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Digital Globalization Boom: Pandemic crutch or springboard to the future?

Digital information and data flows surged in 2020 as COVID-19 forced personal interactions to go online. But digital globalization is still limited, and this pandemic-era savior faces powerful threats.

Steven A. Altman is a Senior Research Scholar at the New York University Stern School of Business and Director of the DHL Initiative on Globalization at NYU Stern’s Center for the Future of Management. His research examines international flows of goods and services, capital, information and people; how cross-country differences and distances shape those flows; and their implications for business and public policy.

First, the good news. Internet links across national borders have kept us far more connected despite social distancing than would have been possible just a decade ago. International internet traffic soared 48% in 2020 according to data from the telecommunications research firm TeleGeography, and there have also been double-digit increases in international voice calls and e-commerce sales during the pandemic. 

The sudden spike in digital flows last March was so large that many asked, “Will the coronavirus break the internet?” YouTube and other streaming services had to reduce video quality to save bandwidth, but telecommunications networks and internet platforms held up remarkably well as country after country went into lockdown.

The growth of digital flows last year stands in stark contrast to other aspects of globalization. The 2020 edition of the DHL Global Connectedness Index showed sharp drops in international trade, capital and people flows at the onset of the pandemic. Trade in goods has rebounded strongly, but foreign direct investment remained weak through the end of 2020, and international travel was still down more than 80% in January 2021. Digital interactions don’t perfectly replace in-person contact, but online connections have been crucial while travel has largely been put on pause.

Looking back on the 2020 surge in digital flows, we should avoid the misconception that national borders don’t matter online. The internet is still used mainly to connect within countries rather than between them. For instance, just about 7% of voice calls, including calls over platforms such as WhatsApp and WeChat, are international. Less than 15% of friendships on Facebook cross national borders. And only 10% of global e-commerce sales are international.

Thus, most of the COVID-19 surge in digital flows was probably domestic rather than international. Online meetings likely replaced far more local gatherings than international ones, simply because most business and life interactions take place within national borders. Just about 21% of economic output ends up in a different country from where it was produced, and a mere 3.5% of people live outside their birth countries. 

Cost of a “tech cold war”

Policy barriers, however, have also crimped the growth of digital flows across borders, and they represent a growing concern moving forward. Data localization laws have proliferated in recent years, slowing productivity growth and services trade. And the prospect of a U.S.-China “tech cold war” has threatened to further fragment the internet. A recent Deutsche Bank analysis estimated that this could come at a cost as high as $3.5 trillion, due to reduced demand, costs of operating across rival platforms and costs of relocating supply chains.

Online criminal activity has also spiked amidst the digital flows boom. Cybersecurity complaints to the U.S. Federal Bureau of Investigation (FBI) more than tripled early in the pandemic, with large increases in phishing and malware attacks. And 2020 ended with the revelation of the SolarWinds Orion breach, which Microsoft President Brad Smith characterized as the “largest and most sophisticated attack the world has ever seen.”

Additionally, before the pandemic, the growth of the internet itself had slowed. International internet bandwidth grew at the slowest pace in 15 years in 2019, and the number of people using the internet increased just 5%, the lowest growth rate of internet users on record. 

Lasting boom or return to pre-pandemic trends?

Looking forward, telecommunications carriers predict that the pandemic-era boom in internet traffic will return to this slowing growth trend. Digital flows have been key to keeping the world connected through the pandemic, but rather than celebrate, we should work to preserve and strengthen our digital connections. 

One positive development is the inclusion of protections for international data flows in recent trade agreements, such as the U.S.-Mexico-Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). New regulations protecting the free flow of non-personal data across the EU are also a step in the right direction. But more still needs to be done. Four principles can guide the way forward.

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Cybersecurity plus interoperability

First, prioritize cybersecurity. It is time to take digital security challenges as seriously as other threats that have demanded responses across the whole of society, such as nuclear weapons and international terrorism – and now the COVID-19 pandemic. This latest crisis is particularly apt, since it hit many countries unprepared despite repeated warnings, with enormous human and economic costs.

Second, emphasize interoperability. Even as countries take different paths on data privacy and content moderation, interoperability should be maximized. Countries should pursue common standards where possible, but it is even more crucial from a global perspective to preserve common platforms and facilitate secure mechanisms for data flows between areas with different regulations. 

Protect, but without protectionism

Third, don’t automatically equate distance with danger. Countries and companies vary widely in terms of their technical capabilities and regulatory structures for protecting sensitive data. Sometimes keeping data close by can make it more secure, but this is not always the case. Data localization entails costs as well as risks. Focused regulations, where the benefits clearly outweigh the costs, should be favored over blanket data localization requirements.

Fourth, resist digital protectionism. As more of the world’s business takes place online, international opportunities increasingly revolve around digital activity. Digital trade has enormous potential to expand prosperity and wellbeing around the world. The necessary regulatory structures for this emerging world are still being developed. They should aim to address societal concerns while fostering a level playing field for international innovation and business competition.

The COVID-19 pandemic has highlighted the benefits of a digitally connected world. But the pandemic-era surge is masking major limitations and challenges. We must not take digital globalization for granted. Rather, we should strengthen our digital ties to accelerate the recovery from COVID-19 and to build a safer and more prosperous future.

Published: June 2021

Image: Nina Tiefenbacher for DHL Delivered

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