The digital economy is the new economy, underpinning productivity growth, development and prosperity globally. Sources of innovation and technological progress are increasingly diffuse, with the emerging world and China now becoming important sources of new technology. But a global governance deficit and geopolitics are contributing to a digitally divided global economy.

One of the main drivers of this digital decoupling is the strategic rivalry between China and the United States. Digital protectionism is on the rise, fuelled by a lack of multilateral rules and norms, and an interest in promoting homegrown companies. Different standards for digital economies, which are inherently global markets, are now being set in the two countries, as well as in Europe.

There's a role for Australian leadership here, along with others.

East Asia is the most data-rich region in the world. There are shared global interests and common challenges, as well as huge potential productivity and growth gains, that should encourage agreement on principles and rules to govern the digital economy - and dialogue and co-operation for confidence and trust-building along the way.

Middle powers like Australia and Japan will need to find creative solutions and groupings that are inclusive. ASEAN must also be at the centre of finding multilateral solutions and keeping regional arrangements open and outward-oriented.

Since data has the features of a public good - that is to say that, unlike a physical object you might buy in a shop, the use of data doesn't stop others from using it and it is accessible to many at the same time - barriers are detrimental for economic growth and development. A digitally divided global economy affects supply chains, productivity, people's livelihoods and the growth potential of economies, including those at the technological frontier.

Right now, there are system differences between countries, with diversity across governments, economies, approaches to data privacy and ownership, governance regimes, and attitudes to international trade and investment. A fit-for-purpose multilateral digital governance regime will allow governments to set their own policies and retain sovereignty, while multilateral rules should limit discrimination, promote transparency and predictability, and constrain governments from protectionist policies.

Rule-making for the digital economy has progressed in bilateral and regional agreements like the Australia-Singapore Digital Economy Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

This bottom-up approach will increasingly have to be guided by multilateral principles to avoid lowest-common-denominator outcomes by building trust across different countries through technical and economic co-operation.

Multilateral initiatives already include Japan's Data Free Flow with Trust initiative at the G20, signed on to by China and America, and the WTO's e-commerce plurilateral initiative. The practical way forward is for middle powers to mobilise governments, technical experts and business through regional groupings like APEC.

But regional co-operation on the digital economy will have to comprehend a wider range of issues than traditional trade issues in existing agreements, including trusted access to data, protecting privacy and security, competition policy, and formulating norms to govern artificial intelligence and fintech.

Risk can be managed and mitigated with competition, technical solutions and agreed principles and rules. Introducing more competition takes time and needs to be done with governance that identifies and reduces risk within and across borders. This will require international co-operation and experience-sharing.

Platforms that rely on large numbers of users and network effects will be punished by users and lose market share quickly if they breach the trust of consumers - provided the market is competitive and switching costs are not prohibitive. Platforms in any country have an incentive to protect the data of their users and maintain trust through cyber security and transparent terms and conditions. That incentive can be enhanced with appropriate governance.

Hardware bottlenecks and choke points can be alleviated by competition. Concentration of the production and supply of semiconductors, strategic materials and other technologies are all risks that can be alleviated or avoided in this way. Avoiding vertical integration of production and allowing competition, including from foreign companies, in each stage of production will support alternative suppliers and shift risk to private enterprises.

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Increased competition, including between China and the United States, under agreed multilateral rules - instead of bans for strategic, security or protectionist reasons - will lift innovation and productivity and reduce risks borne by governments and societies.

Agreed principles and rules can lead to competition that encourages companies to outperform those in other countries, instead of undermining them.

Yes, domestic laws are important for protecting against data misuse or privacy breaches by foreign and domestic actors. Clear, consistent and enforceable domestic laws around privacy and market integrity requirements, with serious penalties, are an important protection against cyber risk. But experience-sharing between countries can help get policies right.

There's an urgency in guiding multilateral digital principles to avoid a fractured global system. As the G7, G20 and other groupings discuss ways forward, middle powers can shape global outcomes most effectively with progress in the Asia-Pacific region that builds an inclusive and workable co-operation agenda.