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Pacific Currents

Pacific Currents is a discussion forum on Asia-Pacific economic issues. We welcome submissions from all stakeholders including academics, researchers, thought-leaders, civil society, business leaders; and other policy experts. Submissions should cover issues related to economic policy and integration in the region. Articles should be written for a general audience and not technical but should have a foundation in objective policy analysis. Articles should also conform with PECC nomenclature - if you are not familiar, the editor will provide you with appropriate guidelines. Acceptance of articles is entirely at the discretion of the Editor. Articles should be in an op-ed format of around 1000 words but longer submissions are also occasionally accepted. Submissions are done in the name of the author and represent their individual opinions and not those of the institutions that they work for. To submit an article, please send in Word format to:

Digital DNA: Disruption and the Challenges for Global Governance

Peter F. Cowhey (University of California, San Diego), 
Jonathan D. Aronson (University of Southern California)

Digital technologies are becoming critical to every facet of the world economy. These digital technologies are the “digital DNA” that unleashes dazzling changes in the information, communication, and production capabilities that are transforming how the world works. We call this the information and production disruption. The IPD is rapidly altering the dynamics of firms, how markets perform, and the potential for stronger economic growth and social prosperity. Government policy makers with an eye to the future are searching for policies to leverage the best potential of these disruptions, but have yet to determine how to reconcile seemingly contradictory policy challenges. We offer recommendations for global economic governance that provide a new foundation for problem solving to cope with messy problems that inevitably accompany large-scale change. Despite the current political headwinds we show how trade policy can be the key platform for enabling an extensive complementary set of regulatory and nongovernmental actions to govern the IPD productively.

Scholars, government officials, and corporate executives have acknowledged to us that the disruption is occurring but that it is difficult to grasp because it is so multifaceted. This diffuseness makes it hard to distill the first priorities necessary for governance reform. We respond to this challenge by clarifying the fundamentals on how the IPD is altering national and global patterns of innovation. We choose this leverage point because economists agree that innovation—which we define as the commercialization of new knowledge—is central to global growth and prosperity.

Further, we probe how the IPD alters the dynamics of regional innovation. We call the emerging regional patterns “digital platform clusters.” These clusters extend the dynamics associated with digital platforms (often associated with giant information companies like Google and Microsoft) to smaller specialized technology firms and, as important, to firms rooted in more traditional industries. The sustainable success of industries close to the heart of the economic agenda of the Trump Administration, such as autos and other heavy manufacturing markets, depends heavily on how the IPD evolves on a global scale.

The digital DNA of the new innovation model entails distinctively global forces. Global interactions allow information feedback cycles to speed the production of initial designs and constantly refine them. As a result, the prospects for digital platform clusters depend in part on sound global economic governance. The governance choices include traditional issues of market access and competition, but they also require choices about how to build a trusted digital environment that covers cybersecurity and digital privacy. Getting the governance of the IPD right is critical to capturing the growth opportunities afforded by this new model of innovation. Getting it wrong could slow the world economy in the coming decades. Even worse, bad governance choices could breed widespread social and political mistrust because of the cynicism that surrounds the use of digital technologies.

We explain how national policy responses intersect and potentially conflict with choices about global economic governance. In an interconnected world, the intersection of national and international choices alters the vector of technological and economic change. Hence, we propose a strategy for updating global governance that better reconciles the diversity of national preferences with the need for common global understandings about market governance. We test our strategy against a series of “hard cases” that are critical to getting the governance of digital DNA right.

Like the Internet, the IPD’s future will be influenced by cyberattacks, limits on global data flows, the emergence of digital haves and have-nots, and other threats. Nonetheless, the best way forward involves pragmatic cooperation and compromise among public, private, and civic stakeholders working within multistakeholder organizations. Making the MSO process work requires a clear understanding of the respective roles of government and civil society. The challenge is to persuade the stakeholders that progress and compromise are essential to innovation, job growth, and prosperity everywhere. Some leaders are beginning to embrace the challenge and taking the first steps toward international progress on cooperative solutions. Our argument is a probe of where these first steps could ultimately lead. It unfolds in four parts.

The first step is to define the scale, character, and urgency of the challenge that is raised by digital DNA. Nongovernmental organizations, corporate executives, and policy officials can churn out memos and issue a profusion of white papers, but unless the issue at hand is of major importance and is time sensitive, neither senior government officials nor high-level business executives will devote enough of their scarce time and attention to solving the challenge.

The IPD is changing how societies innovate and is an important driver of global economic growth. We compare this emerging digital platform cluster model to the dominant innovation model of the past thirty years that was symbolized by the vast successes of Silicon Valley. Our discussions with senior business executives showed a far more widespread appreciation than in 2010 that the IPD is a big deal. Specialized government technocrats have also grasped the point. But, although top political leaders praise entrepreneurship and innovation, they are more preoccupied by debates over slow economic growth, job creation, and the complex links between globalization and economic inequality. Layered on top of these concerns are worries about unfair trade and investment policies. Some of these complaints deserve serious attention and targeted policy responses, but they also divert attention from the importance of IPD dynamics of such grassroot concerns as manufacturing and farming. Without appropriate global governance of the IPD, it will be hard to create the better jobs and higher productivity growth needed to fuel long-term economic progress. We synthesize the central dynamics of the changes to chart a path to making wise choices about the IPD’s governance. The path toward an integrated approach to global economic governance that deals with ongoing disruptions requires a fresh approach to the synthesis of regulatory convergence, civic society engagement, and aspects of trade policy.

After analyzing today’s dominant patterns of advanced technology innovation in the United States and elsewhere, we examine the profound changes spurred by the IPD that are sweeping across firms and markets and the links between these changes and several major policy debates, especially competition in digital markets and the creation of a trusted digital environment. We conclude that the fate of a changed system of regional innovation and digital platform clusters will depend in important ways on choices about global economic governance. We sharpen our case by honing in on how two major firms in two distinct sectors, Monsanto and Qualcomm, are innovating in response to the IPD. Their strategies illuminate how governance and innovation policies must evolve.

The second step lays out a strategy and a design for governing the disruptions that relies on a mix of international agreements and the partial convergence of national policies. We focus on governance instead of policy because private innovations by industry and civil society must complement government decisions and rules.
An international strategy that addresses changing 21st century global negotiations is needed for governance to evolve productively. We explore who must be at the table and why. We assume that global economic power is dispersing and that governance preferences among actors are widening and explain why the governance of the IPD will be more successful if some alignment of emerging national strategies occurs. Building a foundation of collaboration will require bargaining and compromises among some cadre of countries. A “credible club,” a core group of reasonably like-minded countries with sufficient influence to alter the world market through their choices is needed. Over time, this club could add supporters and help forge important international governance innovations. And, technocratic efficiency and political reality will require that business and “civil society” play a larger role in any governance strategy.

Our approach emphasizes the advantages of using trade as a platform for complementary regulatory and nongovernmental undertakings. Our discussion of cybersecurity demonstrates that various forms of cross-national regulatory collaboration can substitute for a trade foundation, but in the end such collaborations will repackage many of the features of trade pacts in new regulatory language. Therefore, we focus on trade as the beginning point of understanding which policies are needed for success and to generate economic growth and better jobs.

To decide how to proceed, we must determine how much uniformity is necessary or politically possible among global policies. The trick is to embrace a strategy that helps sort out the minimum necessary degree of coordination. In some cases, convergence is less critical, as when the EU and the United States are moving in close policy lock step. What is more important is the removal of certain risks created by the diversity of their policy rules. In other cases, more harmonization on a single policy is vital. It depends on the nature of the interdependence. To support our case, we compare and contrast the level of necessary harmonization needed to improve the security of digital e-commerce payments with what is needed to safeguard cross-border financial payments among banks.

In developing a design strategy, we stress the importance of achieving an appropriate minimum baseline of authoritative international agreement. This baseline can mix “soft” rules that commit governments to create certain types of policy and governance capabilities and “hard” rules that command or forbid specific forms of behavior. For example, both types of rules are binding in trade agreements, but the right mix of hard and soft rules facilitates partial convergence of national governance approaches and still allows for national diversity in the policy mix.

The baseline also should pave the way for complementary governance mechanisms. Deployed appropriately, MSOs allow a more flexible, experimental, and expert way to link a policy framework to implementation schemes that can better respond to dynamic technological environments. MSOs also can make it easier to nudge political–economic coalitions across national boundaries toward more compatible understandings of their interests. We conclude that it is counterproductive to seek a neatly architected scheme of interrelated MSOs to respond to major issues. Ad hoc specialization and problem solving through many different kinds of institutions will prove superior to a grand scheme. But MSOs can only be fully effective if governments set clear baselines for policy and hold MSOs accountable.

The third step provides a detailed examination of three issues that are critical to the dynamics of digital platform clusters—cloud computing, cybersecurity, and privacy. These three issues, which the IPD brings to the fore, must be disaggregated and addressed to avoid paralysis. We test our preferred governance strategy against these hard problems for global governance to illustrate specific, major policy challenges created by the IPD.

The first case covers governance for cloud computing and its related services (a foundational capability for the IPD). It focuses on the international commercial rules governing the emerging cloud architecture for computing, information-enabled services, and the associated issue of the transborder movement of data. The second case concentrates on international issues pertaining to cybersecurity. Creating a trusted digital environment requires strengthening cybersecurity and data privacy, not a comprehensive framework. We explore the governance of cybersecurity using cases from the finance sector. The third case considers challenges about the balance between the economic gains from Big Data and the protection of personal privacy. We examine the privacy of data based on a comparison of the contrasting U.S. and EU approaches as a springboard for our analysis.

Cybersecurity and privacy are “hard cases” for global economic governance because they largely remain outside the frameworks of binding international agreements and rely mainly on consensus statements of normative expectations and endorsements of best practices. Our strategy for governance could create more productive governance options. The three issue areas are interlinked. Thus, it is hard to imagine a productive governance regime for the cloud ecosystem that exists separate from some common international understandings about cybersecurity and digital privacy. But, we also show that tidy grand bargains are unnecessary to make progress on these linked issues.

The final step suggests linking international agreements to advance a trusted digital environment into annexes of a new digital economy agreement. This approach would address gaps in trade policy related to the IPD’s impact on the functioning of world markets. Such linkage will strengthen the pacts on the trusted digital environment and reduce risks that rules on privacy and security will become excuses for protectionist strategies. There are several ways to anchor these policy arrangements to binding international agreements, but trade is the simplest conceptual and practical fit, so we focus on it in our proposal.

Current divisive controversies raise proper concerns over the political will to rely on trade agreements to address crucial governance choices. But, even if it is not used in a trade context, work done in the TPP and other trade negotiations may be usefully transplanted to other agreements. So, preparing for a moment that is “riper” for negotiating and reaching an agreement, we explore the template of a trade agreement for a stand-alone pact on the digital economy. We want to show what could be done. Experienced negotiators would make adjustments as necessary. We argue that starting with a trade template provides a governance infrastructure of established principles that simplify the creation of specific governance frameworks on issues such as improved market access for providers of the cloud infrastructure and its digital ecosystem of services and goods.

Trade agreements also can strengthen national commitments to create governing capabilities that could advance digital privacy and security. They could provide principles and norms needed to underpin a converged, coordinated international baseline of soft and hard rules, including significant privacy principles. (We believe that we are the first to propose a way to incorporate privacy protection systematically into trade policy.) At the same time, the negotiating process allows for a closer coordinated review of the costs and benefits of various governance choices, all of which are important to getting the proper balance of growth and safeguards of civil liberties right.

Along with many critics of trade agreements, we conclude that traditional trade agreements alone will fail as a governance response. Our approach allows ample room for variance in national policies and for extensive reliance on civil society innovations. We also rely on coordination among national regulators and MSOs to produce workable governance arrangements. We believe that, in a time of profound economic and technological transition, the philosophy of economic governance must emphasize the virtues of experimentation and learning, two tricks that are difficult to fold into traditional governance arrangements. But if trade agreements turn out to be a political “bridge too far,” other ways exist to package international agreements to achieve many of the same purposes.

Ultimately, our book is an extended thought experiment or plausibility probe. We do not know whether every part of our argument is correct (although we are prepared to defend each part vigorously). But the architecture of the argument shows how to integrate the digital DNA driving the IPD into a more ambitious line of policy development. Inevitably, this volume is imperfect. So, we invite comments, criticisms, and corrections of our errors and omissions so that the end-game solution can be refined as developments and negotiations move forward.


Extracted from - Digital DNA: Disruption and the Challenges for Global Governance, Peter F. Cowhey and Jonathan D. Aronson, Oxford University Press
(Forthcoming, summer 2017)

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