Platform Governance Through an Economic Lens

In the 1990s, Lawrence Lessig theorised that “code is law”1. He was getting at a fundamental truth about the internet: while legal frameworks targeted its content, the hardware and software that formed its architecture also functioned as de facto regulation in shaping outcomes. The dynamic holds true today as well, albeit in a more complex way. It points to one of the key differences between the West’s and China’s approaches to the ordering of the global data governance landscape. It is tempting – and reasonable -- to view the tension in the outcomes both hope for primarily through a geopolitical lens. But the economics of transnational data flows and platform operations are equally relevant.

Ronaldo Lemos and Christian Perron highlight regulatory competition as one of the key consequences of diverse approaches to platform regulation, with the European Union’s (EU) regulatory paradigm predominant – the ‘Brussels effect’. This has proliferated through a ‘push’ effect: its adequacy provisions have compelled other countries to enact regulation that clears the GDPR bar while the depth of its market means that platforms have changed their policies and modes of operation to pass muster.

In contrast, China’s regulatory approach has not been extra-territorially proactive. Instead, its influence – particularly in the Global South – operates in keeping with Lessig’s dictum. At its inception, the Digital Silk Road (DSR) element of the Belt and Road Initiative (BRI) was more a loosely organised branding exercise than unified strategy2. While this still holds true to some extent, Beijing’s focus on the DSR is now deepening with the growth of Chinese companies’ investments in developing economies – from digital infrastructure such as fiber-optic cables, cellular network equipment and data centers to frontier technology such as 5G.

Heidi Tworek touches upon two crucial aspects of this in her paper: the gap in digital infrastructure supply to the Global South due to path dependence based upon a utilitarian market approach, and China’s role in plugging the gap between demand and supply, offering digital infrastructure options to governments, in, for instance, Africa. To extend her argument, this underpins the Chinese approach to shaping governance paradigms for platforms and data flows – a demand-driven ‘Beijing effect’3. In mediating the digitalisation of developing economies, Beijing is not merely building infrastructure; it is putting in place standards and protocols that define the boundaries of regulatory efforts. And – just as the US has via the operating models and terms of service of US-based platforms and the EU through the GDPR – it is developing a constituency for transnational standard setting and regulatory initiatives in various fora such as the International Telecommunications Union.

The tension between these competing approaches and regulatory visions is inevitable, with daunting national security implications. Examining this tension from the perspective of value creation and accrual along the supply lines of global platforms, however, potentially opens up more space for transnational coordination and cooperation. The core difference between the Western and Chinese models of data governance that underlie their regulatory frameworks – the different attitudes to cross-border data flows – is a good example. Data sovereignty and its implications for platform governance such as data localisation enable more privacy-invasive and surveillance-centric regulatory regimes, certainly. But this is not the only impetus for countries in the global South. Digital platforms are fundamentally different from conventional international businesses in their relationships with consumers. The latter become assets whose data is processed into monetisable information. This logic, fiercely debated in recent years and analysed in depth in Shoshana Zuboff’s Surveillance Capitalism, among other commentary, has had logical consequences in every sphere of platform governance – from antitrust and merger assessment to content moderation and privacy. Regulatory frameworks across the world that have been geared towards conventional markets and often operate in silos even in the same jurisdiction are still struggling to develop coordinated approaches that are fit for purpose4.

These digital value chains are extractive in multiple ways. First, as Lemon and Perrone point out, they can put countries in the global South – typically lower in the value chain – behind the innovation curve. Technologies and algorithms are built in developed economies using data harvested from developing economies that remain consumers. Second, platforms’ ability to operate without physical presence means that tax revenue allocation is often misaligned with value generation and governments’ development priorities. Resolving this misalignment has been a difficult process given the compromises involved, complicated by loopholes that have allowed transnational digital platforms to claim domicile in tax havens. International negotiations on these issues have been underway for eight years. There have been successes, such as the G20 and Organisation for Economic Cooperation’s (OECD) Base Erosion and Profit Shifting initiative5, but numerous impasses as well with pushback from both developed economies – the US in particular – that have birthed these platforms and digital models, and data rich, high consumption economies in the global South. The push in the global South for data sovereignty by various means that impede data flows is thus not tied to China; there is an economic logic to it.

Take India as an example. It is a pioneer in building digital public infrastructure in the form of modular platforms, and a key market for global platforms. It is also, unlike countries within the ambit of the DRI, uninfluenced by the Chinese model of platform regulation given geopolitical tensions between New Delhi and Beijing. As Lemos and Perrone have pointed out, India has banned 49 Chinese apps on security grounds. Regardless, it has mirrored China’s stance on data sovereignty in several ways. Taxation and economic nationalism play a substantial role in this6. India’s tax regulators have struggled with the question of how to make data-driven global platforms subject to domestic regulations. The equalisation levy instituted in 2016 and India’s rejigging of the concept of ‘significant economic presence’ in 2018 to account for digital platforms have caused tension with trade partners such as the US. Localisation and on-soil mandates are part of this push, making domestic taxation more viable. Likewise, localisation requirements can advantage domestic platforms that lack the capital and capacity of global rivals. Drafts of India’s E-commerce legislation, in fact, lean into this.

The OECD’s headway on the Inclusive Framework approach to the digital taxation issue is worth looking at7 in this context. In October 2021, 136 jurisdictions joined the ‘Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’8. It is not a panacea by any means; its Pillar One formula for reallocating taxing rights on profit above a threshold to market jurisdictions has been criticised in various quarters. Nor is implementation and the phasing out of national taxes and levies like India’s likely to be a smooth process. Yet, it is a significant feat of international cooperation that could potentially bridge gaps on at least one front when it comes to platform governance and data flows.

The economic tensions baked into platform value chains are just one aspect of the complex, multi-faceted challenge of platform governance. However, they bear on core issues – from data localisation to digital antitrust. And progress here can create institutional mechanisms and multilateral understanding that set the context for movement in other areas. Tworek holds out the possibility of the current moment panning out like the 1850s when the International Telegraph Union, predecessor to today’s International Telecommunications Union, was at the centre of a cooperative international mechanism for regulating global communication flows. It’s worth remembering that the mechanism worked for decades at least partly because of the economic links and benefits it enabled.