The Challenges for America’s Defense Innovation

November 21, 2014
| Reports

From WWII to the 1957 launch of the Soviet Sputnik to the 1980s defense buildup, U.S. defense investments in research and development not only promoted American security and safety but made a major contribution to U.S. innovation and economic leadership, assisting in the development of a host of industry-defining technologies from the Internet to GPS to the laser. Yet since the end of Cold War, federal funding for R&D, including defense R&D, has increased much more gradually and recently has actually declined. In addition, the 2013 sequestration – which mandated automatic spending cuts numerous programs including defense research initiatives – has exacerbated the challenge.

This report takes a closer look at America’s defense innovation ecosystem, assessing the current state of U.S. military expenditures compared to historical averages and our international competitors. It then analyzes the impact of the sequestration and limited budgets, the decline of the industrial base for defense needs, and the erosion of domestic innovation generally on the health of the defense research enterprise. The United States defense system is still the most innovative in the world, but that leadership is not assured and is in danger of failing. This decline in leadership will not only impact defense innovation and capabilities, but also overall commercial innovation and U.S. competitiveness.

The Economic Cost of the European Union's Cookie Notification Policy

November 6, 2014
| Reports

In 2009, the European Union sought to regulate HTTP cookies—small text files are sent from a website and stored in a user’s web browser while the user is browsing that website—as part of their “e-Privacy” Directive, forcing all European websites to not only post their cookie policies, but also to seek the consent of each visiting user for the use of those cookies. This report finds that the total annual cost of this law is $2.3 billion dollars per year. This figure includes both compliance costs for European website operators and productivity costs. Given these costs and the law’s limited demonstrated benefits, European policymakers should abolish this largely symbolic “feel good” law for the sake of the European digital economy.

This report explores how not only is the EU privacy directive’s cookie policy costly, it also offers little to no benefits for EU citizens. In fact, by raising costs for website operators, it reduces the revenue available to develop quality online content and services for consumers. By requiring websites to notify users of all HTTP cookies, the policy may discourage many uncontroversial uses of cookies such as personalization which improve users’ online experiences. This policy also ignores that even when cookies are used to deliver targeted advertising, this largely benefits consumers with better ads and website owners with higher revenue they can use to provide higher quality consumer experiences. Additionally, users have filed few complaints about how websites are using cookies. The UK’s ICO received only 38 complaints regarding cookies between April and June of 2014, comparable to 9,000 complaints for automated sales calls during the same period. Answer ing this trifling number of complaints is not worth the law’s financial burden given the fact that the ICO also has noted that the majority of cookie complaints are “vexatious, personal, and time wasting.”

Several European Union and member state policymakers have begun looking at the cost-benefit analysis of this law a few years after its original implementation. As the European Union and its member states begin to revisit the e-Privacy directive, they should recognize that continuing to implement this cookie law is costly both to economic productivity and individual European websites. Furthermore, if the ICO’s experience is any sign of this law’s public mandate, it is unwanted in Europe as well. The European Union should act expeditiously to rollback this burdensome directive for the good of its digital economy and the ease of web surfing of its citizens.

Digital Drag: Ranking 125 Nations on Taxes and Tariffs on ICT Goods and Services

October 24, 2014
| Reports

Information and communications technology (ICT) drives productivity growth in the developed and developing world alike. Yet despite the clear benefits, many nations discourage ICT adoption by businesses and consumers by imposing discriminatory tariffs and taxes on cell phones, computers, telecommunications services and an array of additional ICT goods and services in the vain hope of increasing government revenues and/or protecting domestic ICT producers. Of 125 nations examined in this report, 31 impose combined ICT tax and tariff rates of over 5 percent of product or service costs, with several countries adding more than 20 percent to costs. Another 40 countries impose taxes and tariffs of between 1 and 5 percent. Economic studies demonstrate that these added costs limit ICT adoption which slows productivity growth. This report examines ICT tax and tariff policies around the world, assesses the negative impact of these policies on ICT adoption and productivity growth and recommends that nations eliminate all tariffs and discriminatory taxes on ICT goods and services.

Countries add taxes and tariffs to a range of consumer ICT products and services, including mobile phones and plans, computers and broadband service, and other electronics products. While 68 nations add at least 1 percent to the cost of ICT goods and services, Bangladesh imposes the highest costs, adding 57.8 percent to the cost of ICT goods and services over and above the country’s universal 15 percent VAT. In second and third place are Turkey and the Republic of the Congo, which add 26.1 percent and 23.8 percent, respectively. Greece, the only member of the OECD to rank in the top 20 countries, imposes 9.6 percent added ICT costs. Chile, only other OECD country in the top 50, adds 4 percent to costs. The majority of the countries that impose high costs are lower- or middle-income countries located in Africa, South Asia, and South America.

Many of the same countries that have imposed significant costs on consumer ICT products have also enacted high taxes and tariffs on business-use ICT products and services such as office equipment and intermediate ICT parts as well as mobile phones and computers. Forty-six nations impose a total cost on business purchases of ICT goods and services of more than 5 percent. Fully one half of the top 50 countries for business-use ICT tax and tariff rates are from Sub-Saharan Africa, with 11 countries from Latin America and the Caribbean and the rest from other regions. While there are many similarities between consumer-use and business-use ICT taxes and tariffs, tariffs comprise a much larger percentage of total business ICT cost additions than taxes among top countries.

The scholarly economic evidence is clear that because discriminatory taxes and tariffs raise costs for ICT users, whether businesses or consumers, they lead to reduced ICT adoption. The report estimates that these taxes and tariffs result in substantial decreases in adoption: over 20 percent for Bangladesh, Brazil, and the Republic of the Congo; between 10 percent and 20 percent for 11 more countries including Argentina, Pakistan, Ecuador, and Turkey; and between 5 percent and 10 percent for another 18 countries.

Because of reduced ICT adoption, economic growth suffers. For example, for every $1 of tariffs imposed on imported ICT products, India suffered an economic loss of $1.30 because of lower productivity. Overall, estimates point to yearly growth reductions between 0.7 percentage points and  2.3 percentage points of GDP per capita for countries with the highest tax and tariff rates.

Nations impose discriminatory taxes and tariffs on ICT goods and services for a variety of reasons, including the fact that they are relatively easy to tax and are seen as luxury goods. But because ICT taxes and tariffs limit growth, the net revenue benefits from taxing ICT goods and services are usually short lived. Studies indicate that revenue gains from such taxes and tariffs are often cancelled out over time because of reduced economic growth. For example, a recent study estimates that countries that reduce taxes on mobile goods and services regain revenue levels due to added sales and growth within 2 to 6 years.

Governments also enact tariffs on ICT goods in the mostly vain belief that it will spur domestic ICT production. But studies find that in most instances all these tariffs do is raise costs for other ICT-using industries, making them less productive and competitive, while doing little to spur the growth of a domestic ICT goods sector.

Given these findings, the guiding principle for nations should be straightforward: eliminate discriminatory taxes and tariffs on ICT goods and services for either consumers or businesses. This does not necessarily mean that ICT goods and services should be tax free—although some countries have happily begun moving in this direction—just that they should be taxed no higher than other goods and services. However, ICT goods should be tariff free since these are by definition always discriminatory. Finally, nations should also move to eliminate non-tariff barriers to trade that serve to raise the price of ICTs, such as domestic preferences for ICT procurement, local data storage requirements, and other protectionist measures.

A clear way for nations to enable faster economic growth is to spur the use of ICT by businesses and consumers. And many can do this with the stroke of a pen: eliminating discriminatory taxes and tariffs on ICT goods and services. 

The Coming Transportation Revolution

October 17, 2014
| Reports

The Internet of Things, cloud computing and improved sensor technology have created a new paradigm in transportation development that will allow for the creation of truly connected and ultimately autonomous vehicles. These technologies will improve safety, increase efficiency on America's roadways and eventually save billions in accident costs and lost productivity.

The Global Mercantilist Index: A New Approach to Ranking Nations’ Trade Policies

October 8, 2014
| Reports

Countries’ use of mercantilist policies in recent years has expanded dramatically, particularly in emerging economies such as Brazil, China, and India. These practices, such as forced technology transfer or local production as a condition of market access, intellectual property (IP) theft, compulsory licensing of IP, restrictions on cross-border data flows, and currency manipulation, all distort trade and investment and damage the global economy.

Collectively, these policies represent a major threat to the integrity of the global trading system and they demand a coherent and bold response from both free-trading nations such as the United States, as well as multilateral trade and development organizations, such as the World Bank, the WTO, and the United Nations. Despite this, many choose to turn a blind eye to mercantilism, for instance, the World Bank’s Temporary Trade Barriers Database 2013 Update asserts that protectionism may have peaked, and is now subsiding. ITIF refutes that claim, arguing that mercantilism is indeed still a major concern not only for the U.S. economy but for the entire global economy and trading system. It’s time the U.S. government and its like-minded trading partners get more serious about confronting mercantilism.

In order for the U.S. to take the lead in more effectively combating foreign mercantilism, it is time for Congress to provide the charge and the resources to the United States Trade Representative to develop an annual comprehensive ranking of nations’ mercantilist policies; in other words, a “Global Mercantilist Index”. ITIF's “Global Mercantilist Index” (GMI) uses a new comprehensive method to rank nations on mercantilist policies, while also proposing new policy tools to address the problem. 

Summary Policy Recommendations:

Congress should task USTR with creating an annual “Global Mercantilist Index” and provide additional funding accordingly;

The White House should publish a national trade enforcement strategy that reviews the adequacy of U.S. trade enforcement mechanisms with the goal of developing additional enforcement tools and focusing on the worst-behaving countries (Brazil, Russia, India, China and Argentina);

Congress needs to craft an Omnibus Trade and Competitiveness Act, similar to that of 1988, that both institutionalizes a Chief Trade Enforcement Officer and Working Group at USTR and restructures the interagency trade process;

Congress should increase USTR, the International Trade Enforcement Center (ITEC) and the International Trade Administration (ITA) appropriations with those increases targeted to trade and customs enforcement;

Congress also needs to be sure to appoint individuals to the International Trade Commission (ITC) who take trade enforcement seriously and do not simply have a “maximize consumer welfare” mindset;

Congress should require that provision of trade preferences, such as GSP and other development assistance, be tied to the GMI and Special 301 Report findings;

The U.S. Agency for International Development (USAID), the Millennium Challenge Corporation, the State Department, and other U.S. development organizations should advocate for a new approach to development economics not grounded in export led high-tech growth;

The United States should work with our free-trade allies to restructure the WTO to recognize a change in membership toward countries that do not play by the rules so that it becomes a more effective enforcement organization and not just a market opening one;

Trade policymakers should work with the WTO to develop a similar global mercantilist ranking report that applies an international lens;

International development organizations such as the International Monetary Fund, EuropeAid and the World Bank should use the global mercantilist ranking report to inform their funding decisions.

The Rise of Data Poverty in America

September 10, 2014
| Reports


Data-driven innovations offer enormous opportunities to 
advance important societal goals. However, to take 
advantage of these opportunities, individuals must have 
access to high-quality data about themselves and their 
communities. If certain groups routinely do not have data 
collected about them, their problems may be overlooked 
and their communities held back in spite of progress 
elsewhere. Given this risk, policymakers should begin a 
concerted effort to address the “data divide”—the social 
and economic inequalities that may result from a lack of 
collection or use of data about individuals or communities. 

Data-driven innovations offer enormous opportunities to advance important societal goals. However, to take advantage of these opportunities, individuals must have access to high-quality data about themselves and their communities. If certain groups routinely do not have data collected about them, their problems may be overlooked and their communities held back in spite of progress elsewhere. Given this risk, policymakers should begin a concerted effort to address the “data divide”—the social and economic inequalities that may result from a lack of collection or use of data about individuals or communities. 

Going Local: Connecting the National Labs to their Regions for Innovation and Growth

September 10, 2014
| Reports

Since their inception in the 1940s, the Department of Energy (DOE) national laboratories have been in the vanguard of America’s global research and development leadership. However, the national innovation system has changed in the past 70 years. Today, much technology development and application occurs in the context of synergistic regional clusters of firms, trade associations, educational institutions, private labs, and regional economic development organizations. Unfortunately, legacy operating procedures limit the DOE labs’ ability to engage fully with the regional economies in which they are located. This lack of consistent engagement with regional technology clusters has likely limited the labs’ overall contributions to U.S. economic growth.

Beyond Internet Universalism: A Framework for Addressing Cross-Border Internet Policy

September 9, 2014
| Reports

In 1995, Bavarian authorities raided the German offices of CompuServe and charged Felix Somm, the president of CompuServe’s German subsidiary, with violating the law because the company did not block access to certain websites, including some sites containing child pornography and Nazi propaganda. In response to these charges, CompuServe subsequently blocked access to two hundred online messaging boards for all four million of its customers worldwide, outraging many of its Internet users who were angry that German law could dictate what content was available to those outside its borders when other countries had more permissive laws about indecent and offensive content.

In 1998, a German court convicted Somm and gave him a suspended two-year sentence and a fine, but the ruling was overturned a year later. This case set off an international debate about the appropriateness of applying domestic laws to a global network—a debate which is even more heated, more important, and still unresolved to this day.

The Internet is a global network that is fundamental to commerce, communication, and culture. The ability to use the Internet to purchase products and services from halfway around the world, to talk to friends and strangers in other countries, and to share and discover new ideas, is what has made the Internet the defining technology of the 21st century. But the same capabilities that make the Internet the incredible powerhouse that contributes trillions of dollars annually to the global economy—the ability to transfer data seamlessly across geographic borders—has exacerbated the international conflicts that arise between nations with different laws and values.

Even though the importance of the Internet to the global economy and society continues to grow each day, collectively nations have made little substantive progress in creating a framework for resolving the many conflicts over Internet policy that inevitably occur between sovereign nations. These conflicts arise over a myriad of issues, such as free speech, intellectual property, privacy, cybercrime, consumer protection, taxation, commerce regulation, and others. To date, despite many attempts, no framework has been successful at providing a practical and widely-accepted model for policymakers to resolve cross-border Internet policy conflicts in ways that respect both the global nature of the Internet and national laws and norms. 

One reason for the lack of progress is that different nations have different sets of values and priorities, and attempts at resolving policy disputes inevitably falter because the various parties lack a common basis for dialogue. Another reason is that many proposed frameworks tend to apply a particular nation’s worldview on the rest of the world, such as promoting democracy and freedom of expression (as in the case of the United States) or maintaining political control (as in the case of nations like China and Russia). But despite their appeal (e.g., they would be relatively easy to administer if everyone would just agree to one universal framework), such frameworks simply cannot work because nations have significantly different cultural values, policy priorities, and legal systems. It is highly unlikely Europe will agree to a U.S. privacy framework (or that the United States will agree to an EU privacy framework), or that Saudi Arabia will agree to U.S. free speech framework, especially when it comes to Internet pornography. But the alternative, a Balkanized, fragmented global Internet that gives nations the right to act on the Internet with impunity cannot be the answer either.

What is needed is a framework that allows nations the right to customize Internet policy to their own national needs and rules, while at the same time constraining those rights in ways that enable global Internet commerce and digital free trade while also preserving the underlying global Internet architecture, like the global domain name system. While nations will not always agree unanimously on specific policy proposals, appropriate solutions, or even the relevant evidence, a common framework of understanding cross-border Internet policy issues will allow for healthier Internet policy debates, better cooperation and coordination between nations, and fewer policy conflicts.

This report explores the nature of cross-border Internet policy conflicts and provides a sample of the types of conflicts that have been seen in recent years. It also discusses the limitations of existing Internet policy frameworks, offers an alternative perspective and outlines a specific set of rules that should be used for evaluating cross-border Internet policy conflicts. Finally, it operationalizes this framework using various examples to show the method in action.

State Open Data Policies and Portals

August 18, 2014
| Reports

This report provides a snapshot of states’ efforts to create open data policies and portals and ranks states on their progress. The six top-scoring states are Hawaii, Illinois, Maryland, New York, Oklahoma, and Utah. Each of these states has established an open data policy that requires basic government data, such as expenditure information, as well as other agency data, to be published on their open data portals in a machine-readable format. These portals contain extensive catalogs of open data, are relatively simple to navigate, and provide data in machine-readable formats as required. The next highest-ranked state, Connecticut, offers a similarly serviceable, machine-readable open data portal that provides wide varieties of information, but its policy does not require machine readability. Of the next three top-ranking states, Texas’s and Rhode Island’s policies require neither machine readability nor government data beyond expenditures; New Hampshire’s policy requires machine readability and many types of data, but its open data portal is not yet fully functional. States creating new open data policies or portals, or refreshing old ones, have many opportunities to learn from the experiences of early adopters in order to fully realize the benefits of data-driven innovation.

The Export-Import Bank's Vital Role in Supporting U.S. Traded Sector Competitiveness

July 28, 2014
| Reports

As the official export credit agency of the United States, the U.S. Export-Import (Ex-Im) Bank plays a vital role in fostering U.S. traded sector competitiveness and facilitating exports of innovative U.S. products and services to foreign markets. The bank provides financing for export transactions that might not otherwise occur when private commercial lenders are unable or unwilling to provide financing to foreign purchasers of U.S. exports and plays a key role in leveling the playing field for America’s exporters by matching the credit support that other nations provide, ensuring that U.S. exporters are able to compete based upon the price and performance features of their products. In 2013, the Ex-Im Bank supported over $37 billion in U.S. exports—many of which would not have been possible without Ex-Im assistance—which supported over 200,000 jobs at more than 33,000 firms or their suppliers.

Yet the Ex-Im Bank is under heavy attack from a variety of ideological and special interest critics who oppose the Banks’ very existence. Populist opponents, from both the left and right, oppose the Bank as mere big business “crony capitalism” and a manifestation of unnecessary government intervention into market forces. Other groups have made unsubstantiated claims that the bank’s export credit assistance distorts capacity in markets such as the global aviation industry. Yet there is scant evidence that the global aviation industry suffers from sustained structural overcapacity or that export credit finance contributes to overcapacity in any meaningful way. This report debunks the fallacious claims of both the Bank’s ideological and special interest opponents, which have been designed to obscure the instrumental role the Ex-Im Bank plays in supporting U.S. manufacturing and services exports.

The reality is that the export credit finance the U.S. Ex-Im Bank provides is needed now more than ever, especially as foreign export credit competition continues to intensify. For example, in 2013, China issued three times as much new medium- and long-term export credit than the United States did (China’s $45.5 billion compared to America’s $14.5 billion) and over the past five years China and Germany issued four and five times much export credit as a share of GDP, respectively. If the Ex-Im Bank were disbanded as critics desire, leaving the United States unable to provide export credit assistance to foreign purchasers of U.S. products and services in situations where private sector lenders are unable to do so, the simple reality is that U.S. exports of aircraft, locomotives, power-generation equipment, and thousands of other products and services would be replaced by those of Asian or European producers, whose still-operating export credit agencies would step in to fill the void.

In short, failure to reauthorize the Ex-Im Bank will have far reaching negative results, including fewer U.S. exports, fewer U.S. jobs, and higher U.S. trade deficits. Therefore:

  1. With Congressional authorization of the U.S. Export-Import Bank set to expire on September 30, 2014, Congress should move expeditiously to reauthorize the Ex-Im Bank for a new five-year term.

  2. Congress should raise the Ex-Im Bank’s current exposure limit (i.e., lending cap) of $140 billion to at least $160 billion by 2018, ensuring that American exporters don’t fall behind foreign competitors, whose countries are investing substantially more in export credit finance as a share of their GDP than the United States.