The Future of Internet
Geopolitics Reshaping the Internet in East Asia
U.S. President Biden’s recent official visit to Asia highlighted his administration’s emphasis on the U.S.’s Indo-Pacific strategy and the importance of the security of the region. With an increasingly belligerent Chinese regime, engaged in a supply-chain tug of war with the US while supporting Russia’s invasion of Ukraine, the threats of a similar Chinese invasion of Taiwan appear closer than ever before. East Asia is the most delicate flashpoint in today’s world, militarily, for both conventional as well as cyber warfare, and also the key battleground for trade and economic competition.
The growth of Internet commerce and digital economy in East Asia has been phenomenal over the past several decades, making it one of the most important regions in the world for opportunities in digital growth. Led by China’s huge Internet population, which at 765 million stands more than three times that of the U.S., and also other countries in the region, including developed economies such as Japan, South Korea and Singapore, as well as other developing markets with huge potentials such as Indonesia and Vietnam, demands for more advanced infrastructure to serve the region with better connectivity and higher performance, speed and resiliency have been insatiable.
However, after decades of growth in investment and improvements in connectivity, geopolitical realities have taken center stage. In particular, U.S.-China tensions have had the effect of limiting China’s connectivity to the rest of the world, as the U.S. has severely limited China’s ability to attain additional external bandwidth growth, while it has been actively building a new generation of digital economy and data exchange trade alliances. However, some of these efforts may be hampered by the trend of data sovereignty and digital protectionism in many nations in the region. The U.S. and its allies must realise these concurrent forces at play in order to overcome these obstacles and achieve the best outcomes for their pursuits.
U.S. ban on new undersea cables to Hong Kong has long-term effects for China
At the core infrastructure level of the Internet’s global connectivity lies the vast network of undersea submarine cables connecting the continents, and the trans-Pacific linkages between East Asia and North America are undoubtedly among the most critical connections in the world with among the highest demand. For decades, increasing investment in making more direct linkages between two of the biggest Internet markets of the world, China and the U.S., had been most intuitive and without question.
That changed around 2020, when various branches of the U.S. government raised concerns about the Pacific Link Cable Network (PLCN), which was then touted as the first direct submarine cable connecting Los Angeles, California, and Hong Kong, with high-profile investors like Google and Facebook (now Meta). There were two major factors of concerns: first, the landing of the cable in Hong Kong which was perceived to be a jurisdiction that no longer enjoyed enough autonomy from Mainland China, and second, the presence of a Chinese-owned partner among the investors of the cable.
Since then, at least four major submarine cables to Hong Kong with American investment and connecting to American landings have been canceled or rerouted to other locations, including PLCN itself:
- PLCN: after the divestment of its Chinese investor, Google and Meta received U.S. approval in December 2021 to operate PLCN between the U.S., Taiwan and the Philippines, and to “pursue diversification of interconnection points in Asia including but not limited to Indonesia, Philippines, Thailand, Singapore and Vietnam.“ The connection to Hong Kong was dropped.
- Hong Kong-Americas (HKA): The HKA consortium, which included HKA consortium comprising Meta, China Telecom, China Unicom, RTI Express, Tata Communication and Telstra, abandoned the project and withdrew its application to the U.S. Federal Communications Commission (FCC) in early 2021.
- Bay to Bay Express (BtoBE): The BtoBE cable system, with Meta, Amazon, China Mobile as partners, was to connect California directly to Hong Kong, and then Singapore and Malaysia. It has been reconfigured to land in the Philippines, as the CAP-1 cable system, and once again Hong Kong was dropped as a final destination.
- Hong Kong-Guam (HKG): The HKG cable system, owned by RTI and Google and their subsidiaries, was to connect Guam with Hong Kong, but its FCC application was withdrew in late 2020, with its future uncertain.
The consequences of the cancellations and rerouting of these important and high-capacity cables are severe for Hong Kong, making the growth of incoming and outgoing bandwidth capacity highly questionable for the immediate to medium term future, undermining its current role as a major telecommunications and datacenter hub of Asia. Indirectly, and more importantly, bandwidth connectivity growth for China will also be limited, as Hong Kong used to play an important transit role for the mainland.
As a result, China may double down on its strategy to invest in alternative cables to connect to China, through state support or its state-owned telecom enterprises, such as its previous state-backed financial support with “low up-front costs and fast delivery” for developing economies and smaller nations such as East Micronesia and Papua New Guinea, but the scale and impact of these efforts remain limited.
Indeed, in China’s latest central planning documents of its five-year plans, including the one on digital economy development, Beijing has placed significant emphasis on upgrading its domestic and international digital infrastructure, including setting up datacenters in its western inland region to “compute the data from the east,”as well as using the Greater Bay Area (GBA)in the south to create a “international data free trade port,” which will be “powered by a global network of undersea cables planned for the district.” The chosen hub for the GBA, however, is the city of Nansha, in Guangdong Province, not Hong Kong. Given current global geopolitical tensions, such development, even if they are to progress, will likely not involve much or any foreign investment or participation, which, for undersea cable networks, may spell doom for its effectiveness and success. As undersea cables typically take years to decade to plan and build, and have a lifecycle of several more decades, the current slowing down of China’s future capacity improvement will carry long-term effects for China.
China’s aggression in the South China Sea creates regional Internet chokepoint
The South China Sea is a heavily traversed water on the surface, and at its seabed there are “at least 15 submarine cables, each owned by up to 60 international entities,” with China claiming vast water in the region with its infamous “nine-dash-lines." Many of the cables in the region, with consortium partners covering many of the major telecom operators in the region and around the world, as well as others like Internet content providers such as Meta, are said to have been delayed or forced to rerouted to bypass certain areas.
In the not too distant past, datacenter investments in the region were centered around the three main hubs of East Asia, being Japan, Hong Kong and Singapore. Just as operators may be forced to bypass Hong Kong in favor of Taiwan or the Philippines, now if they need to mitigate the additional risks of the South China Sea, it will be natural to reroute their submarine cables as well as datacenters to around the eastern edge of the Sea, through the Philippines, Indonesia and Brunei, or Vietnam and Thailand around the western edge.
With such geopolitical factors, along with demands driven by domestic and regional digital demands from smart cities, cloud adoption, digital commerce, 5G and so on, these economies are experiencing a tremendous boom in datacenter constructions. According to its own government, the Philippines ranks second in Southeast Asia in datacenter market growth, with Manila having a CAGR of 14.2 percent, just below Vietnam’s 14.5 percent. The datacenter market of the country as a whole will reach 11.4 percent by 2026, with investments of over USD535 million.Telstra, Australia’s incumbent telecom operator, even flatly states that “Asian connectivity has traditionally focused on the hubs of Hong Kong, Singapore and Japan but now is increasingly moving to Taiwan, the Philippines, Korea and Australia."
As for Taiwan, which has already been very successful in recent years attracting OTT (over-the-top, that is, content or application service providers) players to invest in large-scale datacenter on the island, such as Google, Meta and Microsoft, will continue to see rapid growth in its datacenter market, estimated to grow at 23.6 percent over the next five years, reaching USD4.47 billion.
Data trade and digital economy agreements can align geopolitical and economic interests
In April, Canada, Japan, South Korea, the Philippines, Singapore, Taiwan (Chinese Taipei) and the U.S. jointly established the Global Cross-Border Privacy Rules (CBPR) Forum, pledging to promote interoperability and bridge regulatory differences on data and privacy protection, and to establish an international certification system to support free flow of data across borders.While some of these countries or economies may have individual bilateral agreements among themselves and with others in, for example, Europe, the clear trend is for these agreements to be more multilateral and cover more jurisdictions in order for potentially more uniform rules to be established.
On a broader level, the Indo-Pacific Economic Framework (IPEF), proposed by U.S. President Biden during his recent trip to Asia, also put digital trade at a high priority, being mentioned first in the first of four pillars in the proposal. Indeed, the White House cited in its declaration that the partners “will pursue high-standard rules of the road in the digital economy, including standards on cross-border data flows and data localisation,” pledging to “benefit from the region’s rapidly growing e-commerce sector, while addressing issues such as online privacy and discriminatory and unethical use of artificial intelligence.” The thirteen initial members are the U.S., Japan, India, South Korea, Australia, Indonesia, Thailand, Singapore, Malaysia, the Philippines, Vietnam, New Zealand and Brunei — comprising of the countries around the South China Sea. Taiwan, which is not included in the IPEF, most likely will be involved in some other ways, as the U.S. and Taiwan have just stepped up its bilateral trade talks, in parallel of the IPEF efforts.
However, the obstacles facing the IPEF partners in concluding final digital trade and data exchange agreements should not be under-estimated. Data sovereignty laws and regulations, taking the shapes and forms of cybersecurity laws, data and privacy laws, or even national security laws, have been established across many jurisdictions in the region. Some countries, like India and Vietnam, similar to China, has established data sovereignty laws requiring data and servers to be stored locally. Vietnam and India also require any foreign online service providers to set up a local branch or representative to be legally accountable and able to respond to government orders and requests.
On the other hand, some other countries in IPEF are more interested in setting up the baseline, framework and rules for data flows and exchanges with other countries. For instance, Singapore has taken the approach of proactively establishing bilateral or multilateral digital trade agreements and data exchanges rules with other countries, such as an agreement with Chile and New Zealand together, and other bilateral agreements with Australia, the U.K., and South Korea, respectively. The country takes the position, similar to the U.S., that data localisation is detrimental to economic growth, financial transparency and cybersecurity.
Protectionism in the region threatens to undermine the reaching of trade agreements
In addition to the trend of data sovereignty in individual countries in the region, there are also legislations in some of these countries that may be deemed as protectionist, and they may become a factor that undermines the final trade agreement to be reached. For instance, a number of recent legislations in Japan and South Korea were established to “level the playing fields” between domestic and foreign telecom or OTT players, with the rationale that foreign service providers such as video, content, cloud or social media platforms should be regulated in the same ways a domestic company would be. For the foreign platform company, they may see the rules as protectionist and made in favor of the domestic incumbent telecom and Internet players.
The Telecommunications Business Act of Japan in 2021 extended regulations over data breaches or communications failures to cover even companies that did not have an office presence or did not host any telecom equipment in Japan, as long as their services were deemed to be provided for the Japanese markets, such as being marketed in Japan, using the Japanese language, or using the Japanese Yen for payment.
Also, South Korea’s amendments to the Telecommunications Business Act (TBA) of 2021 forced the mobile app platform companies to open up their app payment monopolies. The primary target is of course Apple. In addition, the country’s recently proposed amendments to the TBA establishes new interconnection rules for Internet service providers and value-added telecom service providers, such as content providers, that operate in South Korea, requiring them to pay a “sender pays” interconnection fees to the incumbent domestic telecom companies.The primary target appears to be Netflix.
The way forward
Clearly, the Internet, e-commerce and digital economy in the East Asia region are of critical economic and strategic importance to the U.S. and its allies. On the other hand, in today’s digital era, the security and resiliency of the cyber infrastructure and the electronic transactions must also be safeguarded against threats from all adversaries.
Hence, the U.S. and its allies must take proactive steps to strengthen its cyber resiliency in the East Asia region. Indeed, this should be one of the most important key policy objectives for the U.S. in its Indo-Pacific initiatives. The IPEF and CBPR efforts are just the first steps and they will be of critical strategic importance in achieving these goals, and countering China’s “Digital Silk Road” efforts with its Belt and Road partners.
Specifically, the U.S. and its allies must:
- Establish data flow and technical security standards and rules for undersea cable infrastructure, from construction to operation, and take concrete measures to support and encourage submarine cable investments with partners as part of the IPEF negotiation and final arrangements. To facilitate the consortiums of investors making long-term and large-scale investments for such infrastructure, the U.S. should take the lead to improve the speed and transparency of its licensing and permitting process for these cables investments.
- Work together to redesign, upgrade and factor in all necessary safeguards for the region’s cable infrastructure, and work around the South China Sea and other chokepoints, to achieve higher degrees of resiliency, security and redundancy.
- Endeavor to achieve wider multilateral agreements on standards and certifications for data flow and exchange, starting with CBPR, and expanding the coverage to more countries in the region and globally, and in the process emphasising the values of trust, openness, fairness, security and privacy, in order to maintain global leadership in digital trade against the China-Russian model of digital authoritarianism.
*Charles Mok is a visiting scholar with the Global Digital Policy Incubator of the Cyber Policy Center at Stanford University. He represented Information Technology in Hong Kong's Legislative Council as a Member of Parliament from 2012 to 2020.