The US protectionist policies, the prospect of a tariff war with China, the migrant crises, “temporary” borders shutdowns (even within the Maastricht Treaty perimeter), the unpredictable consequences of an unmanaged Brexit as well as rampant sovereign ideologies are all signals that point in the same direction: a more fragmented world.
Instead of carrying on down the established path of effective collaboration and international agreements strengthening, industrialized countries are rather oddly turning to building walls and enforcing policies that weaken international trade and hinder international relations. Indeed, the latest OECD data suggest that in the second half of 2018 the G20 trade steady expansion may have come to a halt.
Conversely, cross borders data flows, which have grown at a compound rate of 30% over the last four years, do not seem to show any sign of slowing down or stalling. Most of cross border data exchanges do not involve cash payment, and IP packets follow different paths to reach their destinations. Imposing restrictions that hinder the free flow of international traffic would thus be much harder than levying “customs duties”.
Tensions that could have undermined the “free flow of data” between the two sides of the Atlantic have already emerged in the past for example on the European Court of Justice repeal of the safe harbor agreement (i.e. the agreement on the basis of which EU citizens personal data could be transferred to the US) or when at the 2012 Dubai ITU international conference Telecommunications Operators asked to be paid by big Internet Companies for the provision of the high-quality links needed to ensure a satisfactory streaming of quality-critical contents.
However, precisely because data flow restrictions would not have benefitted European Countries and even less the United States, none of these tensions have led to “digital ports shutdowns” and the specter of a “data trade war” has been providentially averted.
The positive effects of the “trade” of Internet services (on economic efficiency and welfare) are more significant than those attributable to the trade of goods. This is because, in the digital services industry, economies of scale and network externalities play a much bigger role. Therefore, the existence of few entities providing a specific internet service leads to greater benefits. Indeed, it is the concentration of an “Internet activity” in the hands of few providers in itself that strengthens and reinvigorates the accrued comparative advantages. This is why, despite various copycat attempts, we ended up having just one global social network provider (Facebook), just few Internet retailers (Amazon, E-bay, Alibaba) and few global content providers (Netflix, Amazon Prime) etc.
Theoretically, we could have a US enterprise as the global provider of social network, the car sharing industry being dominated by German Manufacturers, Italians firms as the prominent figures of digital tourism, and the biggest Internet retailers being located in the UK. In practice, these “world champions” are practically all US companies…but that’s another story.
The fact that few companies dominate and are likely to continue dominating their respective niche internet service market does not necessarily imply cross border data traffic. US companies can provide their services also by locating their servers (from which the service is provided) within the boundaries of the local market/country they intend to serve. However, even when this is the case, domestic servers and servers located abroad typically need to continuously exchange information among them. Moreover, the most promising Internet applications such as those based on virtual and augmented reality are bandwidth hungry.
Cross-border traffic is thus rightly expected to continue to grow. The underlying market of long-distance backbone (i.e. the high capacity cables over which the traffic is physically transferred from a country to another) will follow.
Provided the huge economies of scale inherent in the deployment of long-distance high-capacity cables and the “winner takes all” nature of the downstream business (i.e. Internet service market), we may expect the international digital infrastructure business to be also a highly concentrated industry. And this is actually the case.
However, differently from its downstream businesses, the long-distance high-bandwidth connectivity sector is a highly competitive business and there are no players that enjoy monopoly or quasi monopoly positions. Each country can normally be reached through different routes and each route is always served by at least a handful of operators. In fact, submarine and long distance cables are usually deployed by a consortium of enterprises which share the deployment costs and then preserve their independent share of the cables/capacity deployed.
Rather than from capacity shortage, the industry in the past has suffered from excessive capacity, plummeting prices, unsustainable level of competition. This has led to a series of gigantic bankruptcies which took place in the beginning of the Zeros’. Worldcom, Globacrossing, but also Qwest Communications International and Cable and Wireless, are just some of the most prominent bankruptcy filings, some of which made the headlines also because they overlapped with epic corporate scandals.
Few decades ago, before the Internet took hold, products used to be much easier to export than services. Today, also thanks to the long-distance players that have constantly upgraded their infrastructure, it is the provision of the digital services that has kicked in and took over.
We do not know which applications are going to be developed in the future, or if cross borders data will help addressing the most pressing global challenges. Perhaps in the future physical residency in a specific country will not be needed to enjoy the economic opportunities it offers…Think of Estonia which is already experimenting with the concept of e-residency. Perhaps virtual reality applications will lead to “virtual migration solutions” where workers will not be obliged to leave their respective native countries in search of a job.
What we do know is that, for these scenarios to take hold, we will still need infrastructural players to play their part by continuing to provide high-capacity links at competitive prices. Without the “Physical Internet” made of cables, routers, servers and international backbones i.e. without the “Physical Connectivity”, the wonders of the internet digital services would not exist…it is as simple as that.