Read part one and part three.
China’s data regime has been lurking in the news this week following the Supreme Court’s decision to uphold the TikTok ban, which hinged on the rationale that China could compel TikTok to hand over sensitive American data.
The first article in this series found that it would be extremely difficult, if not impossible, for China to impair the technical interoperability of the internet. And yet, this notion of technological bifurcation between the U.S. and China persists — manifesting this week as the banning of many young Americans’ favorite pastime.
If internet fragmentation is understood as occurring between businesses and economies, then fragmentation is undeniable. China’s data laws play a significant role in this. Yet understanding the broader economic impacts of these policies traces back to geopolitics: in particular, notions of trust and reciprocity between countries.
There are three models for data governance, according to Erik van der Marel, a senior economist at the European Center for International Political Economy and an associate professor at the Solvay Brussels School of Economics and Management. The first is a liberal model, or the American model, in which “companies are fairly free to operate across borders with their data.” The second is the conditional flow model where conditions are placed around using citizens’ data and sending that data abroad. This model is popular in Europe. The final model is the one that China is pioneering — and it emphasizes state control over data.
China’s restrictive method of data governance is shaped by a number of policies. The National Intelligence law allows the government to compel companies to hand over data for “national security” purposes. The Cybersecurity Law, Data Security Law and the Personal Information and Protection Law impose strict requirements on processing, storing and transferring data. The laws primarily require that companies working on critical information infrastructure or handling “important” data, process and store such data locally. Government approval is required for the cross-border transfer of certain data, particularly data deemed “important.”
Foreign companies operating in China say that it can be difficult to understand how to comply due to ambiguous definitions and the breadth of regulatory scrutiny. For example, there is a lack of clarity regarding what data classifies as “important” and how to communicate with relevant agencies on the data-transfer approval process. According to the European Chamber of Commerce in China’s 2024 Business Confidence Survey, data regulations are the most significant obstacle for European companies in the financial services industry and among the top five obstacles for the information and communications technology, automotive and utilities industries. The chamber concluded that while the China market remains attractive to European businesses, there is a growing concern about lower profits and regulatory barriers.
But foreign businesses are not the only ones affected. Kai von Carnap, an associate fellow at the German Council on Foreign Relations who specializes in digital developments in China, highlighted DiDi’s failed attempt to list on the New York stock exchange. Shortly after DiDi, a popular ride-hailing app in China, made an IPO on the New York Stock Exchange in June 2021, the Cyberspace Administration of China launched a cybersecurity review of the company motivated by concerns that if DiDi was internationally listed, foreign governments might be able to access sensitive Chinese data. This ultimately led DiDi to make the decision in December 2021 to delist from the New York Stock Exchange.
Bulelani Jili, a PhD candidate at Harvard University specializing in Africa-China relations and internet policy, noted that a lack of trust in Chinese products due to China’s data policies has also limited opportunities for Chinese businesses abroad. China’s ability to collect data from private companies according to a vaguely defined notion of national security “inspire[s] a tremendous amount of anxiety,” particularly in Western observers who don’t trust that the rule of law in China is sufficient to ensure that the Chinese Communist Party is kept in check.
TikTok is an example of this. Another example is Huawei. Huawei was increasingly locked out of Western markets in the 2010s over concerns about backdoor access and more generally the Chinese government’s increasing grip over the private sector, according to Jili. Huawei had been internationalizing since the early 2000s and made about 60% of its revenue abroad. After the crackdown on Huawei in the U.S. and elsewhere, the company returned to a dependency on China’s domestic market, where it now generates 67% of its revenue.
According to research done by van der Marel and Martina Ferracane, an associate professor in international digital trade at Teesside University, restricted data regimes like China’s are correlated with adverse outcomes on GDP, innovation and services exports. Van der Marel told Domino Theory that China’s data laws will probably make the country less effective at innovation, especially in emerging tech like artificial intelligence and quantum computing, which are inherently global technologies. “It’s very expensive to innovate everything yourself, so you need to rely on partners that are also outside your borders. And if you close yourself up from these opportunities, I think in the long term, you would provide a digital market or a technology market that is subpar,” said van der Marel.
Ferracane says that China is currently at a crossroads because some data restrictions need to be lifted in order for Chinese companies to be able to export services to the U.S. and European countries — China exports (relatively) fewer services compared to countries with more open data policies. Exporting services is key to China’s continued economic flourishing as the growth of China’s manufacturing sector slows. If China wants to be able to access the European market, for example, then it needs to be willing to allow European companies to operate more freely in China — i.e., European companies need to be able to offer their services in China while still processing some data in Europe. It’s essentially an issue of bilateral relations, said Ferracane: “if we can’t bring our services to China, you can’t bring your services here.”
Ferracane thinks China understands that it’s at a crossroads and wants to liberalize a bit. The extent to which this will be effective is unclear — it comes down to whether China is willing to give up some control for economic growth, and “I’m not sure they’re willing to,” said Ferracane. If the Chinese government allowed Chinese data to be processed abroad, that would make it much more difficult to monitor and collect data, which “usually relies on physical access to the data,” said Ferracane. China is also concerned about allowing foreign digital services in the country that could influence how its citizens think. Ferracane thinks that broad liberalizations are unlikely but some sectors that are less sensitive might liberalize.
Essentially, China’s economy has been enormously successful despite its restrictive data policies. “If China was willing to give up the control of information, they would be growing much more. It’s a cost for now,” said Ferracane.
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