FOREIGN LEGAL AND REGULATORY LANDSCAPE:
ITS EFFECT UPON THE DEVELOPMENT AND GROWTH OF E-COMMERCE
14 July 2000
Prepared for the
NATIONAL INTELLIGENCE COUNCIL
By
BOOZ·ALLEN & HAMILTON
3190 Fairview Park Drive
Falls Church, Virginia 22042
I. Introduction
In the past few years, the information revolution has ceased to be an issue of concern only to a few groups of specialists and has become a part of millions of people’s daily lives. Information and communications technologies (ICTs)[1] have been gaining in visibility, primarily as a result of the growing use of the Internet and the proliferation of e-commerce businesses. These technologies are playing a leading role in the globalization of the world economy and in the rapid growth of what is known as the “New Economy."
The "New Economy" refers to a knowledge-driven economy where e-commerce and the Internet permeate all industrial, service and retail sectors, leading to new sources of competitive advantage based on the ability to create new products and exploit new markets. It is based not only on innovative business methods and highly skilled labor, but the support and participation of a forward-looking government and the presence of a knowledgeable population buying ever-evolving products and services. Creating the "New Economy" requires nothing less than a revolution in thinking for government, business and the public.
Because e-commerce is emerging as an important element in the New Economy, an understanding of the present state and the future outlook for the e-commerce environment will contribute significantly to an overall understanding of a particular country's economic potential. To systematically evaluate the e-commerce environment, a Model Framework has been developed to identify and analyze the important factors driving growth in this area.
This paper is divided into eight sections. Following this introduction, the second section will describe the main traits of the new information and knowledge-based economy and explain the Model Framework and the regulatory, technical and operational factors comprising the building blocks of an efficient and effective environment for e-commerce. In the third section, a brief overview will be given of the current global economy and the state of the elements of the New Economy – the telecommunications sector, Internet infrastructure and usage, and current e-commerce development. The next four sections address with particularity the e-commerce readiness of three countries (China, India and Japan) and one multilateral entity (the European Union) with reference to the factors outlined in the Model Framework. For each case, attention will be given to current economic conditions, government structures and political atmosphere and the characteristics of ICTs in that country or region as they apply to an analysis of e-commerce readiness.[2] The final section will draw conclusions from the country studies regarding future prospects for e-commerce development.
II. E-commerce Model Framework for Legal and Regulatory Landscape
The pace at which a country or multinational organization achieves network connectivity and moves toward becoming an information and knowledge-based society depends on its own particular situation and special characteristics. To predict the potential for success of e-commerce, these conditions must be assessed relative to other national entities using an objective measuring system.
The following e-commerce Model Framework provides an overview of the conditions necessary to promote the growth and development of e-commerce. The Model Framework, illustrated in Appendix 1, is derived from a "building blocks" concept. The "building blocks" concept describes the foundations upon which a country's e-commerce capabilities are built and fully illuminates the strengths and weaknesses of the e-commerce environment in that country. Each building block builds upon the results of the previous one. Thus, the strength of the e-commerce Model Framework depends upon the sum of all its parts.[3]
The Model Framework is divided into three tiers to reflect the interconnectedness of the telecommunications, Internet and e-commerce sectors. The success of a country's e-commerce environment is largely dependent on its Internet capacity, cost and access which, in turn, depend on low-cost and widely available telecommunications infrastructure and services in that country. Within each tier, certain regulatory, technical and operational factors influence e-commerce readiness.
A. Telecommunications Regulatory Factors
Regulatory Authority
The price of telecommunications services and the extent to which universal service coverage has been attained, both of which must be considered when assessing a country's progress toward becoming a knowledge-based society, depend on how the regulatory framework is designed and what role is assigned to the regulatory authorities.The independence of the regulatory body in overseeing the telecommunications industry is vital to the success of the infrastructure. An independent regulatory body not susceptible to political pressures will be able to perform its functions consistent with the interests of the industry and the public. In some countries, the key regulatory functions may be shared with or under the control of the ministry for that sector, thus limiting the independence and negotiating power of the regulator. Often, the independence of a regulatory body is more apparent than real.
Government regulators in the telecommunications industry must strike a balance that will allow for the proper development of the market in the new economy. In many instances, where privatization has taken place, state-run monopolies have been replaced by private monopolies or dominant, government-supported "national champions." In these cases, the regulators must take appropriate steps to open the market to new, possibly smaller providers and supervise the dominant firms to ensure healthy competition. The regulator should prevent anti-competitive and price-fixing practices of the monopolies and operate as a counterweight to large conglomerates of domestic and transnational corporations.
At the same time, minimizing regulatory intervention in the telecommunications industry also promotes the public interest. Minimization of regulations allows for competition and is considered necessary for innovation and development. In order for the telecommunications infrastructure to adapt to the increasing demands and needs of its customers, the regulatory environment must be flexible enough to promote convergence of telecommunications technologies. Burdensome regulatory restrictions that strongly favor a nation's incumbent telephony provider or restrict product development stifle innovation and entrepreneurship. Barriers to entry and high access costs must also be limited in order to spur growth of e-commerce.
Licensing
Throughout the world, the government licenses participants in the telecommunications industry. The ease or difficulty with which a license can be obtained, the transparency of the licensing system and the fees imposed on licensees are factors influencing who can and who will participate in the industry. In addition, the degree to which the licensing system is used by the government to control participation in and development of the infrastructure will impact the development of competition in the market.Accounting System
In telecommunications, the existence of an accounting system for providers and the degree of transparency in that system provides stability and viability for telecommunications providers that is necessary to create a competitive environment. In an effort to extend telephony to a greater proportion of its population, a government may impose a universal service requirement on telecommunications providers. The terms of such a requirement and the scheme established to pay for it may help or hinder the development of e-commerce.Local Competition
Growth in the telecommunications sector will come in the form of increased competition, by allowing large companies as well as those with minimal capital and resources, to offer a full package of services. The availability of interconnection, the ability of a new provider to use the resources of an established local telephone company, greatly enhances the growth and innovation of the telecommunications infrastructure. Innovation will be promoted by allowing specialized companies to remain focussed on their own research and development efforts. The tariff terms imposed on interconnection and the degree to which tariff terms favor the incumbent provider will also influence the growth of the telecommunications infrastructure.Available Services
The development and availability of new technologies designed to provide access to communications and the Internet will greatly influence e-commerce growth. Fixed landlines provide a major means of access but are often limited by high costs for the consumer. Where alternatives including mobile wireless telephony and cable television exist, access costs are expected to decrease and Internet usage and e-commerce are expected to increase.Foreign Competition and Ownership
In order to protect local or national providers or maintain government control over access and content, many governments restrict the level of foreign competition and ownership in their telecommunications sector. More and more, however, countries are recognizing that foreign competition and ownership provide funding through investment and access to new technologies that are vital to developing a strong telecommunications infrastructure and greater services.B. Telecommunications Technical and Operational Factors
Spectrum Efficiency and Management[4]
Spectrum efficiency and spectrum management are absolutely crucial to the burgeoning demands being placed upon the telecommunications infrastructure. Although fiber and wireless represent two viable alternatives to constructing a wireline infrastructure, a host of other obstacles remain. One of these, the failure to manage spectrum, will result in interference issues that will likely limit the usefulness and capability of telecommunications technologies.Network Architecture
The existence of an open network architecture or a telecommunications architecture that promotes access for anyone on equal footing promotes competition and encourages new entrants. With the existence of competition and new entrants, prices will drop from artificially high levels. Additionally, an open network architecture will provide manufacturers with the information necessary to create variations and improvements upon existing technology.Infrastructure and Rights-of-Way[5]
The efficient and accelerated construction of an advanced telecommunications infrastructure capable of delivering Internet technologies relies upon the utilization of exiting infrastructure. The railroad and electric infrastructures provide a large number of necessary rights-of-way that the telecommunications infrastructure needs in order to provide Internet bandwidth.C. Internet Regulatory Factors
Regulatory Authority
The chilling effect that a regulatory body can have upon the growth and development of the Internet can be significant. Due to the vaunted "borderless" nature of the Internet, if one country establishes regulations perceived as unnecessary or burdensome, Internet providers and businesses may simply relocate to a more hospitable environment. Therefore, a country should establish an Internet-friendly reputation if it wishes to achieve and maintain a significant degree of Internet market participation.Cost of Access
Again and again, in the countries surveyed, a significant factor in the growth of Internet usage and e-commerce is the cost of access to the Internet. Cost of access includes the price of computer equipment; the cost of alternative means of access including mobile phones, wireless and cable television; and the cost of connecting to the Internet via an ISP which can include a connection fee and an hourly rate for access to the Internet.Labor and Immigration Policies
Innovation of the Internet requires sufficiently knowledgeable individuals to create, support and repair products and services. Maintaining a talented pool of individuals within a country may necessitate relaxation of immigration policies, allowing the free flow of information. The easing of a country's immigration policies can come in a variety of forms including reducing visa restrictions, academic waivers and IT-specific exemptions.Government Incentive Programs
Although regulations are often perceived as a governmental proscriptive tool, regulations may also provide a vehicle for promoting specific technologies. Under the "universal service" model used in the United States, the government subsidizes telecommunications providers, allowing them to provide services to customers who would not normally be serviced. The "universal service" model represents one of many models that could be used to extend access to the Internet and the benefits of being connected to everyone.Content Control/Censorship
Censorship of pornography, anti-government topics and other controversial topics may have wide-ranging impact upon Internet usage. Traditional laws and regulations also have the potential of affecting a country's Internet development through content control. Filtering programs and government monitoring will likely result in decreased usage or attempts to subvert restraints.D. Internet Technical and Operational Factors
Protocol Standards and Development
Although the Internet relies heavily on the technical and operational factors of the telecommunications infrastructure, a number of Internet-specific technical and operational factors are of some consequence. Technical issues surrounding protocols including open development allowing for adequate testing and analysis, flexible or mandatory implementation and government involvement in development are crucial for software manufacturers in maintaining compatible and current software.Language Barriers
The reluctance of a particular country or government to accept multiple languages for Internet applications will not only limit the availability of content to the public, but will also stifle the growth and development of the country's own Internet industry. A country's web designers, ISPs and information technology (IT) manufacturers will be limited to producing products that are only beneficial to customers that are literate in that country's language.Skilled Labor Force
When an economy undergoes a transition as complex and potentially far-reaching as the transition to the New Economy, businesses will change the way they operate so that some employment opportunities are created and some are lost. The shift to higher technologies will thus require retraining and migration of skilled labor so the work force can adapt to the demands of the new technology. Where a skilled labor force is already available, the development of the Internet capability will be greatly enhanced.Government Incentive Programs
Many believe that the government has a role in adapting the workforce to the new economy. Retraining the present workforce and establishing programs aimed at providing whole populations with greater education and access to the Internet and e-commerce opportunities are ways the government can promote public awareness and encourage Internet use and e-commerce growth. Moreover, the extension of Internet access in some regions of the world, where the middle and lower segments of society have relatively low levels of income, will depend more on the involvement of the government in subsidizing the dissemination of information and communications technologies.E. E-Commerce Regulatory Factors
Taxation
One of the most critical building blocks for e-commerce is the level of regulatory involvement and intervention in development of the new system. The most visible e-commerce regulatory issue is whether to tax goods and services sold over the Internet. Although the most successful e-commerce countries have placed a moratorium on e-commerce taxes, the effects upon the tax base have not gone unnoticed. In the United States, it has been reported that state and local governments are losing US$170 million in potential tax revenues each year due to e-commerce sales. However, an e-commerce tax moratorium provides a powerful financial incentive for certain businesses and individuals, otherwise reluctant to venture into the electronic marketplace, to go online.Privacy
The ability to access a great wealth of information with a few keystrokes has, in some cases, suppressed the growth of e-commerce. Apocryphal stories of data mining and the selling of personal information cause consumers to envision an Orwellian society where personal data is sold to the highest bidder. A country must strike a delicate balance between preventing private and governmental abuse of personal information and giving industry the tools necessary to tailor its products and services to meet consumer demands.Content
Content policy issues include the extent of government involvement in controlling content on the Internet and the liability of ISPs and companies for content posted and transmitted on their networks. Limiting both government involvement and provider liability will encourage participation in e-commerce.Content - Intellectual Property Rights (IPRs)
The growth of the Internet heightens traditional intellectual property concerns (e.g., unlicensed copying of copyrighted material, trademark violations) because of the ease with which copyright and trademark laws can be circumvented online. There are also entirely new concerns as laws suited to the non-Internet world often have unforeseen technical ramifications. Distributors such as telecommunications and Internet service providers wish to transmit material without worrying about whether it is crossing national borders or infringing on laws other than those of their home country.The application of trademark and copyright law to e-commerce must be resolved against the fact that these authorities are largely country-specific. For instance, while one country may allow for automatic copyright, another country may require copyright registration. Therefore, in order for a country to be successful, its laws should be consistent with the major e-commerce countries' copyright and trademark legal authorities or with provisions of the international agreements governing IPRs. The major international agreements are the World Intellectual Property Organization (WIPO) Copyright Treaty, the WIPO Performances and Phonograms Treaty and the WTO Trade-Related Intellectual Property Rights (TRIPS) Agreements.
Security - Encryption and Authentication
In any secure verifiable electronic transaction, some methods of encryption, authentication and repudiation are all necessary. The laws and regulations that govern these activities must bring the same level of assurance to consumers as if the transaction had occurred in the brick-and-mortar world. Digital signatures, a form of authentication and repudiation, must be considered the equivalent to a written signature in order for e-commerce to flourish. Additionally, laws and regulations must allow for encryption programs that are compatible (e.g., technology-neutral) with other countries' standards in order to be considered viable e-commerce technology.Security - Payment Mechanisms
Governments can encourage participation in e-commerce by providing policies to recognize and develop secure electronic payment mechanisms. Knowing that security mechanisms are in place, businesses are more likely to offer products and services in that country and customers are more likely to use available forms of payment to purchase through the Internet.Participation in New International Standards Development
In addition to international agreements addressing IPR issues, other standards agreements aimed at promoting Internet capability and e-commerce development are under consideration by multinational bodies such as the WTO, the UN and other regional bodies. Where a country is actively engaged in developing international standards and is willing to adapt its own laws and policies to comply with those standards where possible, e-commerce in that country will benefit from greater market access and ease of transactions throughout the border-less e-commerce world.
F. E-Commerce Technical and Operational Factors
Protocol (Standards) Making Process
A well-established telecommunications and Internet infrastructure provides many of the necessary building blocks for development of a successful and vibrant e-commerce marketplace. An open protocol standards-making process will contribute to the technical development of e-commerce.Product Restrictions
Restrictions upon purchasing certain legal products (e.g., prescription drugs) may have the unintended effect of forcing consumers to purchase restricted products and, incidentally, other unrelated products in other countries. Other products may be restricted for political or cultural reasons with similar effect.Delivery Infrastructure
Successful e-commerce requires a reliable system to deliver goods to the business or private customer. Customers may be attracted by the convenience of ordering online but if their purchases are not delivered in a dependable and prompt manner, this advantage of e-commerce may be lost. The development of the transportation and postal infrastructures of a particular country will impact e-commerce heavily on this point.Availability of Payment Mechanisms
Secure forms of payment in e-commerce transactions include credit cards, checks, debit cards, wire transfer and cash on delivery. The availability of these forms of payment, the development of new forms (e.g., smart cards, Internet banking accounts) and public confidence in using them are all factors in how quickly e-commerce will become part of a country's commercial environment. The absence of methods of secure forms of payment will prevent true "virtual" transactions from taking place.General Business Laws
The application of general business laws to the Internet will serve to promote consumer protection by insuring the average consumer that the Internet is not a place where the consumer is a helpless victim. E-contracts should have the force of law, dispute resolution forums should be available and grievances should be remedied. Securities laws and financing regulations should allow for ease in obtaining investment to develop e-commerce businesses.Public Attitude to E-Commerce
The public attitude toward using e-commerce in daily life is a significant factor in the success of e-commerce. In some societies, face-to-face dealing and bargaining at the point of sale are traditional elements of retail transactions. Shopping may be valued as an opportunity for social interaction where more than just goods and payment are exchanged. Even the age of the general population may influence e-commerce development, though many differ on how it might do so. A younger population may be more open to using the new technology while an older population may be better able to afford access to the Internet and the goods sold through e-commerce.Business Attitude to E-Commerce
The willingness of companies to move away from traditional ways of doing business and develop methods and models that include e-commerce is essential. E-commerce-friendly business laws, including securities laws, financing laws and commercial contracting laws must be in place to encourage these sorts of changes in business attitudes.Governments and businesses wishing to encourage and develop e-commerce must be aware of less tangible cultural factors in business and society at large. Since these factors often are particular to a country or region, a more localized and flexible approach will be necessary to fully exploit market opportunities.
III. The Global Economy and E-Commerce: An Overview
In 1999, the global ICT market topped US$2 trillion and maintained 9 percent growth. The industry is expected to break US$3 trillion total by 2004.[6] Ninety million Internet devices were brought on line in 1999 bringing the world total to 260 million. The number of personal computers (PCs) rose to nearly 400 million by the close of 1999. Since PC prices are expected to continue to fall, this trend is likely to continue.
Presently, North America leads the world in Internet use and e-commerce. In March 2000, the total number of Internet users worldwide was estimated at 304 million - 45 percent in the U.S. and Canada, 27 percent in Europe, 23 percent in the Asian-Pacific, 3.5 percent in Latin America, 1.5 percent in Africa and the Middle East.[7] Internet users are estimated to top 350 million by the end of year 2000.
Though North America will continue to lead in Internet use, growth will be significantly faster in other regions where ICT infrastructure is less developed. By the year 2005, North America will represent 30 percent of all Internet users, Western and Eastern Europe will account for about a third and Latin America and Africa/Middle East are estimated at 7.3 percent and 3.8 percent respectively.[8] Almost a quarter of the worldwide online population will reside in the Asia-Pacific region. In that region, Internet use is expected to double in the next five years to almost 190 million in 2005. China is expected to contain the largest number of Asian Internet users by 2005.
Total Internet purchases in 1999 were estimated at US$130 billion and are projected to reach US$2.5 trillion by 2004. In 1999, companies invested US$280 million in e-commerce infrastructure and Internet presence and venture capitalists in the U.S. risked US$32 billion in web-based businesses.[9]
In the short term, e-commerce and advertising revenues will remain largely within the United States. By 2003, the U.S. will retain more than half of all e-commerce revenue, with Europe representing about a third.[10] Advertising is even more U.S.-centric. The U.S. accounted for 85 percent of all online ad revenues last year, according to Forrester Research, and will keep more than two-thirds through 2004.
As in North America, worldwide growth in Internet usage will be followed by increases in online transactions and e-commerce revenue. In Asia, online revenues are expected to grow from US$6.6 billion in 1999 to US$340 billion in 2003. In Japan, business-to-business (B2B) e-commerce grew by 400 percent in 1999 and is expected to grow by as much as 20,000 percent between 1999 and 2003.
It is to be noted that while e-commerce is expected to continue its remarkable growth, it still represents only small percentage of total retail sales. In 1999, e-commerce in the U.S. accounted for 1 percent of total retail sales and is expected to reach only 15 percent by 2010.[11]
IV. CHINA
A. IntroductionNo country has been more eager to embrace electronic commerce yet more fearful of its impact, than China. During the last three years, Chinese business and government have pursued an aggressive plan to prepare the country for electronic commerce. At the same time, regulators have imposed strict information controls and economic regulation on the Internet to protect the current government regime. Reconciling these two forces dominates discussion of the Internet and e-commerce in China.
China is a communist country yet over the past 20 years, the government has been moved its economy purposefully from a planned to a market-based system. As a result of reforms undertaken since 1978, the economy has grown more than tenfold. The gross domestic product is expected to increase 7.2 percent from 1999 to 2000. Foreign trade has increased by the same factor as Chinese manufacturers have begun to compete in the global marketplace in goods including personal computers.[12]
Lately, China has had limited success maintaining its economy in the face of the Asian financial crisis. Structural problems, the problem of reducing employment levels in the state enterprise system, unemployment in general and low rates of income especially in rural areas all pose serious challenges to long-term economic growth.
The potential market for e-commerce in China is huge but the investment risks are great as well. China has virtually none of the regulatory, technical and operational elements that, taken together, will allow and promote e-commerce growth in the near future. Also, content issues will continue to impede growth of the Internet and e-commerce.
B. Telecommunications in China
China is the world's fastest growing telecommunications market.[13] Growth has resulted from widespread economic reforms that rely on advancing high-technology industries. According to an official government report, the Chinese communications industry earned over 289 billion yen (US$34.9 billion) in 1999, up nearly 25 percent from the year before.[14] Since 1992, China's ICT spending has experienced a compound annual growth rate of approximately 30 percent. At this rate, China would present a US$174 billion ICT marketplace by 2004. In comparative terms, China's share of worldwide ICT spending has increased more than any other country but Brazil. In 1992, China accounted for just 0.6 percent of the global ICT spending. By 1999, this percentage had jumped four-fold to 2.3 percent.[15]
The Chinese government recognizes that continued development requires market liberalization and technological advances in the telecommunications and information technology sectors. Infrastructure investment is also a key element of China's economic growth potential with major infusions planned for the telecommunications sector. China’s forward-looking, centrally-planned and infrastructure-focused development program means that the country will continue to make major investments in high-capacity, high-speed and advanced technology. The government's approach to reforms, however, has retained a very active role for regulators and state-owned enterprises which is likely to impede Internet and e-commerce growth.
As with most things in China, there is a divergence in infrastructure between urban areas and rural areas. Overall, China has 8.7 fixed phone lines per 100 people, but in urban areas the number rises to 27.7. At the end of 1999, China had 6.4 cellular subscribers per 100. Although cellular penetration trails fixed-line at the moment, by 2001, cellular penetration will exceed fixed line penetration (12.8 to 12.1 per 100). Because of this, mobile telephony is expected to play a large role in the development of e-commerce in China.
1. Regulatory Factors
Regulatory Authority
The Chinese government is torn between the desire to create a modern telecommunications infrastructure and concerns about security and control of information. Recent actions to liberalize the domestic telecommunications market notwithstanding, the industry remains highly regulated. The three telecommunications providers are operated by state-run organizations, all with close ties to the Ministry of the Information Industry (MII), the industry's chief regulator.China Telecom, the state-run monopoly, continues to dominate the fixed-line services market, including local, long-distance, international and data transmission services. Historically, the company has controlled the industry by restricting access to its network. As a government monopoly, it also influences policy through its close association with regulators.
Licensing
Research did not uncover any information.Accounting System
Research did not uncover any information.Local Competition
Competition, however, is emerging in China. In 1994, an alternative, state-designated telecommunications competitor, China United Telecommunications (Unicom), began offering services in urban areas. Together, China Telecom and Unicom control the wireless sector (with 100 percent of the market) and dominate the paging sector (with nearly 70 percent of the market). Last year, China's third domestic provider, China NetCom, introduced limited service, primarily in metropolitan areas. Once complete, NetCom's sophisticated fiber-optic network will offer enhanced services at lower prices than its competitors.In preparation for China's entry into the WTO, the Chinese government has begun to make changes in the telecommunications industry. The MII replaced the Ministry of Posts and Telecommunications as the industry overseer in 1998 and the telecommunications sector was split from the postal sector. The MII has encouraged greater competition between China Telecom and Unicom, using administrative means to create a more level playing field. China Telecom itself will be restructured into four separate operational entities focussing on fixed-line, mobile, paging and satellite services.
Available Services
Research did not uncover any information.Foreign Competition and Ownership
The communications market in China remains closed to foreign investors. Foreign interests are prohibited from holding a direct equity position in Chinese telecommunications service companies, or having any degree of operational control without permission from the State Council, which has been resolute in denying permission. As a result, foreign involvement has been limited to arms length agreements whereby foreign companies surreptitiously provide investment in exchange for a share of operating revenue. Until it was able to obtain state funding last year, China Unicom entered into this type of agreement as a way to circumvent the investment ban. Toward the end of 1998, these arrangements came under scrutiny from the MII, which reaffirmed that foreign investors are not allowed "to participate in the design, construction, operation and management of telecommunications networks."These rules, however, should begin to change later this year in preparation for China's accession to the WTO. First, as a WTO member, China will be required to adhere to the WTO Basic Telecommunications Agreement, implementing certain regulatory reforms and opening basic telecommunications to other members of the WTO. Additionally, as part of its November 1999 agreement with the U.S. government, the Chinese government will relax foreign ownership restrictions immediately upon its accession to the WTO. The agreement allows up to 50 percent foreign ownership in value-added services in two years and 49 percent foreign ownership in mobile and fixed-line services, domestic and international, phased in over five to six years after accession.[16]
The development of telecommunications technology presents yet another dilemma for the Chinese government. The MII would like to foster the development of a domestic manufacturing industry, and has used its control over China Telecom to ensure that purchasing favors locally-made products. However, to acquire best-in-class technology from the global market, the MII cannot afford to favor domestic companies to the exclusion of foreign technology firms. Foreign investors must be allowed sufficient access to the China market to continue investing and transferring technology. To this end, under the 1997 Guidelines for Foreign Investment in Industries, micro-electronic technology and information and communications system network technologies are listed as two newly emerging industries in which foreign investments are encouraged. The Guidelines also list the manufacture of digital communications multi-media systems and the manufacture of equipment for network accessing communications systems as industries in which foreign investments are encouraged.
The government still directs the type of technology adopted in China through its stringent control of frequency and standards. For various wireless technologies, this is a major hurdle. The recent surge in popularity of IP telephony in China challenged the MII’s desire to protect its traditional long-distance business. The speed with which technology is evolving and converging is making it increasingly difficult for the MII to maintain its control.
The MII’s aim to establish a nationwide broadband multimedia network will continue to drive the market, although China’s large, still under-served market means the MII will need to devote the bulk of its efforts to basic telecommunications infrastructure over the next three to five years. Convergence trends have a long way to go before they become evident in China, except in the more prosperous provinces and economic zones, where networks are being upgraded to prepare for emerging convergence technology.
2. Technical and Operational Factors
Spectrum Efficiency and Management
Research did not uncover any information.Network Architecture
Investment in new equipment and extension of the country's communications infrastructure have only recently become priorities for policy makers as telecommunications is increasingly linked with continued economic growth. Currently, China lags behind its Western and East Asian counterparts in the availability of telecommunications services. According to official government reports, teledensity reached 13 percent nationwide in 1999 with the level closer to 30 percent in major urban areas. The telephone lines connect nearly 80 percent of villages across the country, making limited telecommunications available to most Chinese.[17]It is clear that China’s telecommunications regulator has been very concerned with public security. It has taken measures to ensure that there is ample control over the flow of information on its networks. However, strict control over telecommunications, the Internet and electronic commerce is likely to hinder Internet use and e-commerce development.
Infrastructure and Rights-of-Way
Research did not uncover any information.C. The Internet in China
The Internet presents significant opportunities for Chinese economic development, but free access to news and information poses challenges to the current political regime. Though the government has said a comprehensive nationwide set of rules will be released in 2000, recent rapid growth of China's Internet industry has so far outpaced the government's ability to regulate it. As a result, Beijing has undertaken a unique approach to the Internet: promote its development while restricting its content and availability. In China, 1999 was proclaimed "The Year of Getting on the Internet."[18]
Internet use in China is growing at a rate three times faster than the global average.[19] Since 1996, the number of Internet users has increased 300 percent annually. According to government reports, Internet users more than doubled from 4 million to 8.9 million during the last six months of 1999 alone.[20] These Internet users are now able to access nearly 150,000 mainland-based Chinese Web sites, and over 2,300 registered government-sponsored sites.[21]
Internet use is largely concentrated in urban areas around Shanghai, Beijing, and Guanzhou where computers, communications infrastructure, and wealth are concentrated. According to the U.S. Department of Commerce, Shanghai has the highest computer penetration level. The city has 1.3 million computer users, representing 10 percent of the city's population.[22] According to China Computerworld, 18 percent of urban Chinese households have purchased a PC, with ownership as high as 35.4 percent in the city of Guangzhou.
Estimates for China’s potential Internet growth are staggering: it is estimated that the number of Internet accounts will grow to 116 million in 2004, making China one of the largest Internet markets in the world. This will be made possible by widespread use of mobile phones and personal electronic assistants (such as the PalmPilot) to access the Internet. Personal computers are still prohibitively expensive for most Chinese and should remain an urban phenomenon for the medium term.
In an effort to control the flow of information over the Internet, the Chinese government has developed a hierarchical system of companies and organizations controlling access to the Internet. China's dominant Internet backbone, CHINANET, operates as a subsidiary of China Telecom. Construction of the backbone began in 1995. By June of the following year, CHINANET had been extended to all thirty provincial capitals. Three years later, it had been extended to all major cities in China making it the nation's most extensive network by a large margin. In most of the country, it is the only digital access available. Today, the network carries 82 percent of China's Internet traffic and is suitable for e-commerce.[23] The CHINANET backbone primarily supports China Telecom Internet traffic with excess capacity sold to a limited number of smaller ISPs. However, the monopolistic power of China Telecom has enabled the carrier to charge very high leasing fees, limiting the market share of competing service providers.
Portal sites have become popular, and the state-controlled China.com had an extremely successful IPO on the NASDAQ in late 1999. Other widely-visited portals include Sina, 8848, and Madeforchina. Most provide both Internet content and physical goods. Their content and operations, however, are subject to increasing state scrutiny.
1. Regulatory Factors
Regulatory Authority
In an attempt to control the Internet in China, the government has created an unwieldy regulatory environment. In 1998, the MII was formed to regulate Internet activities and spur the growth of the domestic Internet. Under the auspices of the MII, the government closely oversees telecommunications, multimedia, broadcasting, satellites and the Internet. The MII also manages licensing, security, content and access. Other government agencies are also involved in regulating ICPs and e-commerce activities.[24] Many observers believe this regulatory system will ultimately collapse under its own weight as providers and users proliferate and methods to circumvent government intervention become widely known. For the time being, however, the government has taken a heavy hand towards regulation.Chinese ISP services are controlled by a few backbone service operators (e.g., China Telecom, China Unicom and JiTong Telecom) under licenses directly by the MII. ISPs must complete rigorous licensing procedures. Once licensed, the provider must register with communications and security agencies at both national and regional levels. New laws require providers to complete an additional licensing procedure with the Administration for Industry and Commerce, which then grants a logo that must be posted on the provider's web site.[25]
The process of securing licensing from the various agencies and departments responsible for Internet regulation is a complex process. For many companies interested in serving the Chinese market, simply obtaining a copy of all the applicable rules presents a significant entry barrier. The other primary impediment to licensing is the continued dominance by China Telecom, the country's incumbent telecom provider and primary ISP.
In addition to licensing, Beijing recently issued new rules requiring all Internet companies to register for government verification. Companies that handle online advertising, design or electronic commerce must list details such as their registered capital, address, server name and business range on a web site run by the Administration for Industry and Commerce. After confirming the information, the Administration will give companies a special electronic seal of approval that will appear on the companies' web sites. Every qualified online trading company is required to use the logo on its home page so consumers and other companies can decide whether to do business with the company.
In late January 2000, the government suddenly promulgated the Regulation of Commercial Encryption Codes, requiring all businesses using encryption technology to register their encryption software at the National Commission on Encryption Codes Regulations by January 31st. It also mandated that firms must eventually register the names and e-mail addresses of all users of encryption technology. In mid-March, China reversed this strict regulation that would surely have put a chill into foreign investment in China and hurt its prospects for WTO membership.
The Chinese government's ambivalent attitude toward the Internet as a whole is reflected in recent advances and retreats in regulation of foreign investment. While recognizing that the Internet can be a major engine of growth, perhaps quickly leveling the playing field with more developed economies, the government is concerned about maintaining control of the economy and of information. In September 1999, the government announced a ban on foreign investment in Internet Content Providers (ICPs), following an earlier ban on foreign investment in ISPs. A week after the MII promulgated the ban, however, the ICP Yahoo! launched its China service. In November 1999, the MII announced draft regulations that would allow direct foreign investment in e-commerce, but would prohibit ICPs from using content from non-Chinese sources. In January 2000, the government relaxed its ban on foreign ISP investment and announced that foreign firms would be allowed to invest in three cities. This is to expand to 14 additional cities next year and eventually to all cities and regions.
The effect of these changes in the regulatory environment is unclear. The Chinese government is either unwilling or unable to enforce fully many of the Internet and e-commerce regulations it has established. Barriers to foreign money in the IT sector were lowered upon the realization that growth would require at least some foreign investment. Data show that as much as US$100 million in foreign investment has poured into China’s Internet sector and that more than 50 percent of ICPs have foreign funding. Most popular Chinese-language portals, such as Sina.com, Netease.com and Sohu.com, have received substantial amounts of foreign capital investment.
China’s policy on investment by foreigners as ISPs or ICPs should change with its accession to the WTO. According to the agreement between China and the United States, once China joins the WTO, it will allow foreign investment in China-based Internet companies. Foreign service suppliers will be able to provide a variety of services including electronic mail, voice mail, online information and data base retrieval, electronic data interchange, online information and data processing (including transaction processing), and paging services. Foreign service suppliers may hold 30 percent foreign equity share upon accession, 49 percent after one year, 50 percent after two years. Foreign service suppliers may provide services to designated cities and regions according a schedule which depends on the date of accession to the WTO. After two years, foreign service providers will be allowed to provide service to the entire country.
As part of its accession into the WTO, China has also pledged to sign the Information Technology Agreement (ITA). The agreement commits China to eliminate its tariffs, currently as high as 13 percent, on information technology products by 2005. The agreement will dramatically increase access to China's domestic market for goods and services and is expected to will spur competition, enhance service offerings, and reduce costs.
Despite the WTO agreement between China and the United States, however, the MII states that foreign investors still will need government approval and licenses to enter China’s Internet market. The MII will be responsible for examining and approving foreign investment projects in the ISP sector. Content provided by ICPs will be reviewed by other agencies before MII approves it for public networks. An ICP licensing system will be established, the details of which have yet to be clarified.
In another move to control content, information and foreign investment, the government is restricting non-state-owned concerns from going public overseas and is developing state-owned Internet competitors. For instance, the state telecommunications regulator has set up the portal CCIDNET.com as a competitor to any independent portals serving the China market. With these bureaucratic hurdles blocking competition from the private sector, state-owned web sites will clearly be at the front of the line for some time in China.
There are several reasons why China’s Internet policies are often self-contradictory. While certain laws may seem entirely clear on paper, in practice the government exercises considerable discretion in enforcement. Delineation between the operations of ICPs, ISPs, Application Services Providers (ASPs) and e-commerce ventures is not always clear, complicating government efforts to control discrete areas of Internet activity. Foreign investors avoid bans on investment by using moribund but listed Hong Kong enterprises as a front or using Chinese citizens educated and residing abroad to give the appearance of Chinese ownership. Not least of all, Internet regulation is subject to turf battles among various government agencies including the MII, which regulates ISPs; the State Bureau of Secrecy, which enforces the ban on transmission of state secrets; and the State Administration of Radio, Film and Television, which oversees content provision generally.
Until recently, Chinese Internet users were forced to rely on slow connections via the telephone system. A directive of September 1999 stipulated that the businesses of the telecommunications (currently providing Internet access) and cable TV companies (which can provide faster cable modem access) must remain separate. This effectively banned cable modems, but in January 2000 the city of Shanghai was given an exception, allowing the entry of cable modem technology into the market.
Soon thereafter, Legend, the state-backed PC maker, was given permission to market home systems that combine broadband Internet access and online investing, further eroding the 'convergence' ban. Now MeetChina, an e-commerce venture in cooperation with Legend and Motorola, is set to offer wireless e-commerce service, accessible to consumers using only a relatively cheap device such as Motorola’s MobilePad. In contrast with its earlier attitude, the state seems increasingly willing to let the market decide what form Internet access technology will take.
Cost of Access
Access to the Internet remains a luxury for the privileged few. Users must obtain a permit to access the Internet. Once licensed, users face high access charges, which are set by the government. Recent restrictions on access to the Internet demonstrate the Chinese leadership's desire to exploit the Internet for business while constricting information it considers threatening to Communist Party rule.[26]China Telecom is the only Internet backbone service provider and reseller of capacity to other ISPs. High access fees in the past have meant that many fledgling ISPs have not survived, and have also kept end-users’ fees high, stunting Internet growth. For this reason, China Telecom made two major cuts in their rental rates to ISPs in 1999 as part of the MII attempt to expand the number of Internet users.
Labor and Immigration Policies
Research did not uncover any information.Government Incentive Programs
Research did not uncover any information.Content Control/Censorship
The government requires all web sites to undergo security checks by the government to prevent the release of sensitive national information to foreign nationals. The State Bureau of Secrecy closely monitors Internet activity to ensure that it is not jeopardizing state security. On January 25, 2000, the State Security Bureau issued the State Secrecy Protection Regulations for Computer Systems on the Internet, retroactive to January 1, 2000. The Bureau announced that "all organizations and individuals are forbidden from releasing, discussing, or transferring state secret information on bulletin boards, chat rooms, or in Internet news groups."[27]The regulation concerns 'state secrets', defined in official government parlance so vaguely that it could mean any material not specifically authorized by the government for publication. Under previous laws, individuals posting such information on bulletin boards, chat rooms, or news groups were responsible for it. Under the new rules, however, any individual or company transmitting such information can be held responsible. This will, if enforced, effectively require ISPs and web sites to police the content passing through their domain, even that for which they have no original responsibility. To ensure compliance, information providers and transmitters will have to check any data published or disseminated with an appropriate government agency. Web sites and ISPs that do not remove offending information after one warning may be shut down.
Given the number of users, web sites and e-mails on the Internet, it will be virtually impossible to monitor all of the content that could contain 'state secrets' under the government’s definition. But the new regulations stand as the first direct application of China's state secret laws to the Internet.[28]
In March, the MII established the Internet Information Management Bureau to restrict Internet content accessible by Chinese Internet users to prevent the "infiltration of harmful information on the internet."[29] The Ministry also barred the dissemination of foreign news on Chinese portals.
While governments around the globe wrestle with questions of Internet regulation, the Chinese government is exercising significantly broader control by exerting its ownership influence on content as well. To curb the flood of foreign media, the government has developed its own web sites.[30] Chinadotcom, a state-affiliated web portal, now dominates the domestic Internet market. Xinhua, the official Chinese news agency and one of Chinadotcom's shareholders, strictly censors the portal's content.[31] Other government-backed web sites, including Qianlong, which groups nine major media-companies, and CCIDNET.com, operated by the MII, supply state-approved content and receive preferential regulatory treatment. In addition, the Chinese government has set up a special police force to monitor activity on the Internet.
Many observers doubt whether China's plans to control the Internet will be effective. The government's own web sites are less popular than their private counterparts and Chinese web users are becoming more sophisticated in circumventing the censors, partly by using 'proxy' servers to retrieve blocked sites.[32]
2. Technical and Operational Factors
Registration of domain names in China is governed by the Provisional Administrative Measures on Registration of China Internet Domain Names (promulgated May 1997). In the market of Chinese-character domain names, two institutions register domains: the Singapore-based I-Dns, and China’s own China Internet Network Information Center (CNNIC). CNNIC has been authorized to register '.cn' domain names and make rules governing the standards and management of Chinese domain names. Foreign companies are not permitted to register a domain name in China unless they use their Chinese subsidiaries or representative offices as the applicants. CNNIC itself currently is commercializing the domain name market in cooperation with a U.S. strategic partner.
Protocol Standards and Development
Research did not uncover any information.Language Barriers
Research did not uncover any information.Skilled Labor Force
Research did not uncover any information.Government Incentive Programs
Research did not uncover any information.D. E-Commerce in China
The emergence of electronic commerce has quickly caught the attention of Chinese regulators. Many view e-commerce as a necessary component of the country's plan for continued economic development. However, as with other aspects of the Internet, the Chinese government has taken a unique approach to regulation with regards to e-commerce.
In many ways, China seems suited for the rapid development of e-commerce. Driving forces that make e-commerce attractive includes the explosion of Internet use and the government's interest in developing e-commerc.
Current E-Commerce Activity in China
Along with growth in Internet users has come increased e-commerce revenues. There are now over 200 e-commerce web sites in China, employing over 5000 people. E-commerce revenues on the Chinese mainland grew from about US$8 million to US$24.2 million in 1999, according to the MII. Others estimate revenue could grow to US$96.7 million in 2000, and US$1.2 billion by the end of 2002.China’s e-commerce sector is still technologically unsophisticated, particularly in the areas of security of transactions. Sophisticated 'storefront' sites require that consumers have credit cards and trust the security of online ordering, neither of which is usually the case in China. Typical e-commerce transactions involve ordering a product online and paying cash on delivery. Changes in payment form may be on the way. There are already 100 million bank cards in China which accounted for US$100 million in purchases in 1998. Though credit card penetration is low, Visa International expects the number to grow to several million in the next few years.
Several Chinese web sites, including Sina.com, 8848, Focus, and A1B, have already begun e-commerce activities. Most of these are supporting business-to-business (B2B) e-commerce. Since 1998, however, business-to-consumer (B2C) e-commerce has emerged in industries ranging from book sales to airline tickets. A wider variety of products is becoming available as the e-commerce sector grows.
Most e-commerce is taking place in Chinese urban centers, particularly Shanghai. As the country's main financial center, Shanghai has become China's e-commerce hub. The city has the country's highest concentration of personal computers and Internet connections. Shanghai is also unique in the availability of electronic payments methods, another critical component of e-commerce. Shanghai currently has 10 million credit and debit card holders, 5,000 Point of Sale (POS) systems, and 2,600 Automatic Teller Machines (ATMs).[33]
In November, an e-commerce institute was established in Guanzhou at the South China University of Science and Technology in conjunction with Carnegie-Mellon University and the Chinese University of Hong Kong. This institute will advise government officials on how to foster electronic commerce and regulate online transactions.
Infrastructure for E-Commerce
China is rapidly deploying a network to accommodate electronic commerce. China began installing e-commerce servers in 1998. Since that time, the number of e-commerce servers has increased at an annual rate of more than 1,000 percent.[34]In 1997, the China International Electronic Commerce Center was established within the Ministry of Foreign Trade and Economic Cooperation to build the necessary infrastructure to accommodate electronic commerce. They have successfully created the infrastructure to link companies and state agencies with the world, but developments within the organizations have not kept pace. According to the Chinese State Economic and Trade Commission, only 10 percent of China's state-run firms run computer networks that can be used for digital business.[35]
1. Regulatory Factors
Where most countries are adopting the U.S. model of a deregulated, decentralized Internet, China is trying to promote e-commerce while imposing the same type of regulation imposed on other facets of its economy.
Regulation of e-commerce is proving difficult. The Chinese leadership seems to be increasingly aware of the fact that sustained economic growth requires the reduction of the restrictions that have constrained the private sector of the economy.[36] For example, under the PRC Contract Law (promulgated March 1999), valid contracts can be formed through the exchange of "data messages." The contract law also contains provisions that are specifically tailored to e-commerce. Moreover, the 1994 Law of the People's Republic of China Concerning Protection of the Rights and Interests of Consumers sets forth a number of general principles applicable to the sale of goods and the provision of services in China applicable to all transactions, including electronic transactions. The manner of implementation of this law and the efforts to enforce it are yet to be determined.
Taxation
China has not yet developed full tax regulations for e-commerce and the Internet, but as most e-commerce takes place via cash-on-delivery transactions, existing laws should be sufficient to handle transactions conducted over the Internet. It is not yet clear how these laws will be implemented and enforced. The government has undertaken research on the matter. In March 2000, China National People’s Congress started to consider legislation on taxation of e-commerce.The classification of transactions goes to the heart of a turf war within the Chinese government. The Ministry of Information Industry oversees the provision of Internet access, while the State Administration of Radio, Film, and Television oversees content. No firm divisions have been established between service and content provision, and therefore there are no clear rules regarding which tax category a company’s product may fall. The government is actively working on this issue.
Finally, tax evasion is a serious problem in China and the government is investigating ways of forcing foreign invested companies to pay more in taxes.
Privacy
Compared with Western countries, the Chinese government is less concerned with the protection of consumers' privacy on the Internet. No data protection legislation has been enacted. Customers have no rights to review data collected on them, to ask for correction of such data or to control to whom that data is made available.Content
Research did not uncover any information.Content - Intellectual Property Rights
China has joined the major international conventions on protecting intellectual property rights. Generally, intellectual property protection falls under the current, inadequate Copyright Law of 1990. The Copyright Law covers dissemination of copyrighted material through traditional means such as print media. It does not, however, cover new possibilities for intellectual property theft such as the unauthorized use of a web site’s material by another web site or the publication on the Internet of material stolen from traditional sources.Security – Encryption and Authentication
The problem of how to secure online transactions raises two main questions. What type of encryption technology should be used to encode transaction data? Who has the right to decide this and enforce its use among banks and vendors? Despite U.S. export restrictions, encryption technologies capable of supporting online payments are readily available to Chinese companies from international network security providers. However, citing concerns over the security of financial information and the importance of developing domestic expertise, the Chinese government has declared its intention to develop its own encryption protocols.Security – Payment Mechanisms
The Ministry of Information Industry and the People's Bank of China are currently establishing guidelines for the establishment of certificate authorities. Certificate authorities issue 'digital IDs' allowing vendors, buyers and financial institutions to identify each other online and verify authenticity of transactions. At the same time, without benefit of central guidance, a number of institutions, including MOFTEC, China Telecom, and several major commercial banks, are working to establish alternative certificate authorities.[37]Development of financial mechanisms to support online transactions is another critical issue. Developing online payment systems for e-commerce requires reform of the most fundamental areas of China's financial and banking system. For example, some financial settlements between Chinese banks are conducted only once every few months, leaving plenty of time for fraud to take place. Moving banking onto the Internet could provide an even greater opportunity for fraud.
Participation in International Standards Development
Research did not uncover any information.2. Technical and Operational Factors
Protocol (Standards) Making Process
Research did not uncover any information.Product Restrictions
Research did not uncover any information.Delivery Infrastructure
Research did not uncover any information.Availability of Payment Mechanisms
The use of credit cards is not widespread in China. This limits much B2C e-commerce to transactions where ordering is online but payment is by traditional means such as cash on delivery or wire transfer. On the other hand, China has over 100 million debit cards that can be used as a form of payment for online transactions. This form is limited, however, by a lack of integration between financial institutions throughout the country. In contrast, the B2B sector, which does not rely on a credit card payment system, is expected to grow more rapidly than the B2C sector in the short-term. All e-commerce will be held back by China's lack of fully integrated computer networks, which makes it impossible to process transactions across different regions and between different banks.General Business Laws
China's legal system is not e-commerce-friendly. China has limited experience with drafting e-commerce legislation for issues such as transactional security, intellectual property rights protection and tax regulations. Regulations supporting areas critical to the development of e-commerce (such as privacy, consumer rights, validation of electronic contracts and recognition of digital signatures) have yet to be written. Such regulations are all the more important given the wide areas e-commerce cuts across. Government bodies involved in everything from telecommunications, finance and public security have a clear interest in its development. The potential for regulatory conflicts is therefore enormous.Public Attitude to E-Commerce
China's consumer market is still too immature to make e-commerce attractive. Remote purchasing by consumers is rare in China. Internet users will approach e-commerce with little or no previous experience using mail-order catalogues, TV-shopping or similar systems. Since debit or credit card purchasing is still relatively new, consumers are even more sensitive to the possibility of fraud when purchasing online. But China's Internet users have, simply by using the Internet, already demonstrated that they are 'early adopters' open to new methods of interaction.Business Attitude to E-Commerce
By contrast, China's large number of inefficient state-owned enterprises are unlikely adopters of new technology. Many state enterprises operate in protected markets where incentives to innovate are minimal. Many are also locked into a web of entrenched purchasing relationships that e-commerce threatens to upset.But an even larger number of Chinese enterprises are eager to find more markets, particularly in export, for their products. However, they lack the resources to make large capital investments and are not yet equipped to accept online orders, let alone offer online payment facilities. For them, e-commerce may one day be an ideal solution.
E. Conclusion
The regulatory environment in China is strict and often contradictory. The government recognizes the value of building a modern telecommunications infrastructure but fears losing control of the sector and the information coming into and leaving China. China's accession to the WTO is supposed to encourage China to relax its regulatory restrictions and open its telecommunications and Internet markets. Some observers caution, however, that what China actually does in the way of liberalizing its markets remains to be seen.
Estimates for China's potential growth are staggering. These are generally based on a belief that the use of wireless devices to access the Internet will continue to spread, making access to the Internet and e-commerce easier and less expensive for businesses and the public. However, since the government controls the type of technology adopted throughout China through control of frequency and standards, the development of mobile telephony is likely to be limited. Also, mobile telephony and wireless access devices remain as expensive and as unattainable for the average Chinese as PCs.
Other major obstacles to e-commerce exist in China. The divergence in telecommunications infrastructure between urban and rural areas must be overcome to improve access and connectivity. The development of a telecommunications and Internet infrastructure will be limited by the ban on foreign direct investment and foreign ownership. China's e-commerce sector is technologically unsophisticated, particularly in terms of the security of transactions. The poorly developed infrastructure of railroads, ports and postal systems hinders access to equipment and reduces the efficiency of the e-commerce method of shopping.
China's legal system is at an immature stage. Legislation related to ICTs has not kept pace with the development of new technology and increased use. Enforcement of laws and regulations is unpredictable and subject to abrupt and often disquieting changes. To address these problems, MII said in early 2000 that it would promulgate a series of new regulations to provide a comprehensive regulatory framework for Internet-related activities including e-commerce. Until such new regulations are in place, B2C will remain a thing of the future in China.
The Chinese government continues its attempts to reconcile the decentralized, deregulated, dynamic and global nature of Internet commerce with its efforts to maintain tight control on information and communications within the country. The speed with which telecommunications technology is evolving, especially with regard to the convergence of traditional voice with datacommunications technology, is making it increasingly difficult to sustain this approach. China's accession to the WTO, expanded international trading partnerships, and increased Internet usage among Chinese consumers may also be factors forcing the government to relax its restrictions of the Internet. Until and unless the government does so, those restrictions are likely to strangle the development of a medium that many in China feel is critical to the country's continued economic development.
V. The European Union
A. Introduction
At the European Council meeting held in Lisbon on March 23 and 24, 2000, the European Union (EU) set the ambitious objective to become the most competitive and dynamic economy in the world. The Council recognized the urgent need for Europe to exploit the opportunities of the New Economy and in particular the Internet. History has shown, however, that European initiatives are many, but their actions are few.
Currently, businesses face many barriers establishing an e-commerce presence in Europe. Differing technical standards and varying regulatory models and approaches to market liberalization have diminished the returns these companies can expect while North American participants in e-commerce are reaping increasing rewards.[38]
Progress is being made. In 1998, the EU began to deregulate several sectors including telecommunications. On January 1, 1999, the EU adopted the euro as the currency unit for the eleven member states who satisfied the macroeconomic conditions necessary to join the European Monetary Union and who opted to participate immediately. As the EU moves toward a single market and a single currency, more trade barriers will be lowered. These factors, combined with unprecedented increase in Internet access and use throughout Europe, are believed to bode well for the development of European e-commerce.
B. Telecommunications in the European Union
In the last few years, the European telecommunications services sector has been undergoing radical changes designed to liberalize the industry. Since 1998, the market has been opened to allow interconnection agreements between incumbent operators and new market entrants, building a European data network of huge capacity.
Incumbents hesitant to lose their lucrative analog and ISDN business are dragging their feet over roll-out of broadband services such as DSL. Cable TV operators are beginning to gain market share, though too many are still owned by the state incumbent, a situation generally unfriendly to competition. The EU plans to provide "generalized electronic access to main basic public services by 2003" and "to make available in all European countries low-cost, high-speed interconnected networks for Internet access and other telecomm networks as well as the content for those networks."[39]
The European mobile telephony market is strong, leading the U.S. both in manufacturing (Nokia and Ericsson are the world's first and third largest manufacturers of hand sets) and technology (95 percent of European mobile phones use digital technology compared with under 50 percent in the U.S., where analogue dominates). Europe also leads the U.S. in application and use of Wireless Application Protocol (WAP), which allows access to the web via hand-held devices such as the Palm Pilot and smart phones.[40]
1. Regulatory Factors
Regulatory Authority
In mid-2000, the European Commission intends to launch the next round of directives updating the rules and regulations governing the sector. These directives include simplifying licensing conditions, giving national regulators greater flexibility to impose access and interconnection obligations, boosting consumer protection and obliging mobile operators to offer number portability.[41]The new proposals are aimed at regulating the behavior of powerful telecommunications firms. Under the plan, the Commission would issue a notice listing those areas of the telecommunications sector where regulation might be necessary to promote competition. National regulators then must decide whether those areas targeted by Brussels warrant regulation in their own national markets. National regulators would only be able to impose regulations in areas on the Commission's list.
The EU would also ask national regulators to indicate sectors where individual firms actually enjoy "substantial market control." If EU officials agree with the national regulators' assessment, they would approve the imposition of "appropriate regulatory obligations" on the companies concerned to prevent them from abusing their market power. Clear, unambiguous rules would be set out for national regulators regarding possible sanctions for violators of the regulations.[42]
In a significant move, the Commission recently recommended that national telecommunications regulators call on operators with large local networks to offer rival operators 'unbundled' access to the local loop, the copper wiring which runs directly into homes and offices.[43] The rival companies would be able to offer new and advanced services, such as lightening-fast data transmission, without having the massive expenditure needed to build their own local loop. This would encourage technological innovation and increase competition among providers, lowering the cost of access to the customer.
If and when the relevant section of this recommendation is accepted, national regulators would be required to ensure operators make facilities available to their competitors on the same terms as their subsidiaries.[44] The Commission has set a recommended deadline of December 2000, but as yet only Austria, Denmark, Finland, Germany and the Netherlands have made arrangements for complete unbundling by this date. The European Competitive Telecommunications Association (ECTA) has urged the Commission to fast-track mandatory local loop unbundling in Europe as a necessary step to closing the Internet gap with North America.
Licensing
See previous section.Accounting System
Research did not uncover any information.Local Competition
Market access to telecommunications equipment within the EU varies widely among Member States. Most Member States discriminate against non-EU bids in the telecommunications sector. Market access is also impeded through standards and standard-setting procedures, testing, certification and attachment policies.Available Services
Research did not uncover any information.Foreign Competition and Ownership
Under the WTO Agreement on Basic Telecommunications Services, eleven Member States have committed to providing market access and national treatment for voice telephony services as of February 5, 1998. Four other States will phase in commitments by 2003. Four Member States qualified their commitments by maintaining foreign investment restrictions. The EU also adopted the pro-competitive regulatory commitments set forth in the Reference Paper associated with the WTO Agreement.2. Technical and Operational Factors
Spectrum Efficiency and Management
The European wireless sector adheres to a single digital standard known as the Global System for Mobile Communications (GSM). GSM was established early as an open standardized platform by industry and supported by the Commission and national governments and its success is largely attributable to an effective public/private partnership. While each U.S. mobile company must compete aggressively to sell its own particular digital and analog standard, Europe adheres to a single digital standard, enabling European mobile companies to work together on new technologies. The big three European companies (Nokia, Siemens and Ericsson) are now co-operating on ‘3G,’ the third generation of mobile phones. The current generation of mobiles is limited to a data transmission speed of 28.8 kilobits per second, but new 3G phones will be able to send and receive data at broadband speed, or 2 megabits per second.The proliferation of wireless service raises an important issue - the availability of space on the airwaves to meet the demand for new mobile services. Experts fear that without sufficient spectrum, there will be a lack of competition when 3G services start to take off in a few years' time. Europeans will be emphasizing the need for 3G spectrum in world telecommunications conferences this year.
Network Architecture
Research did not uncover any information.Infrastructure and Rights-of-Way
Research did not uncover any information.C. The Internet in the European Union
Like most regions of the world, Internet use is expected to grow quickly in Europe in the near and medium future. Western Europe should have more than 215 million users on the Internet on at least a quarterly basis by 2003, compared with 197 million in the U.S.[45] By 2003, Western Europe will rank second behind the U.S. in both total e-commerce revenues and B2C revenues. B2C revenues should grow from US$8.18 billion at the end of 2000 to US$40.25 billion, or 19.2 percent of the worldwide total, by the end of 2003.
1. Regulatory Factors
Companies establishing Internet and e-commerce operations in Europe face many regulatory challenges. Differing technical standards, varying regulatory models and approaches to market liberalization often lead businesses to operate with higher complexity and costs. The development of e-commerce is driving a movement to harmonize regulations in areas such as banking, consumer protection, privacy, liability and cryptography, among many others. Factors ranging from the availability of skilled labor to tax compliance requirements to differences in healthcare systems impede greater harmonization and discourage new market entrants.At the same time, the EU approach to standardization has significantly improved. There is now an emphasis on voluntary industry driven standardization and an increasing acceptance of de facto standards. One of greatest obstacles is the lack of an EU patent directive, without which, innovation necessary in the New Economy will be delayed.
Furthermore, there is great need to harmonize regulations restricting cross border distribution and logistical services.
Cost of Access
The traditional argument levied against Europe in terms of internet potential is PC penetration rate, which is generally behind the United States. However, the rise of new technology portals such as 3G mobile communications mitigates this statistic.The cost of access in Europe has historically been 50 percent greater than in the United States; until 1998, monthly subscription charges for Internet access were commonplace. That changed with the launch of Freeserve - a "free" service in the United Kingdom that forced many Internet service providers to adopt the "free" phenomenon.[46] With so much competition in the long distance market, local access has now become the crucial bottleneck to development.
Only 22 percent of European households have access to the Internet, compared to 50 percent in the United States. The EC wants to bring down Internet access costs by encouraging competition and faster access through private investment. In addition, bringing down access costs will simultaneously stimulate deployment of new Internet technology.
Within Europe, there exists a "digital divide" between countries such as Sweden and Finland, with levels of penetration close to that of the U.S., and the Southern regions with less than 10 percent penetration. This gap is widening, posing a real danger of a "two speed" Europe in terms of Internet access and use. The Commission also plans to use structural funds to ensure that peripheral regions are not left behind in the information economy.
Labor and Immigration Policies
With a limited global pool of IT experts and intensified international competition to attract them, countries across the EU are changing their immigration rules to attract skilled workers. For example, Germany and the UK are introducing new procedures to expedite renewals of work permits, extend the period a permit is valid and, for certain skilled individuals, allow entrance into the country without proof of a specific job offer. The relaxed immigration policies are said to be contributin to anti-immigrant sentiments in some countries. Surveys suggest that many Indian and east European IT professionals are reluctant to emigrate to the EU due to this problem. Many would rather go to the U.S., giving North American yet another advantage in the New Economy.[47]Government Incentive Programs
Research did not uncover any information.Content Control/Censorship
The fear that the U.S. will continue to dominate Internet content has led the EU to unveil an initiative to boost the amount of European content on the world wide web.[48] A key part of the program will involve providing web-content firms with information on financing projects and acquiring investment from venture capitalists. The Commission will also propose an improved system to facilitate copyright clearance from rights-holders for using works such as music, video and art clips in products and services online. Projects aimed at advancing smaller companies and boosting the presence of content using the EU's lesser-spoken languages will also be advanced.2. Technical and Operational Factors
Protocol Standards and Development
Research did not uncover any information.Language Barriers
The presence of multiple languages has been an issue for the EU because most of the Internet content is in English. The recent explosion of localized content has started to attract more Europeans as they realize the relevance and power of the medium. Europe had approximately one million Internet hosts in 1995, and today Europe is believed to have over six million hosts. According to a MMXI Europe Survey, European home Internet users are catching up with those in the United States in terms of the time they spend online each month. In October 1999, British surfers spent four hours online, Germans spent about five hours online and French users spent an average of three hours on the Internet. The average American home user stays on the Internet for about five-and-a-half hours each month.[49]Skilled Labor Force
According to a recent Commission survey, Europe does not yet have the skills base to support building the New Economy. The Commission found in 1999 that "the equivalent of 510,000 full-time jobs remained open in the [IT] sector in Europe. Others calculated that this will grow to no less than 1.6 million jobs in 2001."[50] Recognizing that multinationals will move to other countries to find more skilled labor, Europe has begun to take action to increase their skills base and attract global IT experts to the European economy.At the meeting of the European Council in Lisbon this year, Member States were challenged to help bolster the IT workforce and computer literacy overall. The Lisbon Summit requested that numerous training and IT awareness programs be implemented through European schools, including ensuring Internet access in all schools of the European Union by the end of 2001.[51] The Lisbon Summit concluded that there is a widening skills gap, especially in information technology. Europe's training systems must adapt to the changing demands of the knowledge society to offer re-training opportunities to workers displaced by rapid change. The creation of a European framework should define new basic skills to be provided through life-long learning and a European diploma for basic IT skills should be established.
Government Incentive Programs
Research did not uncover any information.D. E-Commerce in the European Union
Despite its rapid growth, European Internet penetration remains one quarter of U.S. levels. However, the European Union is in the enviable position of having an internal market of 370 million people using a single currency. Unfortunately, significant gaps still exist between the 15 member countries regarding regulations. For example, Germany unilaterally bans two-for-one offers, lifetime guarantees and heavy discounting, except during specified times of year. Without a single, transparent, coherent legal and regulatory framework, e-Europe will never be able to fully leverage its resources online.
In December 1999, the European Council agreed to the e-commerce directive allowing service providers and e-commerce businesses whose operations comply with their domestic laws to offer services to all Member States.[52] The Commission hopes to enforce greater security standards for retail e-commerce and bring about the introduction of multifunctional smart cards which could be used throughout Europe regardless of the country of issue. The promotion of online content in languages other than English and making government services available on the Internet are also key goals of the EC.[53]
Building on the large market share currently held by its mobile providers, Europe could become the world leader in mobile e-commerce. By 2002, European consumers will be able to access video news and sports reports, voice-driven Internet pages, and even X-rays from their 3G mobile phones.[54] The squabbling over standards in the U.S. means that 3G networks will not be available there until some time between 2003 and 2005, leaving the field open for European providers.
1. Regulatory Factors
Taxation
Recently, the Commission proposed imposing a value added tax (VAT) on services delivered on the Internet. The proposal would require non-EU companies selling more than €100,000 annually of Internet services and paid-for TV to EU customers to register for VAT in an EU member country. The Commission and European industry groups say the plan would correct a market distortion, whereby European companies were obliged to pay VAT on Internet services, while their non-EU competitors do not. This proposal has been criticized by other countries like the U.S. who say it is protectionist and could undermine efforts to agree on international rules on the taxation of e-commerce to be addressed in OECD talks next year.[55]Privacy
The EU Data Protection Directive, which went into effect in October 1998, aims to balance the protection of an individual's right to privacy with regard to transmission of personal data with the need to facilitate the flow of such information within the EU. The Directive allows for data transfer to third countries if they provide an "adequate" level of protection for the data under their own laws or through international obligations they have undertaken. The ease with which information moves across border will depend upon how individual States define "adequate."In early 2000, the Commission and the U.S. Department of Commerce reached an agreement on a "safe harbor" system which will allow continuing data flows between the U.S. and the EU and ensure privacy protection for EU citizens' personal information. Under the arrangement, U.S. organizations voluntarily agree to adhere to principles which bridge the gap between the U.S. and the EU systems governing privacy.
Content
Research did not uncover any information.Content - Intellectual Property Rights
The EU and its Member States support strong protection of intellectual property rights. The Member States are members of all the relevant WIPO conventions and they fully enforce high IPR standards, including those in the TRIPS Agreement.Registration of trademarks with the European Community Trademark Office (CTMO) began in 1996. The CTMO issues a single trademark valid in all 15 Member States. National marks continue to exist in conjunction with the EU marks.
Patent applications in the EU are governed by the EC patent convention concluded in 1975. In 1999, the Commission began to advance legislation to replace the convention with Community legislation to ensure secure patent protection throughout the EU on the basis of a single patent application.
In 1997, the Commission proposed a Directive to harmonize Member State legislation on copyrights and to establish clear definitions of protected material. The proposal does not cover infringement liability by online service providers. The Directive also requires Member States to implement the obligations in the WIPO copyright and performances and phonograms treaties, and requires approval from the Parliament and adopt
