Lecture Series: Geography and Cyberspace, Territorial Sovereignty in the Information Age

Geography and Cyberspace: Territorial Sovereignty in the Information Age

February 15, 2000

Recent articles and book chapters include: "The MAI and the Clash of Globalizations (Foreign Policy); "Back to the Future: Neomedievalism and the Postmodern Digital World Economy" (Journal of International Affairs); "The Architecture of Globalization: State Sovereignty in a Networked Global Economy" (Governments, Globalization and International Business); and "Electronic Cash and the End of National Markets" (Foreign Policy).

Rapporteur's Report

Casino Vega, an Internet gaming establishment that operates under the laws of Costa Rica, is one of the thousands of websites which anyone in the world with a credit card and an Internet connection can visit to wager money online. To gamble in this virtual casino, a customer purchases e-cash from a vendor in the United States and then transfers the funds electronically to Costa Rica. If the customer travels to Costa Rica, gambles there, and then returns to the United States with his winnings, he has not committed a crime, as long as he reports the income and pays taxes on it. The issue becomes more muddled, however, if he remains in the country while money is transferred electronically to Costa Rica. What determines the location of the activity--the physical presence of the gambler, the computer that processes the transaction, the wires that carry the information, or the country where electronic cash is won or lost? Does anyone's law apply in cyberspace, or does everyone's law apply? How do we determine jurisdiction when it is detached from geography? How do we decide who makes the rules?

Stephen J. Kobrin began his discussion by citing this example in order to raise the broader question of the tensions between global cyberspace and the legal sovereignty of the territorial nation-state. Since the Peace of Westphalia in 1648, the international political system has been based on the mutually exclusive jurisdiction of sovereign nation-states. This system, equating political authority with geography, is being challenged by the advent of information and communication technologies that confound traditional notions of jurisdiction and complicate the question of where events occur.

While online gambling is a vivid example of the difficulty of enforcing national laws in cyberspace, Kobrin suggested that a much larger question involves Internet taxation. As the information revolution moves forward, national economies are becoming electronically interlinked into a networked world economy, markets are moving online, and economic value is steadily being transferred from physical to electronic commodities. Software, music, movies, books, and even services such as consulting, research, and legal advice are shifting from "atoms to bits" and can be obtained online, free from the constraints of a plastic CD or an office visit. The ease with which electronic value moves throughout the networked global economy is posing new and significant challenges to the taxing authority of nation-states. If a programmer in Bangalore, India, writes software on a computer in New York, value is being added, but where does the transaction take place? Which government has jurisdiction to tax?

Kobrin argued that a tax-free web is nonsense; there is nothing special about Internet commerce that justifies preferential treatment, and governments will hardly give up the growing revenue stream that the explosion in e-commerce will provide. Moreover, and contrary to libertarian arguments, even electronic markets cannot exist in a vacuum; they require the social order that oversight and authoritative regulation provide. The question is not whether the Internet will be taxed and regulated, but rather how and by whom? In Kobrin's view, territorial regulation and taxation simply will not work; only through international collaboration and multilateral rulemaking can states hope to effectively govern global electronic commerce. But this idea itself calls into question the boundary between national and international spheres, and it is likely to raise divisive issues on which states find it difficult to agree. While geography is decreasingly viable as a basis for organizing and controlling economic activity, moving beyond territorial regulation will not be an easy task.

In the question and answer period that followed, a number of audience members voiced concerns as to whether the Internet environment is or will remain both unique and a challenge to territorial sovereignty. One attendee noted that in the early stages of their development, previous information and communications technologies had been similarly expected to overturn existing industry structures and undermine the authority of national governments. However, corporations and governments with vested interests in the status quo successfully suppressed the potentially disruptive aspects of these technologies and channeled their development to fit within the existing social order. He therefore wondered whether the same thing might not occur with the Internet, in which case the tension between cyberspace and territoriality would prove short-lived.

A number of other attendees focused on the example of taxation. Several asked whether the problem of regulating and taxing elusive transactions was really new, given earlier experiences with mail-order catalogs and the like. Surely the problem was not as unique or insoluable as Kobrin was suggesting? Others addressed his claim that a tax-free World Wide Web is nonsense. One stated that tax exemption has often been granted to nascent industries, and that Internet commerce should receive similar treatment. Another pointed out that while Kobrin thought taxation would be difficult but necessary, others analysts who argue that taxation is difficult may be motivated by a normative preference for a tax-free environment. In response to these and other points, Kobrin reaffirmed his belief that while the Internet’s technological characteristics complicate the tasks of national regulators, governments can and should find multilateral solutions to taxation and related challenges but must do so without stifling the Internet’s economic dynamism.

Report prepared by Taylor Boas