Is data communications equipment the new oil?

Author: Ricardo Tavares
Published: 2017-06-19

The Economist magazine recently claimed data is now more valuable than oil. While data monetization is driving a new “gold rush,” there’s something else happening reminiscent of the financial impact of the oil industry, the rising importance of data communications equipment in the trade deficits of a large number of countries.

Imports of electronics equipment—communications infrastructure, devices, data-center equipment and so on—now can rival oil trade in value. Let’s start with India. By 2020, domestic electronics consumption is estimated to reach $400 bn. A deficit of $300 bn a year is expected, equivalent to India’s oil imports bill.

However data equipment is very different from oil in a fundamental way. While nature chooses where oil can be found, electronics manufacturing is produced in global value chains (GVCs) whose central hubs are defined by a combination of policies and underlying economic competiveness. Everyone would like to produce mobile phones, computers and wireless base stations. Unsettling to many countries, though, China has come to dominate global electronics production.

Operating in GVCs has meant importing to export. China has done that, and more. A classic example are the lavish incentives Taiwanese contract manufacturer Foxconn received for its plant in Zhengzhou, China, where it produces the iPhone. City officials reduced energy costs, lowered social insurance payments, gave $1.5bn to contractors building the factories and workers’ dormitories, created a special economic zone, and provided a loan of $250 million to Foxconn. In exchange, the city received 150,000 jobs.

The results of this and numerous other projects have been astonishing and ignited international concerns. China’s most recent industrial policies seem to aim at total dominance of entire high-tech industries. There has been both a geopolitical and economic backlash. The U.S. has banned Huawei telecommunications infrastructure equipment on the grounds of national security. India put in place its “Make in India” program.

Elsewhere, Brazil is reviewing its import-substitution (ISI) strategies, some of which have come under World Trade Organization’s (WTO) scrutiny. And Turkey is following some of Brazil’s industrial policy requirements when forcing mobile operators to buy locally-manufactured goods when they acquire radio spectrum. But the major flaw with such ISI policies is the economics of scale with global supply chains. It simply makes no sense to produce data equipment only for a domestic market.

In the near future, trade disputes in the electronics sector are likely to rise. The quality of industrial policies will matter to attract pieces of the electronics GVC. While protectionism is rising, it is clear nothing can substitute for real economic competitiveness and an outward-looking approach.

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