jurisdictions in the global technology race.
- Coordinated initiatives to introduce digital taxation would be more effective and perceived as fairer; tech giants selling goods and services online across borders face little income tax liability in the buyer’s jurisdiction under existing international tax arrangements, favoring tax arbitrage and uneven playing fields.
- Institutional proposals:
- Calls for a new Bretton Woods moment for the digital age to build consensus on broad principles and common institutions that can resolve digital-era problems and create a predictable and open framework for international trade.
- Proposal: establish a digital stability board—in the image of the Financial Stability Board—to develop common standards, regulations, and policies; share best practices; and monitor risks (Medhora 2021).
- Potential deliverables from such cooperation: a charter of technological rights, uniform statistics for the digital economy, and international data trusts to collect and guard individuals’ data for designated purposes, such as health research.
Strategic outlook and political economy
- Strong domestic resistance to collaboration is expected if monopoly rents remain large and cyber warfare is viewed as the key future security arena; rebuilding trust will require sustained effort.
- Cooperation would weaken incentives for conflict and could lead to better outcomes, but success depends on overcoming mistrust and competition.
Source: “Multilateral Cooperation and the Digital Economy,” F&D Magazine, March 2021; authors Rishi Goyal and Daniel Garcia-Macia. References cited in the piece include Garcia-Macia and Goyal 2020 (IMF Working Paper 20/257), IMF 2019 (World Economic Outlook, Chapter 2), and Medhora 2021 (Financial Times, January 17).
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