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  January 13th, 2017 | Written by

China and Russia: Protectionism Subverting Innovation

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  • China and Russia home to some of the worst cases of protectionism.
  • The entire global trading system should push back aginst protectionism.
  • China introduced cloud-computing restrictions that prevent foreign firms from operating in the Chinese market.

As the incoming Trump administration prepares to get tough on trade scofflaws, a new report from the Information Technology and Innovation Foundation (ITIF) shines a light on a number of countries—notably China and Russia—that have been seeking unfair advantage in high-wage, innovation-intensive industries by implementing protectionist and discriminatory policies.

The findings come in the tech think tank’s annual list of the year’s worst manifestations of “innovation mercantilism.” The report urges the new U.S. administration and the entire global trading system to push back with tougher trade enforcement.

“Every nation wants to be a leader in innovation because it can be a key path to economic growth,” said Nigel Cory, ITIF trade policy analyst and the report’s author. “Unfortunately, as this global race for innovation advantage intensifies, some countries are ramping up destructive, beggar-thy-neighbor policies that tip market scales in favor of domestic production and domestic firms. What policymakers forget is that this doesn’t just hurt their economic competitors; it hurts the entire global innovation ecosystem—and often the very countries that put these policies in place.”

Among the worst examples of innovation mercantilism in 2016, China introduced a cybersecurity law that imposes extensive requirements for international companies to store data inside China’s borders. China also introduced cloud-computing restrictions that prevent foreign firms from operating in the Chinese market.

Russia, Germany, Turkey, Vietnam, and Indonesia all introduced local data-storage requirements. Indonesia also introduced a patent law amendment that undermines pharmaceutical intellectual property.

Russia introduced government procurement rules that ban the purchase of foreign software.

Vietnam introduced a network-security law that forces companies to disclose encryption keys and source code to the government as a condition of market access.

The report concluded that innovation mercantilism is only becoming more popular, especially when it comes to forced data localization. This trend also coincides with the growing vacuum that’s been created in the international trading system with the failure to update global trade rules as part of new trade agreements, such as the Trans-Pacific Partnership.

“China has the dubious distinction of being the world leader in innovation mercantilism,” said Cory. “Given the lack of consequences it has faced and the failure to update global trade rules in response, there’s a vacuum where more and more nations are emulating China’s approach. Stopping the spread of innovation mercantilism needs to be a top priority for U.S. policymakers and the global trading system as a whole if we are to maximize global innovation and spur prosperity worldwide.”