A New Competitive Situation in the Digital Economy and China’s Actions

The digital economy and the subsequent changes in the international division of labor are reshaping the original global value chains and redefining the competitive advantages of countries. While strengthening its own digital technology research as well as digital economy construction, China should properly handle differences and competition with Western countries to facilitate sound development of the international digital economy.

In today’s world, the evolving scientific and technological revolution and the flourishing digital economy are profoundly changing the way of production and life, with far-reaching effects on the economic and social development of countries and the global governance system. The digital economy and the subsequent changes in the international division of labor are reshaping the original global value chains and redefining the competitive advantages of countries, which bring new opportunities and challenges to the economic development of countries around the world. The study of the new competitive situation in the international digital economy and the actions of developed economies provide a practical reference for China to better cope with the new round of international economic competition.

The Digital Economy Reshaping International Economic Competition

The digital economy can be defined as the sum of economic activities, especially commercial activities based on the internet, which function by means of digital technology.1 The internet-based digital economy not only provides more convenient services, but also revolutionizes the original mode of production and unleashes enormous economic momentum. Over the past decade, the rapid development of digital technology has

promoted international trade at a lower cost and in a more convenient way. First of all, the e-commerce platform, as a medium of transaction, can connect a large number of producers and consumers, which not only reduces the intermediate links in the transaction, which in turn reduces costs, but also enables some enterprises located in remote areas to overcome geographical constraints and compete in the global market. Second, with fewer intermediate links in transactions, consumers and producers can communicate more directly and effectively, promoting a consumer demand-driven combination of goods production and services, thereby facilitating the era of diversified production. Third, digital technology provides a new opportunity to reinvent the corporate value chains. The advent of the internet of things (IOT) has made it possible for companies that once handled all stages of production to disaggregate them, breaking them into discrete steps, and outsourcing some. Companies can monitor production through the IOT, and finalize the process through crossborder digital trade.2 Digital trade has become an important tool driving companies to reshape their production networks. Finally, digital trade is redefining traditional trade in goods and services. The emergence of high technology, such as 3D printing, is widening the traditional borders of international trade and further leading to an increase in world trade as it allows the producer to reduce costs.3 Therefore, digital technology is changing production and consumption patterns, and globalization has entered a new era defined by data flows that transmit information, ideas, and innovation.4

David Ricardo’s theory of comparative advantage has pointed out that different comparative advantages between countries are an important

basis for international trade. However, in the era of the digital economy, the “comparative advantages” of countries have been redefined. The advent and widespread use of digital technologies has led to a significant reduction in the cost of communication and transactions, and increased competition among enterprises in international markets, thus affecting the redistribution of competitiveness among countries. The combination of digital-driven globalization and high technology will have an important impact on the pattern of international economic competition in the 21st century.

Reshaping the competitive advantages of TNCS and non-tncs

Since the 1980s, transnational corporations (TNCS) have driven the rapid development of the global economy by combining their capital and technological advantages with the cheap labor and resources of developing economies. With the advent of the digital economy, e-commerce platforms connect businesses and consumers more directly and effectively, and businesses can carry out transactions with consumers around the world through the internet. Occupying a niche in international markets is no longer premised on large amounts of capital or large-scale production. Many non-tncs, and even small- and medium-sized enterprises (SMES), are also able to compete in international markets by attracting broad customers through the internet. In addition, digital trade has opened up new spaces for more firms to compete globally.

The extensive participation of non-tncs has made international markets more competitive. Many start-ups are taking advantage of their latecomer status to build their core competitiveness5 by making use of cloud services, etc. for their own development and establishing a worldwide partnership and consumer system through the internet.6 In addition, e-commerce platforms such as Alibaba also empower SMES by providing

financial services such as microfinance loans and logistics services to further strengthen their competitiveness. The large number of non-tncs competing in the international market, which breaks the old competitive pattern, has exposed TNCS to the price pressures and challenges to their business models posed by digital globalization. Thus, the digital economy has changed the competitive order at the micro level of firms and accelerated the adjustment of international competitive landscape.

Redefining the competitive advantages of developed and developing economies

With the development of digital technology as well as artificial intelligence (AI), the factor price in the international market is also changing. This will drive changes in the comparative advantages of countries in international trade. In the last round of globalization, the capital of TNCS in developed economies and cheap labor in developing economies were the main impetus for globalization. However, in the era of digital globalization, the cheap labor advantage of developing economies in international competition grows less important due to the popularity of automation and AI. Moreover, investments in developed economies are no longer aimed at cheap labor, while consumer markets are becoming an important factor for investment.7 The global division of value chains is being reoriented, with the distribution of value chains more concentrated in the three major consumer markets of North America, Europe and East Asia. Therefore, the cheap labor advantage of developing economies alone cannot assure their integration into the world economy. The large markets of neighboring countries are also needed so that their competitive advantages can be realized. This requires the pace of economic cooperation among developing economies to be accelerated in order to achieve complementary advantages and mutual benefits.

More importantly, the era of the digital economy offers many emerging economies the opportunity to “get ahead of the curve.” The

rapid development of information technology based on the internet has led to a qualitative leap in the speed of information dissemination and a significant reduction in the costs. Unlike previous industrial revolutions, the information technology revolution has significantly reduced the gap between developing and developed economies in terms of access to new technologies and information. Developing economies, especially emerging economies, are no longer satisfied with medium- or low-end production and manufacturing. Instead, they are actively promoting high-tech development and exploring innovation in the digital economy. Taking third-party mobile payment as an example, in 2018, the volume of transaction by third-party mobile payment in China reached 190.5 trillion yuan with a year-on-year growth of 58.4 percent.8 Besides China, developing economies including Kenya and Colombia are also promoting mobile payment. These developing economies have moved beyond the credit card payment phase of developed economies and directly entered the mobile payment era. Mobile payment has facilitated transactions; more importantly, it combines with other digital services to create more business opportunities and development space, which provides favorable conditions for these countries to build their competitive advantages in the new round of economic globalization.

Developed Economies’ Actions in Response to Competition in the Digital Economy

With the advent of the digital economy era, the world has accelerated the pace of digital strategic layout. In their quest for competitive advantages in the digital economy era, the Western developed economies, through bilateral and regional cooperation, have seized the digital common market. They are trying to maintain their dominating position in the field of digital technology and in setting digital trade rules with technological monopoly and blockade.

Seizing the international digital market

Similar to historical capitalist competition for resources and labor markets, the international digital market is the focus of competition among the Western developed economies. The digital economy started early in these countries and is well developing with full-fledged relevant industries. Therefore, they have entered the stage of seeking to expand their overseas markets in order to drive their own development. To meet the growing needs of the domestic internet industry, the United States, the European Union, and Japan continue to explore overseas markets to expand external demand for driving the development of their domestic enterprises and digital economy industries. On the one hand, developed economies, represented by the US, the EU and Japan, are actively working with their trading partners to incorporate digital trade rules into bilateral trade agreements, seeking to establish a common digital economy market and achieve effective expansion of the digital economy. On the other hand, developed economies are gaining access to the digital economy market of developing economies by participating in their digital infrastructure construction, and actively getting involved in the development of digital technology and the cultivation of the digital industry in these countries. In the process, the developed economies, represented by the US, the EU and Japan, are not only exporting digital technology standards but, more importantly, helping their respective internet enterprises take the lead in entering developing economies and occupying their markets.

The US has made the opening-up of international digital markets an important element of its digital overseas strategy, the basis of which is to gain access to the digital markets of its trading partners through free trade arrangements. The US is also actively pursuing new digital markets through bilateral cooperation with developing economies. For example, it is strengthening digital economy ties with ASEAN to “share best practices and expertise, discuss opportunities for US companies to contribute to the growth of the digital sector, and facilitate a more open and innovative environment in which both local and American SMES can thrive in the

evolving digital economy space.”9

The EU has promoted the establishment of a digital common market with trading partners through the digital trade terms of bilateral free trade agreements, and has agreed with Japan and Canada to mutually open their digital trade markets. At the same time, the EU is actively engaged in policy cooperation with developing economies, seeking to establish a digital common market. Among them, Latin America and the Caribbean is one of the EU’S priority regions for advancing digital cooperation. The EU is promoting infrastructure, cloud service and AI to enhance technological collaboration and regulatory alignment in key countries such as Brazil and Mexico.10 In addition, ASEAN is also an important partner of the EU in digital economy cooperation. The EU and ASEAN have agreed on a work plan to advance cooperation in areas of mutual interest, including the on-going development of an ASEAN digital economy and society benchmarking.11

Japan has promoted the digital common market through bilateral trade agreements under the rubric “Japan at the center connecting major trading partners.” Besides cooperation with developed economies such as the US and the EU, Japan also focuses on emerging economies to promote digital infrastructure construction in countries such as India.12 By strengthening digital economy cooperation with China and the Republic of Korea, Japan is actively advancing the building of an East Asian digital market.13 In December 2019, at the 8th China-japan-rok Leaders’ Meeting in

Chengdu, China, the three countries agreed to strengthen digital economy cooperation. The Japanese government has both bilateral economic and trade cooperation mechanisms and other top-level designs to promote the entry of Japan’s electronic information industry into the international market. At the same time, through infrastructure construction, Japan is tapping the potential of the digital economy market in developing economies and providing comprehensive support for Japanese enterprises to participate in the global digital economy competition.

Maintaining strong digital technology dominance

The development of digital technology widens the boundaries of the digital economy and provides more impetus for its development.14 Studies have shown that digital technologies have played an important role in driving both developed and developing economies.15 Digital technologies have become a critical determinant of economic growth, national security, and international competitiveness. Thus, the competition around digital technologies has become an important aspect of the pursuit of competitive advantages in the digital economy for developed countries. In the face of the booming scientific and technological power of China and other emerging economies, the US, in conjunction with the EU, Japan and other allies, has imposed a digital high-tech blockade on the pretext of national security on emerging economies, including China. Through blocking and suppressing the latter’s digital technology development, the US, the EU, and Japan can maintain their competitive advantages in the high-tech field. This involves a dual strategy. The first is to impose digital technology export restrictions. The US has raised company-specific export restrictions to the legislative level.16 The Export Control Reform Act passed by the US

Congress in 2018 regulated the control of the export, re-export, and transfer of items (commodities, software, or technology).17 Starting in 2018, the US government cracked down and blocked major Chinese digital technology companies, including ZTE and Huawei.18 Moreover, Japan is considering restricting exports of advanced technology used in such applications as AI and robots.19 The second is to restrict foreign companies’ investment in digital technology.

In August 2018, US President Donald Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA). In September 2019, the US Department of the Treasury introduced FIRRMA’S draft implementation rules, which, after consultation, took effect in February 2020. FIRRMA and its rules expand the powers of the Committee on Foreign Investment in the United States (CFIUS) to scrutinize the national security risks of foreign investments in sensitive and critical “technology,” “infrastructure,” and “data” of US enterprises.20

In April 2019, the EU Foreign Investment Screening Framework went into force. The law sets minimum requirements for member states’ investment screening mechanisms and encourages international cooperation in investment screening, including sharing experience, best practices, and information on issues of common concerns. The law sets certain requirements for member states who wish to maintain or adopt a screening mechanism at the national level. The EU has the right to express its opinion from the perspective of “the interests of the EU” when an investment project poses a threat to the security and public order of several EU countries.21 This

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law subjects foreign companies to multiple restrictions and thresholds from within the EU member states to the EU institutions when investing in digital technologies in Europe.

Japan has followed the lead of the US and the EU in raising its standards for screening foreign investment. In November 2019, the House of Councilors of the Japanese Diet passed the reworked Foreign Exchange and Foreign Trade Act (FEFTA). Under the amended law, any foreign company that invests in a national security-related company such as a semiconductor company in Japan will face investment scrutiny when its shareholding represents 1 percent of a listed company in Japan (revised from 10 percent in the original law).22 This means that the range of foreign companies subject to investment scrutiny will expand significantly. Foreign companies investing in Japanese digital technology enterprises will face strict scrutiny.

Competing for leadership in digital trade rules-making

With digital trade becoming an important issue leading to new directions in international trade rules-making, the competition for leadership in digital trade rules-making has become a priority in the digital strategies of Western countries. Digital trade rules are the focus in a variety of fora, including the reform of the multilateral trading system of the World Trade Organization (WTO) to the policy coordination platform of the Group of Twenty (G20), and from the World Economic Forum in Davos to the Organization for Economic Cooperation and Development (OECD). Western countries are actively adjusting their positions and trying to promote digital trade rules that meet their demands.

The US seeks to maximize its national interests by dominating digital trade rules-making, thereby preserving its economic hegemony in the world. To strengthen its leadership in digital trade rules-making, the US, in conjunction with the EU and Japan, hopes to reach agreement on digital trade rules among developed economies first. The EU and Japan also want

to form a unified position with the US in order to launch more initiatives in digital trade rules-making and assert their dominant position in the new round of competition. By seeking worldwide liberalization of digital trade, the free transfer of data across borders, and exemption from taxation for digital trade, the US is giving play to the advantages of US internet companies in international digital economy competition, which serves to consolidate their favorable position in world competition, and help shape the core competitiveness of the US in the digital economy era. On digital trade rules, the US and its Western allies have similar positions with subtle differences. On the issue of digital trade liberalization, the US advocates full digital trade liberalization23 while the EU supports trade liberalization but coupled with government intervention and regulation. When it comes to cross-border data transmission, the US upholds the cross-border flow of data and strongly opposes data localization.24 The EU agrees with the US position, but stresses certain conditions for the free flow of data across borders and the protection of personal data and privacy under government regulation.25 The General Data Protection Regulation (GDPR) enacted by the EU came into force in May 2018. While harmonizing data protection across EU member states, it provides stricter regulation of data protection for e-commerce, and of data management and protection for digital companies. In order to bridge the differences between the US and the EU on the free cross-border transmission of data, Japan proposes the “free and reliable crossborder transmission of data” and advocates strengthening the coordination of laws and regulations as well as the cooperation between regulatory authorities based on free transmission of data across borders. In the matter of digital trade taxation, countries such as the US, Japan, and Canada advocate exemption from taxation; the EU supports this in principle, but some

member states26 have called for taxation of e-commerce services in order to broaden the tax base. Currently, the US and the EU are still negotiating on this issue, while Japan’s position is similar to that of the EU.27

Reflections on the International Digital Economy Competition

Actions taken by Western developed economies to gain competitive advantages in the digital economy have intensified competition and friction among countries, increasing the challenges facing China’s digital economy development. While strengthening its own digital technology research and development as well as digital economy construction, China should promote digital economy cooperation with other developing economies. Through properly handling differences and competition with Western countries in the field of digital economy, the international digital economy will develop soundly amid competition.

Strengthening digital technology cooperation with developing economies through the Digital Silk Road

In the era of the digital economy, developing economies should seize development opportunities in large infrastructure such as roads, railways, ports, and bridges, as well as necessary digital infrastructure such as the internet. Most developing economies are less digitized, both in terms of the hardware equipment of digital infrastructure and software facilities such as internet services. Studies by the United Nations Conference on Trade and