The Internet as a Source of Regulatory Arbitrage

Abstract

The Internet is a transnational communication medium. Once connected, there is little that a single country can do to prevent citizens from communicating with the rest of the world without dramatically reducing the economic and intellectual value of the medium. As a result, connection to the Internet enables regulatory arbitrage by which persons can, in certain circumstances, arrange their affairs so that they take advantage of foreign regulatory regimes. Regulatory arbitrage reduces the policy flexibility of nations by making certain types of domestic rules difficult to enforce. Citizens with access to the Internet can send and receive anonymous messages regardless of national law; both censorship and information export restrictions become nearly impossible to enforce, although governments have it in their power to impose some impediments to ease of use. The effectiveness of European-style data protection laws is reduced when personal information can be stored in offshore data havens. Ultimately, restrictions on certain types of transaction, e.g., restrictions imposed by securities laws, also may be undermined if these transactions can easily be carried out offshore. However, claims that income tax systems will be seriously undermined are, I argue, vastly overstated, at least in the medium term. On balance, therefore, I predict that the Internet’s regulatory arbitrage effects will tend to promote liberal democratic values of openness and freedom more than they will detract from what most consider to be the modern states’ legitimate regulatory powers.

Keywords: Internet governance, cyberlaw, regulation, administrative law, arbitrage, regulatory arbitrage