← Back to Blog

May 12, 2015

New Trade Dynamics: Technology Policy and Protectionism

As China’s economy continues to grow, access and ability to compete in the country’s domestic market has become increasingly important for firms looking to grow and scale globally. This is particularly the case for technology firms, which rightly see significant opportunity in serving China’s growing domestic personal and business markets. At the same time, China’s government and industry leaders – aiming to continue the country’s rise up the global value chain – are seeking to enhance the position of their domestic technology companies.

Unsurprisingly then, trade and technology policy has emerged as a major international issue. Tensions in this area have been heightened by allegations of cyber espionage on the part of both China and the US, which have blurred the lines between economics and geo-politics. The revelations of former National Security Agency (NSA) contractor Edward Snowden have proved particularly inflammatory, lending credence and support to Beijing’s assertions about the need to protect its domestic information technology infrastructure.

The most recent manifestation of this underlying discord came late last year when China announced new regulations requiring foreign firms supplying computer equipment to domestic financial institutions to provide source code and backdoors to Chinese government officials, while also being subject to “invasive audits.” Though the Chinese government suspended implementation of the policy in April, the environment remains tense, with the Chinese government looking to further enhance its cyber-security review process.

As a result of these barriers some firms, notably IBM, have begun to barter their intellectual property resources or other concessions  in exchange for market access.  Facing a reduction in sales following the Snowden revelations of 2013, IBM has sought to solidify its presence in China by forging partnerships with domestic industry and encouraging technology transfer. But while the company’s CEO Virginia Rometty argues that the deals are win-win for both sides, critics have expressed concern that the company may be mortgaging long-term resources for short-term gain.

On the Canadian side, Waterloo-based Blackberry has taken a different approach.  Deterred by information security concerns in China, the company has chosen to focus on other large emerging markets such as India, Indonesia and Malaysia. In January 2014 the Blackberry’s CEO, John Chen, indicated that his company had no interest in being “sucked into a geo-political equation.” Chen also pointed to concerns about the scale of the company’s operations, noting that “it takes too long to ramp up to a size that is even reasonable.” But a strategy of ignoring China’s large and growing technology may not prove viable – or advisable – in the long-term.

Still, while foreign companies continue to face barriers in accessing China’s technology markets, Chinese companies also face significant barriers internationally. Large Chinese technology companies have seen access to markets and acquisitions blocked on the grounds of security concerns. Indeed, as a result of the barriers imposed Huawei  has little footprint in US market. On both sides then, mistrust and allegations of government interference are curtailing opportunities for economic growth. Meanwhile, on the multilateral front, World Trade Organization (WTO) talks aimed at creating a new technology trade agreement remain stalled.

The now widespread use of technology policy and cyber-security concerns as non-tariff barriers to trade should be a cause for concern for policymakers both at home and abroad. So-called ‘forced localization measures,’ which may include onerous disclosure requirements, local data sourcing requirements, complex safety and security standards our outright discriminatory practices, are intended to tilt the playing field in favour of domestic firms. As a small country reliant on access to large export markets, Canada is particularly vulnerable to the effects of these practices. As such, policymakers must continue to work proactively towards  a comprehensive multilateral solution that puts forward clear rules that adequately balance these trade concerns with issues related to sovereignty, privacy, and security.

Initiatives such as the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA), the recently established RMB trading hub, may signal a more general warming of bilateral relations between the two countries. But whether an improved bilateral relationship will help secure market access and ensure equitable treatment of Canadian technology firms in China remains unclear.

Amid rising geopolitical tensions, heightened techno-nationalist sentiment, and an uncertain regulatory and market environment, Canadian companies face a stark choice. On one hand, by avoiding the Chinese market all together, Canadian firms are ceding ground to competitors in one of the largest and fastest growing markets in the world. At the same time, bartering intellectual property or compromising on security in exchange for market access carries significant long-term risk. But countries can agree on clear and mutually acceptable standards for technology trade – ideally through universal, multilateral processes via the WTO – significant commercial opportunities will be lost on both sides.

Interested in becoming a DEEP Centre member?

The Centre for Digital Entrepreneurship and Economic Performance turns research findings into practical insights and tools for stimulating innovation, entrepreneurship and job creation.