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Jewish World Review April 18, 2000 / 13 Nissan, 5760

Mort Zuckerman

Mort Zuckerman
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Tensions on the 'Net

http://www.jewishworldreview.com -- AMERICA EXULTS in its dominance of the emerging digital economy that will not only transform our domestic economy and society but profoundly affect our relations with the rest of the world. Resentment of American ascendancy is already apparent in the perennial resistance to the export of American popular culture and newer objections to American political and military dominance. Anti-Americanism is sure to intensify when more businesses in other countries experience the hollowing-out effects of the acceleration of foreign-market penetration by American E-commerce. Even sovereign states will not be immune, for their national tax revenues and their currencies will be vulnerable to the unique nature of the global E-economy.

This may strike some as overstatement, even given the manifest speed of E-commerce growth. Yet just a few years ago no one foresaw the spread of E-commerce and no one talked about the possibility that the Internet might become the major worldwide distribution channel for goods and services that it promises to be.

In the world of the Internet, there are no electronic borders. By abolishing distance and facilitating the collection of information, the Internet makes it easier to reach beyond a home country's borders to match buyers with sellers. Everyone will be forced to compete globally. Monopolies built on geography and locality will be undermined. The movement of physical goods will still be impeded across borders, but nothing will impede a vast expansion of business-to-business dealings. Indeed, even formerly domestic industries such as financial services, banking, education, consulting, gambling, media, entertainment, public relations, design, and communications will become open to global competition.

Future trade freedoms. In this emerging digital marketplace, the United States is by far the global leader, well ahead of Europe and Japan. How this will affect the movement toward free trade and the relatively cooperative postwar liberal trading order is unclear. At the very least we should expect to see more demonstrations like those in Seattle protesting the mission of the World Trade Organization and more appeals to nationalism and protectionism. During the Cold War, the United States was able to influence other nations by offering economic inducements. But America's powerful E-economy will hurt countries and businesses that have lagged behind and even discourage economic cooperation with the United States. The Internet rose is not without thorns.

In the world of the Internet, being first is critical, and American companies have spent hundreds of millions to be first. Once a site gathers a mass of buyers by offering useful product information, a snowball effect takes over, attracting more and more sellers whose products draw even more buyers. It is a fast-moving cycle that connects everyone everywhere quickly and establishes one dominant player as the electronic middleman, leaving late arrivals out of the running. It is estimated that within three years electronic middlemen will have the capacity to control a quarter of the world's transactions between businesses. And, if anything, foreign companies will increasingly have the unhappy choice of using the American middlemen or just disappearing from sight.

If anything, the American lead is bound to grow as American companies establish name and brand recognition and develop the appropriate fulfillment mechanism to satisfy their clients. We need little imagination to know how the winner-take-all nature of the Internet will be portrayed as American electronic imperialism. Listen soon for the cries of Internet regulation of one kind or another.

There are areas where European countries lead. European technology producers have an advantage in wireless broadband, a platform that may well emerge as the dominant technology in the next few years. The European notion is that the mobile telephone rather than the personal computer is poised to become the principal tool for communicating and transacting. But the first round goes to U.S. producers, and the rest of the world remains years behind. The American model has now become the world standard, and this standard will dominate at least for the next several years. We certainly lead the world in building the new infrastructure of the information age. Morgan Stanley Dean Witter analyzed the 46 leading suppliers of the infrastructure of the digital economy that were considered to have a competitive advantage over the next several years and 31 of them are American; only four are European. Altogether the pressure on other businesses, other societies, and other economies is going to be enormous. European and Japanese companies in industry after industry will find themselves at a growing disadvantage vis--vis American companies.

That is not all. The impact on national economies will be substantial. Three areas where growing American predominance will be felt are currencies, trade, and balance of payments. The United States will benefit from the long-term IT trade surplus; it will benefit from the dramatic growth of U.S. exports of intellectual property rights, namely royalties and fees that have now emerged as the largest component of U.S. exports; and it will benefit from the continued strong export growth in a number of technology-intensive service activities, especially computer data processing and database services. These trends will strengthen the American dollar and weaken other currencies over the long haul.

Other national consequences will follow. The Internet will have such a transforming effect on business models that it will divert profitable activities from European and Japanese companies to American companies, and extend the reach of American companies, in an unprecedented way, into the service sector of foreign economies. This will inflict a loss of profits on the foreign companies, which in turn will reduce tax revenues collected by governments. The fiscal effect will be compounded by the fact that the Internet is a borderless technology that makes physical location virtually irrelevant. This creates the incentive to shift business activities to the lowest tax regimes. Companies may be physically farther away from their customers, even though they are only a mouse click away.

Who and where? If the ability to collect tax is based, in part, on knowing who is obligated to pay it, this ability on the part of governments will be eroded when taxpayers are increasingly hard to identify, when companies can organize anonymous electronic transfers of funds, and when encryption technologies may well make it virtually impossible to find out who is doing what and with whom.

If taxes are traditionally supposed to be paid to the country in which the income is generated, how will the taxing authorities know what country is generating the income? They may not even know the country of residence of the people, and firms, who are carrying out taxable activities. And even if they do, the Web will make it easier for more and more people to resort to tax havens. The Internet will make it much simpler to direct economic activity into many different countries while a person is sitting at one desk. Who is to decide which country is the home of the profitable economic activity and where the value is created?

No developed country is going to sit back and allow its fiscal revenues to erode. American firms will be seen as the cause of these declines, and the governments will be lobbied by businesses on the losing end to "do something." It is hard to imagine their doing anything that makes economic sense. But that won't stop the attempts and the subsequent strain in relations between America and the rest of the world.

America's leadership is, if anything, certain to expand. We have a business culture that rewards innovation and rapidly adapts to changing technologies and applies them at Internet speed, where speed to the market is critical. No wonder then that immigrants skilled in the computer sciences are drawn to the United States in great numbers, having seen that America offers maximum scope and rewards to their talents and energies. Nearly 25 percent of CEOs in the freewheeling culture of Silicon Valley are Chinese or Indian immigrants. The brain drain of talented young immigrants to the United States is yet another source of resentment on the part of developing and developed countries. America's lead will be enhanced by the fact that it spends more on research and development than either the European Union or Japan. Furthermore, the scale of the American digital marketplace enables Americans to spread the costs of developing, testing, and launching E-commerce sites until they work, and work effectively. Beyond that, the American financial system is uniquely able to move financing and other resources to the cutting edges of the economy, thus providing entrepreneurs with the necessary capital to develop and expand the new businesses.

We have entered the 21st century enthralled by and propelled by a post-industrial revolution in technology. The Internet has captured the imagination of business and the public and spread with stunning speed. It has created a whole new business concept that, in turn, has created a whole series of new companies and new industries that have expanded choice and the quality of life.

E-commerce is not going to be entirely a win-win proposition for all countries. Some countries will gain much more, and some of that gain will be at the expense of others. If America's pre-eminence is seen as predatory or unfair, the relations between the United States and its longtime allies are in for a period of accelerated strain and conflict.



JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.

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© 2000, Mortimer Zuckerman