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Reality Check: 99.9% of Chinese Internet Still Not Free.

Wednesday, the South China Morning Post ran a story that cascaded around the tech world and even made the front page of many business sections.

The SCMP reported that Chinese officials have made a decision to lift the ban on politically sensitive foreign websites, such as Facebook, Twitter and the New York Times, within the Shanghai free-trade zone, a 28 square kilometer free-trade haven where China will relax rules restricting foreign investment and free-trade (the “free-trade zone” opens officially on Sunday).

Much of the subsequent media coverage focused on the opportunity for these companies in get a foothold in the Chinese market.  Unfortunately, that framing is problematic.  These companies originally had a foothold in China when the Internet market was still nascent.  In fact, they were the early market leaders.  Unfortunately for them (mostly U.S.-headquartered companies) they were blocked from the Chinese market by “the Great Firewall”.  At the time, the purported reasons for the blockings were that these sites presented a threat to public order and national security.  However, this thinly veiled rhetoric was pierced by reality, as the Chinese clones (aka copies of Twitter [Weibo], Facebook [RenRen] and Google [Baidu]) that filled the void contained nearly identical “objectionable” content:

Also in the aftermath of the Xinjiang riots, microblogging site Twitter was cut off by the Chinese firewall for similarly dubious reasons. Less than two months later, Chinese Internet giant Sina launched a near identical microblogging service. To further the business-over-politics angle of China’s foreign Internet purge, China’s wildly popular instant-messaging service QQ removed a censorship filter after users’ complaints. Dissidents and riot organizers can now use Chinese versions of Twitter to organize.

Even a seemingly harmless site, like photo-sharing website Flickr, has been blocked in China, while its identical clone Bababian has grown steadily with foreign technology and no foreign competition. Likewise, blog-hosting sites Blogger and WordPress have long been blocked in China. Instead, Chinese netizens use Tianya, the 13th-most popular site in China. Far from being a sanitized land of boring blogs about daily activities, Tianya also hosts China’s largest Internet forum, a vitriolic, sensationalized, and hate-filled arena that makes Western gossip sites seem like the Economist.

One prescient Reuters journalist highlighted the potentially bigger picture in an article whose name says it all: “Facebook and Twitter too late for China’s Internet.”  In an Internet world dominated by first-mover advantage and network effects, five years away from a market is an eternity that is going to be difficult to recover from.  Sure, if China opened up its Internet to foreign competition now, Facebook, Twitter and Google will surely advance from their current miniscule market share.  Unfortunately, they will be starting at an extreme disadvantage relative to the companies and online platforms that the Chinese have been using for the past 5 years.

How big a difference did the multi-year hiatus make?  In neighboring Hong Kong and Taiwan, which both are ethnically and culturally Han Chinese (but also lack the pervasive firewall), Google, Facebook and Twitter all have major market share.  In fact, Hong Kong has the highest Facebook penetration rate in the world.  If the Chinese government had not meddled with the Internet, these companies would likely have a very large share of China’s $12.3 billion online advertising market.  To make matters worse, China has by far the most Internet users and the potential for growth is astounding.  That $12.3 billion figure represents a 47% growth rate from the year before.

To put that in perspective, the current (and much ballyhooed) trade deficit with China is $30.1 billion dollars.  If the Obama administration is serious about doubling exports by 2015 and closing the trade gap as they have pledged, his administration should use our trade apparatus and tools to fight for this market.  (In 2010 my organization recommended a World Trade Organization complaint as a place to start, and the USTR has already asked a raft of preliminary questions of the Chinese.)  After all, China gets access to the U.S. market in sectors where it has a competitive advantage.  Why wouldn’t the U.S. government fight hard for the sector of the economy where the U.S. enjoys arguably its greatest comparative advantage?  A big share of that rapidly expanding $12.3 billion dollar a year market would sure go a long way towards closing that trade gap.

The story running under the Shanghai free-trade zone story in the South China Morning Post accidentally put the issue in a more telling perspective.  It highlighted Alibaba, the Chinese e-commerce giant, and its decision to seek an IPO in New York instead of Hong Kong.  Similarly, Baidu went public on the Nasdaq in 2005 and RenRen is listed on the New York Stock Exchange.

What’s the point?

China opens up 28 square kilometers of one city to some U.S. Internet companies and it makes front page news.  In the meantime, the U.S. capital markets have been freely utilized by Chinese companies for years to finance their own operations in markets that their foreign rivals are blocked from competing in.

Not to dampen the significance of the fact that the Chinese market might be maybe, possibly, gradually opening up to some U.S. Internet companies, but seeing wave after wave of wire stories discussing this without context was starting to irritate me.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.