The Digital Mercantilism Trap: Why Our Technology Policies Are Fighting the Wrong War

All views in this newsletter are my own and do not represent the views of The R Street Institute, the US Navy, or any other organization I am affiliated with.

Thanks to Tom Choinski , next week I'm presenting at the Humanities and Technology Association's annual conference here in Newport. The theme of the event is "Deus Ex Machina: Technology as Salvation or Damnation?" My presentation argues that contemporary digital sovereignty policies represent a philosophical regression to 17th-century mercantilism - the same economic fallacy that Adam Smith refuted 250 years ago. We're treating data and algorithms like precious metals to be hoarded rather than knowledge flows that drive innovation.

Francis Bacon's 1627 The New Atlantis envisioned technological advancement flourishing through collaboration across borders. The late 20th-century Internet seemed to fulfill this promise as a global network enabling unprecedented scientific collaboration. Then governments worldwide began systematically dismantling it through data localization requirements, technology export controls, and algorithmic sovereignty mandates.

I'll save the full intellectual history argument for the conference presentation. But the policy implications matter now, because digital mercantilism is actively undermining American technological competitiveness while claiming to protect it.

The Zero-Sum Fallacy Returns

Mercantilist economics assumed that national wealth required hoarding gold and restricting trade. One nation's gain was only achievable through another's loss. Adam Smith demonstrated this approach actually impoverished all participants by restricting the specialization and knowledge diffusion that actually create wealth.

Digital sovereignty policies exhibit identical logic: data localization treats information like precious metals requiring national vaults; export controls assume technological strength comes from denying capabilities to competitors; algorithmic sovereignty mandates presume innovation emerges from isolated national champions.

The strategic incoherence becomes apparent when examining how these policies undermine their stated objectives.

Three Case Studies in Self-Inflicted Wounds

The EU's data localization requirements aimed to protect European technological independence and consumer privacy. Instead, compliance costs for navigating fragmented European data regulations favor the large American tech companies the policies supposedly constrain. Google, Amazon, and Microsoft can afford teams of lawyers interpreting divergent national implementations. Market concentration increased 17% in the week after GDPR implementation as websites dropped smaller vendors in favor of the dominant players. The EU built a wall to keep the giants out of the castle, but the giants were already inside. The wall just prevents anyone from entering to challenge the giants.

Chinese technology nationalism pursued technological self-sufficiency through domestic data requirements and preferential treatment for state-backed champions. The result has been isolation from the global innovation networks that drove China's technological rise. Growing restrictions from both Beijing and Washington are fragmenting Chinese participation in international AI collaboration. Chinese researchers now have the lowest rate of international collaboration among major AI powers, with China contributing only 4.1% of international AI collaborations compared to 38.7% for the US and 23.6% for the EU. Beijing's data localization requirements prevent Chinese researchers from accessing global research networks, while Western export controls and security scrutiny create barriers from the other direction. Both sides are hoarding data and algorithms while fragmenting access to the collaborative research that makes both valuable.

U.S. semiconductor export controls represent the most sophisticated attempt at digital mercantilism. By denying China access to advanced chips and manufacturing equipment, America aims to maintain technological leadership. As my first newsletter analyzed, export controls attack supporting pillars while strengthening the center of gravity - China's drive for technological sovereignty. Every restriction validates Beijing's argument that technological independence is necessary. The controls might delay Chinese advancement by a few years - though even that's uncertain given recent developments like DeepSeek R1 - but they guarantee that when China develops advanced capabilities, those capabilities will be completely independent of American technology ecosystems.

What Strategic Competition Actually Requires

None of this means naive openness to all actors. Legitimate security concerns exist. The question is whether current digital sovereignty approaches actually address these concerns or simply dress up mercantilist fallacies as national security policy.

Effective strategic competition would have an entirely different approach. The U.S. needs to make American technology ecosystems so valuable that restricting access becomes China's strategic vulnerability rather than American weakness. This would allow the U.S. to maintain permanent advantages in the innovation networks that generate next-generation capabilities. Then, the U.S. could establish collaborative frameworks enabling democratic allies to collectively out-innovate authoritarian competitors.

This requires treating knowledge flows as strategic assets rather than vulnerabilities, recognizing that network effects create winner-take-most dynamics where openness generates sustainable advantages, and understanding that innovation ecosystems function through connection rather than isolation. Bacon's utopian collaborative ideals aren't naive - they're strategically sound. Openness creates sustainable competitive advantages that isolation cannot match.

The Choice Ahead

Next week's conference asks whether technology represents salvation or damnation. Francis Bacon answered this question four centuries ago: technology advances through collaboration, not competition for control.

The Internet proved Bacon right at global scale. Open knowledge flows, cross-border research networks, and collaborative innovation created unprecedented technological progress. Digital sovereignty policies are dismantling this working system based on the same mercantilist fallacy that Adam Smith refuted in 1776.

The choice isn't between salvation and damnation. It's between Baconian collaboration that recognizes knowledge flows as the foundation of innovation, or mercantilist fragmentation that treats data and algorithms like precious metals to be hoarded. One path leads toward continued technological progress. The other leads toward isolated fiefdoms that impoverish all participants while claiming to protect national interests.

We're currently choosing the path that Francis Bacon warned against and that Adam Smith proved fails. The question is whether we'll recognize this before we find ourselves impoverished.

What This Means For...

Policymakers: Digital sovereignty policies represent philosophical regression to mercantilist fallacies that Adam Smith refuted 250 years ago. Data localization, export controls, and algorithmic sovereignty fragment the knowledge flows that drive innovation. Before implementing new restrictions, ask: does this actually advance technological competitiveness, or does it recreate the strategic vulnerabilities that openness addressed? Current policies consistently undermine their stated objectives.

U.S. strategic competition: We're dismantling competitive advantages built over decades. The Internet's global reach, open research collaboration, and cross-border knowledge flows created American technological leadership. Digital mercantilism fragments these advantages while competitors build alternative networks. The strategic question isn't whether we can compete through isolation - it's whether we'll abandon working systems based on discredited zero-sum logic.

Tech companies: Continue to navigate between competing digital fiefdoms with incompatible requirements. The fragmentation creates compliance costs advantaging large incumbents over innovative startups. Companies recognizing digital sovereignty as strategic regression rather than inevitable trend can position for eventual recognition that mercantilist policies impoverish all participants - just as they did in previous centuries.

Aspiring strategic thinkers: Adam Smith's critique of mercantilism applies with even greater force to digital markets where network effects and knowledge spillovers create exponential benefits from openness. Zero-sum thinking mistakes capability denial for strategic advantage. Effective competition requires maintaining the collaborative frameworks that generate sustained innovation advantages, not fragmenting them through digital mercantilism.

For those interested in the deeper intellectual history argument - how digital sovereignty represents a betrayal of Francis Bacon's collaborative vision for scientific advancement - I'll be presenting "From New Atlantis to Digital Fiefdoms" at the Humanities and Technology Association conference at Salve Regina University, October 23-25. https://events.salve.edu/event/deus-ex-machina-technology-as-salvation-or-damnation