“You all are stupid,” said the Chinese professor. The audience was immediately attentive. That was not the kind of statement you hear at an international economic conference. Sensing he got the attention he sought, the professor went on explaining. “You all use social media. correct?” Yes, we all do. “Key source of revenue for social media is online advertisements. And all social media you use is of US origin. So this ad revenue in billions and billions goes to them. If you have your own social media platforms the money stops in your own countries.”
Simple logic. Protectionists have been using the same logic ever since the birth of nations. Now they have found a new arena where the logic makes increasingly more sense, with more evidence to back it.
If I were to teach the subject to my business management students, perhaps I would choose an even better example. Compared to ten years ago, credit and debit card usage is much higher now. In 2020, Sri Lanka had 44 million credit cards and 75 million debit card transactions. The spend was Rs 432 billion. Typical transaction fees varied between 1.6 – 2.6% for MasterCard and 1.4 – 2.4% for Visa. For convenience, let’s assume a 2% average fee. So in 2020, Sri Lanka has paid around Rs 8.64 billion to MasterCard and Visa. Sri Lankan banks too would have earned a part of this fee. For comparison, the total amount is approximately equal to the revenue of Sri Lanka Railways in the same year. Yes, if we had local alternative solutions and a market that preferred them over Visa/MasterCard Sri Lanka could have saved some foreign exchange.
The story moves on. Local freelancers pay, as transaction fees, anywhere from Rs 6 – 10 for every dollar they earn. Local hoteliers pay 15-17% of room charges to online travel agencies such as Agoda and Booking.com. Booking an Uber taxi or order a meal via Uber Eats, earns a percentage of the sale to a ‘foreign’ company. Theoretically, if all these could be moved to local platforms Sri Lanka will prevent money from going out. The savings will be added to GDP as domestic economic activity.
The Chinese professor was preaching what that country already practices. China runs the world’s largest digital protection regime. Almost all its social media are owned by Chinese companies. For every ‘Western’ social media platform we can think of, China has come up with its own alternative. WeChat (or Weixin in Chinese), with more than one billion Monthly Active Users (MAU) and a 73% share of all internet users in China, is its most popular platform. A mobile text and voice messaging application developed by the Chinese giant Tencent Holdings is also a giant platform.
China’s advantage is its large market size. China has the world’s largest Internet user “ base at 850 million
Sina Weibo is a Chinese microblogging platform – equivalent to Twitter. It has over 445 million monthly active users with the top 100 users having 485 million combined followers. More than 5,000 companies and 2,700 media organizations in China use Sina Weibo the same way Twitter is being used in other countries. Then we have Kuaishou, a short video social platform for users to record and share their lives. Kuaishou is popular in other countries as well and topped Google Play and Apple App Store’s most downloaded lists in eight countries in 2020. This is followed by TikTok – the Chinese version is called Douyin – again a short video publisher (clips of 15 seconds – 3 minutes). Its popularity at one time earned it the wrath of then US President Donald Trump.
The relatively lesser-known player include: Tencent QQ (an instant messaging app), Tencent Video (the Chinese equivalent of YouTube), Xiaohongshu (literally “Little Red Book”) – a social media and e-commerce platform, DouYu – video live streaming service, Zhihu – Chinese question-and-answer website (similar to quora) where questions are created, answered, edited and organized by the community, Meituan (literally “Beautiful Group”) – a Chinese shopping platform for locally found consumer products and retail services including entertainment, dining, delivery, travel and other services and Baidu Tieba – an online community. One for one, these platforms may not match the social media we know of in terms of features. Still, taken as a whole, they form an alternative landscape.
Linkedin may be the only exception. It’s not that Chinese users don’t have an alternative. They have Maimai, for example, which includes many features of Linkedin. However, Linkedin has a larger user base and as many Chinese wish to have a global network and seek foreign jobs, Linkedin is more popular.
Anyone who can recall the 1970-77 protectionist regime will realise that blocking imports didn’t lead to a growth of local production or innovation
China’s e-commerce landscape is similar to that of social media. Pinduoduo, Taobao, JD.com and Tmall rule across the platforms Tier 1 to 4. The search engine space is dominated by Baidu. While it is not banned in China right now, Google.cn has a long history of conflict with the state. For a time search was curtailed – and politically sensitive content remains censored. Then was also a period when Google redirected all search queries from Google.cn to Google.com.hk in Hong Kong, which returned results without censorship taking the advantage of Hong Kong’s independent judicial power. There was also a period when any attempt to search using Google resulted in a DNS error.
China blocks many digital platforms that are neither seeking to expand political discourse nor provide access to sensitive information, says The Washington Post, ‘It restricts instead platforms that are potential competitors to state-connected Chinese ones like e-commerce sites that compete with Alibaba (e.g. Rakuten, Amazon), business apps, including Slack, Dropbox and Slideshare, and nearly every chat app that could compete with WeChat — including ones from Asia such as Line, KakaoTalk and Viber’
The question here is: is it protectionism that makes China’s digital economy the second largest in the world, just behind that of the US, at RMB 36 trillion ($ 5.5 trillion). Evidence for the more traditional forms of protectionism exists, but never this strong. China could never have achieved such milestones if it were to use foreign digital platforms, infrastructure and apps. So why shouldn’t other Asian nations adopt a similar system?
China’s advantage is its large market size. China has the world’s largest Internet user base at 850 million. Other Asia Pacific nations are far behind. India has 560 million; Indonesia 170 million and Bangladesh 94 million. Some of these countries have local platforms and apps competing with international ones. In India, Ola offers the same solution like Uber, while in Indonesia we find GrabTaxi, Gojek and Movreak in different domains. What these countries have not attempted, is strict protection as China has done.
With digital economies expanding across the board, it is just a matter of time they discover the loss. Australia has taken note. It passed a law requiring digital platforms like Facebook and Google to pay local media outlets and publishers to link their content in the news feed or search results, in February 2021.
So, what’s wrong with it? The free-trade proponents will point to comparative advantage. A particular economy’s ability to produce a selected good or service at a lower opportunity cost than its trading partners. Countries must produce what they are good at and import stuff they cannot competitively produce. Ecuador must produce bananas and Sri Lanka rubber. The two countries purchase from each other so both get the best bananas and the best rubber at the lowest prices.
Also countries must avoid producing goods and services end-to-end. It is a global supply chain. You do what you can do at the best point. Sri Lanka may produce rubber. It has the necessary workforce and a historical advantage. Still, when it comes to making windshield wipers that use rubber as raw material, Sri Lanka might not be the best player. Perhaps China can do that better. So let them do it. The role of the respective governments is to reduce the tariff barriers so that free trade will result in the best product. The consumer wins.
This theory has some limits. Digital raw materials are equally open to everyone. A digital workforce, everyone has. So when it comes to producing digital goods and services, everyone is more or less at the same level. The only factor that differentiates one economy from another, as we have seen before, is the market. Thus comparative advantage has little role to play here. Probably protectionism has a bigger role, once the countries understand what they lose.
Finally: where do smaller markets like Sri Lanka stand? Again, they are not prevented from competing. Even Si Lanka’s tiny market has its own local e-commerce platforms. Sri Lanka has had its own social media, of sorts. Though they didn’t make much money, Elakiri and Lankanewspapers were popular before Facebook took over (they still exist, but are shrinking). Sri Lanka has its own taxi booking and food delivery apps competing with international ones. The most successful one, PickMe is morphing into a super-app as it adds more and more services. However, the potential of these businesses is limited unless they somehow go global. Protectionism, no matter how well-enforced, won’t result in Sri Lanka’s own innovative products.
Anyone who can recall the 1970-77 protectionist regime will realise that blocking imports didn’t lead to a growth of local production or innovation. Sri Lanka’s only opportunity is to join global supply chains and deliver the best.
In other words, Sri Lanka will not be able to successfully replicate the Chinese model. This does not mean that digital protectionism cannot work, but its adaptability to a particular nation depends on many other factors. It is complicated.