Despite Unification, Local Laws Might Take the "E" out of "EU"
by Martin Vander Weyer
In May 1999, Victor Chandler International, Britain's leading independent bookmaker, announced that it was shifting its betting operation from London, England to Gibraltar. British-based horseracing fans would henceforth be able to place their bets by telephone, and in due course via the Internet, without the necessity of paying the 9 percent betting tax that earns Her Majesty's Treasury some £7 billion (about $11 billion) per year. The Ladbrokes division of Hilton P.L.C. and other major British bookmakers rapidly followed with similar online-offshore schemes.
This sudden revolution in the betting business highlights some of the challenges now facing European lawmakers as a result of the rapid advance of e-commerce.
Internet trade may suck business toward Europe's low-tax centers, of which Gibraltar is one, but is the best response to be found in tax harmonization across the European Union, or in competitive tax cuts and incentives in individual member states? What consumer protection rules, if any, ought to apply to a transaction in which, for example, a French resident bets in Gibraltar on an Irish race through a bookmaker whose ultimate corporate owner is British? What moral issues are raised by a sudden upsurge in low-cost e-gambling? Is it in the public interest for Internet betting traffic to be monitored by regulators - on the watch for money-laundering activity, for example - or would that be an unwarranted invasion of privacy?
The non-European student of such questions might imagine that the European Union - a highly sophisticated "single market" embracing 370 million citizens in 15 countries - is ideal ground for a fertile and orderly multinational marketplace in e-commerce. But most Europeans would greet that assumption with a cynical shrug. New car prices (fixed by manufacturers) vary by more than 40 percent between Britain and the rest of the E.U.; Britain and France have recently engaged in a ferocious fight over France's refusal to allow the import of British beef, and a dozen uncoordinated national air traffic control systems cause daily havoc for airline passengers. In the field of technology, Europe cannot even agree on a common design for a domestic electrical plug.
The E.U.'s worst-kept secret is that it is a continent of thinly disguised (and sometimes wholly undisguised) national protectionism; of no common language; of widely differing legal and consumer cultures and attitudes toward privacy, and of elaborate trade legislation arrived at by grindingly slow negotiation and imposed with varying degrees of vigor in different member states.
But there have been many points of progress as well, most significantly in the January 1999 launch of the euro, and the growth in cross-border mergers - in oil, steel, aerospace, telecommunications and other sectors. At the most practical level, Europe now has well-developed, competitively priced distribution services - run by the likes of D.H.L., T.N.T. and the Dutch Post Office - which ease the logistics of long-distance shopping. So it would be wrong to imply that there is no hope for a coordinated European e-commerce regime. In fact there is everything to play for, and the game has barely begun.
Even the most cursory survey of legislative proposals and market patterns reveals two things. First, how far Europe still is from being a true single market; second, how different the European and United States markets are in every respect other than their massive size. And to take full advantage of the potential of e-commerce, European governments must also learn to embrace some foreign concepts: legislative minimalism and self-regulation. Each new technical advance does not require a new law. European consumers need to accept the concept of shopping across distant borders. And to do so, they need to be persuaded that their rights as consumers are internationally protected in a way that can be easily and inexpensively tested in court.
Until recently, Europe trailed far behind the United States in its use of, and enthusiasm for, the Internet. Britons may cross the English Channel in large numbers to buy cheap booze in France, but European consumers in general have barely begun to appreciate the possibilities of cross-border cyber-shopping, or the power of the new medium to drive prices downward.
Awareness of the Internet's possibilities has increased markedly in the past year, however. Europe's stock-market analysts, business columnists and even gossip columnists talk of little else: British I.P.O.'s such as Freeserve and QXL have been many times oversubscribed, and Frankfurt's Neuer Markt has become the fashionable continental bourse for smaller high-tech stocks. New e-millionaires abound, particularly in Britain, with the likes of 26-year-old Martha Lane Fox (whose £6 million, or $9.5 million, business, lastminute.com, has been valued at £400 million, or $640 million) becoming instant celebrities. (Ironically, one of Britain's most successful e-pioneers, Planet Online founder Paul Sykes, is also one of its most vociferous anti-European political campaigners - proof that the idea of the Internet as a force for European integration has yet to catch on.)
The excitement generated by such names has everything to do with the phenomenal rates of growth anticipated for e-commerce businesses. Only 10 percent of European citizens use the Web today (according to British government figures) and total European e-commerce is estimated (by Andersen Consulting) at $19 billion, around 20 percent of the United States figure; by 2003, European e-commerce could reach $430 billion, or 60 percent of United States levels; 50 percent of Europeans will be Web users by 2006.
Across Europe, the pattern of e-commerce development has varied a great deal country by country. Scandinavians, for example, are early adopters, driven partly by the excellence of indigenous manufacturers such as Ericsson of Sweden and the Nokia Corporation of Finland, and already rival Americans in terms of Internet usage per capita. France, on the other hand, has been slow to take to the Web, partly because of linguistic resistance and partly because 70 percent of French households are already equipped with the less-sophisticated Minitel information terminals, and are reluctant to switch. Germany leads the European field in its share of global Internet use, with 15.5 percent of non-United States Internet traffic, compared to 6.6 percent in Britain and only 3.8 percent in France. Despite Germany's lead, it is severely held back by the restrictiveness of its consumer protection laws. <> Legislators across the E.U. know that action is required to keep up with developments. But can they cope with the speed of changes in technology and devise a system that facilitates growth in trade rather than driving it toward less restrictive regimes? One of the vital differences, highlighted by Richard O'Neill of the British Department of Trade & Industry's e-commerce unit, is between those governments that see e-commerce as an economic opportunity to be developed, and those that see it merely as a legislative challenge to be brought under control. Britain and Ireland are firmly in the first category; Germany and France are, so far, firmly in the second.
The E.U.'s first attempt to resolve these questions was not encouraging: The draft E-Commerce directive first published in May 1998 provoked outrage because it proposed that e-businesses should comply with the protection laws of each country they sell to, and that each consumer should have the right to sue those businesses in the consumer's home country. This overturned the rule-of-origin convention at the heart of the single-market structure, which allows a business that complies with its home-country consumer-protection laws to trade anywhere in the E.U. It also interferes with Brussels Convention rules on jurisdiction in commercial disputes.
Consumer groups welcomed the proposals, which they argued agreed with a little-used section of the rule-of-origin convention, according to which consumers are allowed to sue in their own home country if sales were targeted there. But industry lobbyists (including the European employers' federation, U.N.I.C.E.) were horrified by the proposition, which would require mail-order businesses to cope with 15 different jurisdictions - a minefield for suppliers. In Germany, for example, heavy discounting is illegal except at specified times of year (in rules designed to protect neighborhood stores), and two-for-one offers and lifetime guarantees are banned. The American Express Corporation is currently locked in a tussle about its ability to offer the same customer loyalty deals to German cardholders that it offers to consumers in the rest of the world.
Hearings (involving no fewer than 400 parties) were convened in November 1999 to re-examine the issues exposed by the draft E.U. directive. But there are still deep concerns about the underlying approach. "These changes could nullify the whole spirit of the Internet," Brussels-based lawyer Michael Pullen told the Financial Times. The thinking behind them is "10 years out of date," according to a British Conservative member of the European parliament, Michael Harbour. "We're in an entirely new era and we're asking all the wrong questions. Speed and openness are the keys to e-commerce legislation. The only practical solution is through self-regulation."
That message has perhaps its best chance of being taken to heart in Britain, where Tony Blair's Labour government is eager to advertise its business-friendly credentials. "Information is the key to the modern age," Mr. Blair declared recently. "The prize of this new age is to engage our country fully in the ambition and opportunity which the digital revolution offers." In keeping with Labour's rebranding of Britain as a modern, creative economy, the target is to become "the world's best environment for electronic commerce" by 2002. Mr. Blair has appointed an e-ambassador, Alex Allan, and an e-minister, Patricia Hewitt, who speaks of "our desire to build the knowledge economy." Britain's advantages include the English language; the most competitive, liberalized telecommunications market in Europe, and the free-flowing capital markets of the City of London. In the past, the City has not always been good at providing seed capital for high-tech startups, but Europe's venture capital industry is now firmly centered in London and increasingly focused on Internet opportunities. British recipients accounted for almost half of all funds invested by members of the European Venture Capital Association in 1998.
Britain hopes to attract e-commerce by providing advanced skills and infrastructure. Policies such as a computer loan scheme for low-income families, and computer training for all age groups, are designed to familiarize the entire British population with the Internet. But a legislative framework is urgently required, and the Blair administration's first tentative steps at one ran into fierce criticism - this time from civil libertarians rather than trade bodies. At the core of the forthcoming electronic communications bill, promoted by Ms. Hewitt, are provisions to recognize electronic signatures and digital certificates, which verify that signatures and users match. Earlier drafts, however, included controversial police powers (all the more provocative for having been proposed by Labour politicians who would traditionally have opposed such intrusions) to unscramble encoded e-mail or demand the handing over of private encryption keys.
This is not a simple debate. As has been extensively argued in the United States, unmonitored encryption protects pornographers, terrorists and money-launderers. But state interference in private communication smacked too much of Big Brother for the vociferous defenders of British civil liberties, who argued that it contravenes, among other things, the right to silence and the right against self-incrimination. Caspar Bowden of the Foundation for Information Policy Research said that the government is being "bludgeoned back from the preposterous position" it first adopted on these issues. But the measures are in fact due to reappear in the slightly different form of a Home Office bill on investigatory powers, which will reignite the row.
So the British and European legislative framework for e-commerce is still in its infancy, and there are large areas yet to be tackled. These include the full gamut of data protection and privacy issues. Under the European Convention on Human Rights, for example, employees are entitled to e-mail privacy; yet employers are regarded in law as the publishers of their employees' e-mails, and - as test cases against companies such as Norwich Union P.L.C. and British Gas have established - can be held legally responsible for their content. The liabilities of Internet service providers for the content they transmit have also yet to be determined, although again there have been test cases in both Britain and France of holding I.S.P.'s responsible for material passing through their systems. Copyright presents peculiar difficulties, because in some European countries it is automatic, while in others it is established only by registration; the development of MP3 technology, enabling high-quality music recordings to be downloaded from the Internet, brings new urgency to the question of copyright protection. The issue of censorship raises its head not only in relation to different national standards on sexual pornography, but also in the case of books like Hitler's "Mein Kampf," which has been banned in Germany since World War II, yet is now selling briskly to German buyers through Amazon.com in the United States.
Which European countries achieve leadership in e-commerce depends not only on the intelligent resolution of these esoteric matters, but also on taxes. There is broad agreement that sales taxes should apply at local rates at the point of supply, but (as the Gibraltar bookmaking example demonstrates) there are many other wrinkles to be exploited. Capturing taxes on the profits of e-commerce entrepreneurs whose servers can be located anywhere in the world is an altogether bigger challenge. E-commerce patterns across Europe may well be driven in this early phase by differences in tax treatment, and Ireland has already grabbed the advantage by instituting a 12 percent tax rate for Internet businesses (compared to a standard rate of 28 percent for other Irish businesses, and rates of 30 percent-plus across most of Europe). The British government has ruled out such specific incentives, but has hedged its bets by introducing capital gains tax cuts and R&D allowances that are designed to appeal directly to Web entrepreneurs.
As ever, it will be the entrepreneurs and consumers who set the pace in European e-commerce development, and the governments that trail behind. E.U. official Paul Timmers spoke recently of "the clock ticking away" as European governments decided whether "to enter the Digital Economy with conviction." The existing structure of Europe's single market ought to provide an ideal framework for borderless e-commerce. But in the real world, the expectation must be that Brussels will belabor the task, loading the e-commerce sector with unworkable rules that, in due course, will have to be taken apart and reconstructed in a more rational way. In the meantime, one consultant warned, legislative obstacles and failures of coordination could reduce E.U. e-commerce potential by as much as one-third.
The biggest risk is not that business will be lost to European tax havens, but that it will be lost to the E.U. altogether. The spoils will go only to those European nations with the most enlightened combination of business incentives and the lightest touch in legislation.
In China, Malaysia and Singapore, Freedom and Control Dance a Digital Minuet
by Mark Landler
In a recent cloudless morning in Hong Kong, ABN Amro Bank N.V. gathered several hundred of its Asian customers together to present a new range of e-commerce services for conglomerates, multinationals, manufacturers and trading companies. The mood in the hotel ballroom was as sunny as the skies outside.
The bank's executives noted that the global market for e-commerce was projected to grow from $43 billion in 1998 to $1.3 trillion in 2003. Much of that growth would be generated in Asia, the world's most populous continent, which is projected to comprise an e-commerce market worth $32 billion by 2003.
Politics scarcely intruded. Francis Kong, a senior vice president and e-commerce expert at ABN Amro, dismissed worries about state interference in the development of e-commerce. "A lot of Asian countries talk about controlling the Internet, but I think it's impossible," he said.
But Mr. Kong's remark pointed out one of the biggest perils of Asian electronic commerce. With geographically vast, untapped markets like China and Indonesia, Asia is potentially a Valhalla for Internet-based business. But its growth might easily be hobbled by governments that are deeply ambivalent about the prospect of opening their economies and political systems to the free flow of goods and information.
In order to develop and thrive, e-commerce must jump several hurdles, which, while not unique to the region, are nonetheless more pronounced there. One of the most formidable hurdles is the difficulty in settling transactions, since relatively few Asians use credit cards. Another potential obstacle is the prevalence of piracy in computer software and CD's - products that are often sold through the Internet. And, given the region's vast geographical expanse, e-commerce entrepreneurs must find a way of distributing their products across Asia.
On paper, at least, Asia will attract e-merchants for the same reason it attracts sellers of cameras, cars and laundry detergent. It is home to half the world's population - 2.7 billion people, many of whom are young and have rising incomes. Internet usage, while still behind that of the United States and Europe, is growing at an amazing rate. By 2003, Asia will have 63 million Internet users - a compound annual growth rate of 40 percent since 1997, according to the International Data Corporation.
Asia's combination of infant industries and enormous population has led to eye-popping e-commerce growth projections: According to I.D.C., China's e-commerce will generate $3.8 billion in revenue by 2003, up from $8 million in 1998. South Korea will generate $4.9 billion, compared to $57 million in 1998. And Taiwan's market will be worth $2.8 billion, up from $45 million in 1998.
In the wake of the recent Asian economic crisis, many of the region's leaders view the Internet - and e-commerce - as the road that will take them back from the brink of economic ruin. In order to develop reputations as technology-friendly countries, they are scrambling to build technology parks, attract foreign investors and wire their cities for electronic communication. As always in Asia, grand projects and aggressive state involvement are the order of the day.
In Malaysia, for instance, Prime Minister Mahathir Mohamad recently inaugurated the Multimedia Supercorridor, a 750-square-kilometer swath of land south of Kuala Lumpur, which is meant to be an instant Silicon Valley. In Hong Kong, a local property tycoon is building a more intimate technology park on 64 acres overlooking the harbor. Singapore plans to construct a $2.9 billion Science Hub that will host local and foreign technology companies, as well as a university.
Several Asian countries, notably Singapore, have also pledged to create fully wired societies - giving all their citizens access to broadband communications, including wide access to e-commerce opportunities. Hong Kong recently went so far as to make information technology the centerpiece of its economic recovery strategy.
Despite these ambitious future plans, at present the Asia-Pacific region trails the Western world in Internet usage, and is even farther behind when it comes to e-commerce. I.D.C. estimated that the region's entire market for e-commerce was only $700 million in 1998. More than 60 percent of that came from Australia, which has a well-developed e-commerce market, primarily in consumer services like travel and subscriptions to magazines and online news services. Furthermore, Asia is not a homogeneous market. It varies widely by language, culture, literacy and wealth. Singapore's wired society has little in common with the Sumatran villages of neighboring Indonesia. Hong Kong's nascent cyberport is worlds away from the rusting industrial ports of mainland China. Although China and India are far and away the largest markets in Asia by population, I.D.C. forecasts that they will trail Australia and South Korea in e-commerce revenue even in 2003.
How Asian governments regulate the Internet will also differ from country to country. Many regimes - including historically suspicious ones like the Chinese Communist Party - profess to welcome the Internet. And while no Asian country has prohibited online services so far, the leaders' public positions are notoriously unreliable; what sounds fine in principle may prove nettlesome in practice. As the Internet begins to have a political impact in Asian countries, the policies of the various regimes will shift - and in some cases harden.
The advent of e-commerce has revived an old debate in Asia: globalism versus nationalism. While Asian governments are eager for global markets - and the accompanying foreign capital, technology and trade - they remain loath to accept the necessary byproducts of openness, transparency and accountability. Indeed, during the Asian financial crisis, the countries that maintained or erected barriers to the global economy, like China and Malaysia, fared better than those that, like Thailand and Indonesia, left their markets open. These successes may fuel isolationists in the regime who hope to reap the Internet's benefits without opening up their economies to a freer flow of goods, labor, content and information.
Perhaps no country better illustrates the subtle balance between globalism and nationalism than China, where President Jiang Zemin has declared the Internet one of the nation's most powerful growth engines. Beijing has watched as dozens of American Internet companies have rushed into the country to invest in Web startups. E-commerce companies are beginning to overcome Chinese consumers' fears about buying online.
China's largest e-commerce company, 8848.net, recently announced that its revenue had nearly quadrupled to 8.2 million renminbi (about $1 million) during the latest three-month period. The company - which sells personal computers, scanners, books and office equipment - won a $30 million investment from the International Data Group, the parent of market research company I.D.C. Its name, 8848.net, refers to the height (in meters) of Mount Everest, and the company indeed seems headed for the pinnacle of China's cyber-world.
And 8848.net is only one of a thousand cyber-flowers blooming in today's China. American Internet heavyweights like America Online, Yahoo and Intel are lining up to underwrite Internet service providers, portals and e-commerce companies with names like Sohu.com and Sina.com. China.com, a Hong Kong-based I.S.P., recently joined NASDAQ in one of the year's most successful initial public offerings.
But China's bright prospects may be dampened by political realities. Just as China's Internet business was heating up this year, Wu Jichuan, the powerful Minister of Information Industries, reminded outsiders that foreign investment in China's Internet business was, strictly speaking, illegal. Although Beijing had turned a blind eye to foreign investments, Mr. Wu threatened to enforce the law. His new guidelines on foreign investment will be issued by the end of 1999.
Prospective Internet investors were cheered by the landmark 1999 trade agreement between China and the United States, which seems likely to force Mr. Wu into a more open stance. China currently bars foreign companies from distributing products in its domestic market. The United States-China trade deal may prove to be a breakthrough in distribution as well. As part of the agreement, China has agreed to allow American companies to gain distribution rights over a three-year period. As it seeks a seat in the World Trade Organization, China will no doubt extend those rights to other nations. But until these major legal impediments are worked out, the cyber-speculators are staying on the sidelines.
Entrepreneurs and venture capitalists contend that China cannot afford to slam the door on foreign involvement in the Internet. The promise is too great, the development too rapid and the spread of the Net too insidious for the authorities in Beijing to control it, they say. Other China-watchers, however, note that it is precisely the anarchic nature of the Internet that is unsettling to the regime.
If there was any doubt about the Internet's potency as a tool of political protest in China, it was demolished during the crackdown on the Falun Gong, a spiritual and exercise movement outlawed by the government. Despite a vitriolic propaganda campaign against the movement, Beijing was unable to prevent it from using the Internet to spread news about the repression throughout the country and the world.
Even strict business uses of the Internet may meet difficulties in Asia. In China, e-commerce companies must apply for licenses to sell products, and in the current political atmosphere, it is difficult to imagine the government making it easier for foreign companies to participate in the e-commerce business. And with the regime concerned about internal uses of the Net, even home-grown players may find themselves stifled.
The picture is brighter, however, in other Asian countries. Singapore, Thailand, Malaysia and the Philippines have all drafted laws to accelerate the development of e-commerce. For instance, each has passed legislation that gives legal standing to electronic contracts and digital signatures - both of which are crucial for reliable business-to-business online transactions.
Hong Kong has followed suit. There, the government has sought to jump-start e-commerce through a program called Electronic Service Delivery, which will eventually deliver government documents, such as permit applications and income tax forms, over the Internet. Though Hong Kong reverted to Chinese sovereignty in 1997, the former British colony retains control over most of its regulations and remains one of Asia's freest economies.
There are a number of nationalist tendencies in Asian countries that might create inhospitable conditions for e-commerce. In Singapore, for example, the government strictly prohibits pornography on the Internet. Although it has relaxed its regulations on businesses over the last two years, its repressive political climate could affect the distribution of Internet content of all kinds.
As part of the Malaysian government's effort to attract foreign technology companies to the Multimedia Supercorridor, it has pledged to allow the unfettered flow of information on the Internet. Still, the government has been alarmed by the ability of its opponents to use the Internet to bypass the country's compliant, pro-government news media. Anwar Ibrahim, the deputy prime minister who was ousted by Dr. Mahathir in September 1998, and later convicted of corruption and sex-related charges, became a political martyr in large part because his supporters circulated news about his plight on the Internet. According to government critics, their online activism is now monitored.
But Malaysia's economic policies may trouble prospective Internet investors even more than its political policies. Last fall, the government imposed sweeping controls over its currency and capital markets. Dr. Mahathir claimed that the move was necessary to thwart foreign currency speculators from attacking Malaysia's currency. Be that as it may, these controls also locked foreign investment capital in the country. Malaysia now claims the unorthodox policy was a success with the economy recovering and investors returning. But Malaysia's readiness to throw up barriers to the outside world is unsettling for those who want to sell products through the global marketplace of the Internet.
A Presidential Campaign Tests the E-business Influence of Silicon Valley and Big Labor
by Doug Garr
For the moment, most Internet transactions begin in the United States. Whether the United States can maintain its formidable lead in the virtual space race will depend on whether a Republican or a Democrat enters the White House in January 2001. Even more, it depends on which Republican or Democrat is elected. When it comes to such front-line issues as taxation and trade (and such secondary economic areas as immigration quotas and tort reform), the subtle differences between the various Presidential candidates' positions will have starkly different implications for the future of electronic commerce.
Economists of every political stripe generally agree that e-business is good for the United States economy, and that this is an opportunity that we can't afford to botch by too much - or too little - government intervention. But politically, e-business could foment the kind of passionate debate that both NAFTA and GATT did during President Bill Clinton's first administration. As with those international trade agreements, regulation of the Digital Economy raises several important questions: Will a laissez-faire government policy further expand the growth of e-business beyond the country's borders? At what expense to the American economy and its workers will this growth take place?
The 1998 Tax Freedom Act, which legislated a national moratorium on taxing Internet goods and services, is scheduled to expire in 2001. With $31 billion in domestic e-business revenues projected for that year, a lot is riding on who will be in the White House shaping the successor policy. Will the Internet become a world- transforming engine, or will it sputter because bureaucrats are eager to tap a new revenue stream? Beyond questions of taxation, other Internet issues will arise in this election, such as immigration policies that will determine whether or not labor-starved Web enterprises will be allowed to hire necessary workers from abroad.
The early front-runners, Democratic Vice President Al Gore and Republican George W. Bush, governor of Texas, have been courted aggressively by Information Age business interests. In return, the candidates have sought support within the nation's high-tech corridors. By advocating an aggressive free-market position, Bush has received considerable backing from groups that have traditionally supported the Democrats.
Gore also has an open-trade philosophy, although he is slightly more sympathetic than the Republicans to government intervention and regulation. Although Gore dazzled the digerati with his ease with the technological culture - he was the first vice president to use a laptop - some economists believe Gore is less predictable than Bush when it comes to e-business issues. For instance, the Clinton Administration faltered when it initially resisted legislation in two areas high-tech industrialists consider crucial: limiting Y2K liability and expanding the number of high-tech immigration visas. Although the Administration eventually capitulated on both, its hesitation gave some high-tech power brokers reason to wonder just how friendly Gore would be.
Former Senator Bill Bradley is even more of an unknown quantity. After leaving the Senate in 1996, he spent a year at Stanford University making the rounds of Silicon Valley high-tech luminaries. John Roos, a Silicon Valley attorney and a longtime Bradley supporter and fundraiser, is convinced Bradley understands the culture. "He'll do what's best for the Valley economy," said Mr. Roos. Some economists, however, wonder whether his liberal reputation on social and labor issues might make him less sympathetic to business interests than Gore.
Republicans who are heavily vested in the Information Age will likely favor Senator John McCain, who is even more supportive of open markets than Bush. Some multinational corporations, including the Motorola Corporation and the Boeing Company, applauded his fight against the use of unilateral trade sanctions to achieve foreign policy goals. As chairman of the Senate Commerce Committee, McCain led the fight to regulate the telecommunications industry when he crafted the ambitious Telecommunications Act of 1996. Later, he said the bill hadn't gone far enough in deregulating the telecommunications marketplace and opening up competition. As cable, telephony and the Internet become more interdependent, Senator McCain's knowledge of the federal regulatory bureaucracy in these areas would benefit him and the industries enormously.
On the opposite end of the spectrum from McCain is Reform Party candidate Pat Buchanan, who is skeptical of the benefits of e-business. Robert Crandall, an economist at The Brookings Institution, worries that Buchanan would "want to tax the New Economy to keep the old economy alive."
Although Buchanan has not stated his e-business views in any position papers, his spoken remarks offer a few clues. In a 1998 speech entitled "Free Trade Is Not Free," Buchanan compared the global economy to the unicorn, characterizing both as mythical beasts who exist only in the imagination. "Free trade does not explain our prosperity; free trade explains the economic insecurity that is the worm in the apple of our prosperity," he said.
Stephan Moore, director of fiscal policy studies at the Cato Institute, believes Buchanan "would be a disaster" for the New Economy. Others agree. Alan Reynolds, director of economic research at the Hudson Institute, labeled Buchanan the "ultimate trade warrior," a pure isolationist who would not want goods coming across the nation's borders - a position sure to displease e-business leaders.
In sum, although Bush and Gore both tend toward moderate views, high-tech entrepreneurs are slightly more comfortable with Bush. They'd prefer McCain over either front runner, however, because they believe he understands their industry best. Bradley has built a small core of loyal support in Silicon Valley because he sounds appropriately libertarian on business issues while maintaining a liberal, Democratic view on social issues. Buchanan, on the other hand, is anathema. And Republican upstart Steve Forbes is an enigma: scion of a business-magazine company that has historically favored open trade, but openly courting the right-wing, isolationist constituency that might otherwise back Buchanan.
At this point in the campaign, most candidates want to keep their options open and are reluctant to specify their e-business policies. Still, some real differences have already emerged when they have been pressed about the most significant domestic issues: taxation, trade restrictions, immigration, labor law, tort reform and antitrust (especially the fate of the government's suit against the Microsoft Corporation).
The most visible e-business issue is whether to tax goods and services sold on the Internet. Every candidate except Buchanan currently endorses the 1998 Tax Freedom Act, which placed a three-year moratorium on state and local taxes on Internet transactions. These positions reflect political expediency, which may fade after Election Day. "There's a reason why this moratorium expires after the election - because nobody wanted to deal with it," said Aaron Lukas, trade policy analyst at the Cato Institute. Indeed, there is a good chance we will see such a tax imposed during the next administration, no matter who wins the Presidency. A recent study by Ernst & Young showed that state and local governments are losing $170 million in potential tax revenues each year because of the Internet. The National Governors Association favors a tax on Internet goods and services that would be determined by the product's point of origin (the same way catalogue sales are taxed).
In a speech to the Washington Council on International Trade, Gore argued that, "we must fight to keep the Internet a global free-trading zone, and establish a permanent moratorium on tariffs in cyberspace." Bradley currently opposes a Net tax, but has left his options open. "I think that it's too early to make a judgment about what the Internet is actually going to become, and you don't want to stifle it at this stage," he said. Bush also favors the e-tax moratorium, a position that puts him at odds with his fellow governors. McCain is the most vociferous opponent of any Internet tax. In fact, he believes the moratorium should be extended to include "all the ramifications of taxing sales of goods across state and international boundaries," he said in a recent Senate speech.
LABOR AND IMMIGRATION
Most high-tech jobs cannot be filled with untrained American workers. There are now approximately 346,000 American job vacancies for computer programmers, systems analysts, computer scientists and engineers. Yet every year, many thousands of foreign students earn advanced degrees from American universities in fields related to these occupations, and then return home because their student visas run out. This shortage of high-tech labor will become a major political issue in the next few years.
High-tech entrepreneurs are disappointed that Clinton has been reluctant to relax visa restrictions. Most Silicon Valley immigrants fall into a visa category known as H-1B. The New Democratic Caucus has pushed hard to raise the 65,000-worker limit of H-1B foreigners to 105,000, and Congressional Democrats have proposed legislation to issue special "T" visas for the technology industry job openings paying $60,000 a year or more. In 1998, the Clinton Administration initially opposed the H-1B visa bill because it feared it would cost Americans jobs. "That really alienated a lot of the people in the high-tech industry, even though Clinton ultimately signed the bill," according to Rob Atkinson, the director of technology and the New Economy project at the liberal Progressive Policy Institute. Gore still has not distanced himself from this position on visas.
Bush and Gore both are willing to increase immigrant labor to relieve immediate shortages, but neither encourages it as much as McCain, who has vowed to double the number of H-1B visas to more than 200,000. Only Buchanan wants to close American borders to foreign workers. Bradley has not yet weighed in, although some economists feel he would be sympathetic to high-tech employers despite his pro-labor overtures.
While all the candidates support free trade, they each have different approaches to achieving it. Bush is not quite as evangelical as McCain when it comes to easing export sanctions, but he understands that software, backbone equipment and other technology related to e-business growth has to be exported and imported with as few restrictions as possible. A Bush position paper states that "there has been too little opportunity for America's high-tech exporters to make their case about what should be restricted and what should not. As president, Governor Bush will fix the...system by developing a tough-minded, common sense export control policy that significantly narrows the scope of restrictions on commercial products, while building walls around technologies of the highest sensitivity." If Bush were elected, one would expect the international doors to commerce to be opened wide, unless there were a compelling foreign-policy crisis. Presumably, the Bush Administration would be as horrified as Clinton's was by the International Business Machine Corporation's illegal sales of supercomputers that ended up in Russian nuclear labs. (I.B.M. was fined by the federal government in 1998 and paid the maximum penalty for violating export laws.)
Either Democratic candidate - Gore or Bradley - would probably be tougher than any Republican on Internet trade restrictions. High-tech executives were relieved last September when they finally won the battle to get the Clinton Administration to advocate relaxing export controls on encryption products.
The capital gains tax is also a hot-button issue. Although many established information-based companies rely on federal funding for research and development, the venture capitalists who fund high-tech startups rely on the benefits of the capital gains tax rate. According to the National Venture Capital Association, individual investors typically provide more than 90 percent of startup capital for small companies. Congress lowered the capital gains tax rate from 50 percent to 28 percent in 1978, and to 20 percent in 1980. Many in the wired world want it reduced further. The Cato Institute's Stephan Moore predicts that Gore would favor the status quo regarding capital gains, while Bradley might increase the rate. The Republicans, he said, particularly Bush, would likely lower the rate, perhaps to 15 percent.
On research and development, the Republicans probably will shy away from federal support. Federal R&D spending has suffered cuts over the past decade; the trend could continue. "I predict a significant cut in federal support for R&D if Bush gets elected," said the Progressive Policy Institute's Rob Atkinson.
Litigation, especially tort reform legislation, is one issue where Bush and Gore have clear differences. "Gore's in a ticklish spot," said Mr. Crandall of The Brookings Institution. "On the one hand, he wants to court high-tech companies, and on the other, he doesn't want to alienate the plaintiff's bar, which is a huge contributor to his party. Whereas Bush doesn't have that conflict; there's no way the plaintiff's bar is ever going to support him." Indeed, as governor, Bush signed a well-publicized tort reform bill, limiting corporate liability for Texas businesses - which include Dell, Texas Instruments, Compaq and CompUSA. Bradley has not stated a position here, and Buchanan has been silent as well.
While the Clinton Administration signed a bill limiting corporate liability on Y2K mishaps, it did so reluctantly. "Now, there's the sense that with Bush, you don't have to worry about that stuff," said the Progressive Policy Institute's Mr. Atkinson. McCain pushed hard for passage of the Y2K act, which gives big business yet another reason to support him.
Another potentially litigious issue is privacy protection. Electronic networks ease the sharing of sensitive personal medical and financial data. Although every candidate respects the right to privacy, the balance between personal privacy and new technology has yet to be struck. For the most part, the Presidential candidates have remained silent on the question. "Gore is eager to tinker with the system, while Bush is more inclined to rely on market forces," said Gregg Sidak, an economist with the American Enterprise Institute for Public Policy Research.
Unless the Microsoft Corporation and the United States Justice Department reach a settlement during the next few months, the new president will have to confront the issue of monopolistic business practices. In this case, he (all the leading candidates are male) will be repeating history: Nixon was consumed with the I.T.T. antitrust case in 1968, and Reagan was faced with the protracted I.B.M. suit in 1982. (Both presidents pressured their Justice Departments to withdraw the cases.)
There is little doubt that the Microsoft case will influence the debate over whether government intervention stifles high-tech creativity. Speculation that Bush would withdraw the Justice Department suit against Microsoft was fueled when he addressed a group of high-tech executives in October and promised them less interference from Washington. He would "always take the side of innovation over litigation," he said in a not-so-oblique reference to key language used during the suit's proceedings.
Given his position as vice president, Gore is, understandably, supporting the status quo. Just weeks after the Justice Department ruled in favor of the government, Gore visited the Microsoft campus in Redmond, Washington to campaign among employees and did not fare well during a spirited Q&A session. Yet despite hostility in Redmond, Gore's position in Silicon Valley is solid, especially among the many companies that agree that Microsoft has been a predatory monopolist that needs to be reined in.
Whoever does become the next president will have to shape a national e-commerce policy on a domestic as well as a global scale. At home, he will have to decide whether to sign the flurry of Internet bills that were hammered out during the waning days of the Clinton Administration. Already legislation has been written to restrict Internet gambling, authorize digital signatures, outlaw Internet sales of guns and alcohol, and regulate consumer privacy and the spread of junk e-mail. Since most of this legislation was created piecemeal, the next Administration will have to shape a consistent e-business policy.
Internationally, the next president will have to manage the ongoing negotiations that began at the recent, tumultuous World Trade Organization meeting in Seattle. American negotiators are hoping to achieve four e-commerce related goals during this round of trade talks: a moratorium on Internet tariffs, a basic set of rules regulating e-commerce trade, an agreement to refrain from excessive e-commerce regulation, and an agreement to treat products in the electronic world in the same way they are treated in the real world. With the largest investment in Internet-related businesses, no country - or president - will have a greater stake in influencing the future of e-commerce.
Reprint No. 00107