It is a cliché to say that we live in a digital age, with many countries upgrading to become Knowledge Economies.
There is supposedly a digital divide, between those who have access to digital knowledge and skills, and those who don’t. But what has emerged with recent action against Huawei suggests that the world wide web may be splintered into four or more digital networks that are firewalled against each other. This situation stems from major geo-political rivalry, mixed up with technological competition and seriously different governance values.
Lest we forget, the Internet or World Wide Web was invented by the US defense community and its technology was allowed to be developed by individuals through innovations in hardware, software, standards, databases, protocols and institutions.
The internet stakeholders (companies such as Google, as well as the nonprofit Internet Engineering Task Force) collectively maintain what has become the critical infrastructure for social media and communications in the world. It is a complex network that does not have a single architect, but grows through continuous tinkering by web participants that link massive domestic networks, today increasingly mobile smartphones.
The Internet forms the basis for the growth of the worldwide Knowledge Economy through which knowledge is created and shared. Globalization took a long time to take off, but essentially there are three levels of networks that facilitated human exchange of goods, services/finance and knowledge. At the trade level, free trade of physical goods have enabled the globalization of merchandise trade and commercial services, now valued at $46 trillion or 57 per cent of 2017 world GDP.
Because the Bretton Woods philosophy also encouraged free flow of finance, cross-border financial transactions as represented by global FX transactions amounted to 22 times that of physical trade in 2016. And since finance and knowledge is increasingly digital and moved across the Internet,McKinsey Global Institute estimated that digital data increased 45 times in the decade to 2014 and will grow five times in the next five years.
What the trade war has revealed is that the US, which is the creator and major player in the Internet and of course global trade and finance, is rethinking its game under the rubric of “America First”. Specifically, it has weaponised tariffs, sanctions against trading with the enemy using the dollar, and with the actions against ZTE and Huawei, the threat to segregate the Internet and 5G into different networks.
Engineers have always systemically dealt with any system threatened by excessively volatile internal feedback shocks with two approaches – “sand-in-the-wheels” or “modularizing” the system. The first keeps the speed in the system to a safe level and not allowing an accelerating loose flywheel to shake the system to bits. In the 1970s, Nobel Laureate economist James Tobin recommended a “Tobin tax” or financial transactions tax (FTT) in order to moderate or control volatile foreign exchange or capital flows.
This idea has been officially adopted by the Europeans. The second approach is to break the whole system into separate modules that can operate independently, but with gateways (or protocols and firewalls between different systems), so that failure of one module will not bring about failures in the others. The remarkable rise of the Chinese tech platforms have been achieved through their capacity to operate at “speed x scale x scope”.
They innovate faster than their competitors, achieve critical mass in scale because of the size of the China market, and provide scope in consumer services that link markets that were previously segmented by regulation or habit. In other words, the platforms cut across and link markets such as logistics and finance (Alibaba) or consumer games and social networks (WeChat). Two basic technology laws or observed trends define the impact of technology on social behavior and business models.
Moore’s Law says that “processing speed doubles every two years”, thus speeding up and lowering costs of computing. Metcalfe’s Law states that the value of a network is proportional to the square of the number of users – meaning value increases exponentially – the larger the scale, the more valuable the network.
Taken together, technology changes the rules of the game by winner- take-all situations. – whoever reaches a market size in terms of speed, cost and convenience becomes the dominant player. The winner in the Knowledge Economy has competitors achieving replication of digital knowledge at almost zero cost, but you have to invest heavily in generation of new knowledge through research and development. Hence, those companies and nations that reach critical mass and are willing to devote huge sums to R&D and education stands to be big winners in the Digital Economy.
This is why Huawei is such a threat to the American dominance in the Internet, because if the Chinese dominate the Internet infrastructure with 5G speed, scale and scope, then all American systems can be marginalised or worse, crippled through cyberattacks.
The recent shutdown in Russian power networks by a reported US cyberattack shows the reality of such threats. How to address such a threat is clearly a watershed moment in the globalization of knowledge and electronic commerce. Modularization would definitely reduce the scale and distribution of knowledge, creating higher costs and ability to innovate.
The Japanese will attempt to introduce their proposal of “Data Free Flow with Trust,” (DFFT), at the forthcoming G20 summit in Osaka later this month. This proposal draws upon the- Electronic Commerce chapter of Trans-Pacific Partnership, which the US unfortunately rejected.
With measures against Huawei, a digital “divorce” has effectively been announced, with unpredictable outcomes like Brexit. Will the Internet become the Splinternet – a balkanized world of protectionism under America First? How this evolves will show whether we live in an Age of Artificial Intelligence or Human Stupidity.
(The writer, a former Central banker, writes on global affairs from an Asian perspective. Special to ANN)