Toward a new tech order
Macroeconomists in general have treated security matters as largely
distinct from economic matters, except where conflict and crime dominate.
For the most part, they have taken the institutional underpinnings for
safeguarding property rights and military matters as separate from the
analysis of economic policy. But in cyberspace, there are no such
distinctions; no effective domestic norms or public institutions for
enforcing security, such as “e-police” or an “e-justice system”; and no
international mechanisms for de-escalation and maintaining peace.
The interconnections of the digital era blur traditional distinctions
between economic and security issues. Simultaneously engines of economic
growth and channels of security risks, they link and incentivize the use of
economic policy tools, such as trade and industrial policies, for broader
security or geopolitical gains.
Thus, we are confronted with a new set of questions. When, if ever, does
restricting digital trade make sense for an individual country? How does
this affect other countries, and how should they respond? What policies and
institutions can deter conflict?
In a recent IMF staff working paper, we show that some of the standard
answers no longer apply in the digital era (Garcia-Macia and Goyal 2020).
Once the 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. However, these bans come at a deleterious cost for the rest of the
world.
In our analysis, the key motivation for banning technology imports—if a
country hosts a potentially viable supplier—is to repatriate monopoly
profits that would otherwise accrue to foreign firms. The presence of
cybersecurity vulnerabilities only increases the attraction of banning
imports of foreign technology. However, banning imports could halt inflows
of technological knowledge and may be desirable only for a country with
sufficiently advanced technological capacity and know-how. This is not an
entirely new result. Trade economists have long pointed out that banning
imports may be beneficial in monopolistic sectors.
More striking and novel is the finding that banning exports can
also be beneficial for an individual country in the digital economy. The
explanation lies in the dynamics of technological competition between
countries. A challenger country can successfully displace a leader as the
global producer and capture monopoly rents, as a result of international
technology diffusion and domestic scale economies. To forestall such an
outcome and reduce the associated cybersecurity vulnerabilities, the leader
in a certain technology may seek to ban its exports.
Imposing trade bans could lead to retaliation. An import ban might help a
technological power gain an advantage in global markets, although a
competitor might also reciprocate the ban, leading to a worse outcome for
both countries. In many cases, the anticipation of such reciprocity can act
as a powerful deterrent.
Unlike import bans, export bans cannot be deterred with retaliation via
trade policies. A technology leader would impose them irrespective of the
challenger’s response. Hence, they could be harder to defuse in a world of
decentralized international competition.
