We can see a glimpse of the tension in a new report, issued by the office of the U.S. trade representative, that slams China for the way it uses censorship filters to assert its so-called digital sovereignty. These filters place a “significant burden” on businesses trying to operate in the country, the agency said.

But this is about more than China and censorship. According to a separate report from the Internet & Jurisdiction Project—a policy network spanning governments, businesses, and civil society groups—there’s a “legal arms race” underway that “could lead to severe unintended consequences for the future of the global digital economy, human rights, the technical internet infrastructure and security.”

“The future development of global services and the cloud approach are at stake,” warned authors Bertrand de La Chapelle and Paul Fehlinger.

Here’s the paradox that’s so threatening: The Internet doesn’t inherently respect jurisdictions, but the global legal and political system is all about national sovereignty—a principle that goes back 368 years to the Treaty of Westphalia. Governments can’t have one set of laws for offline and another for online. So countries’ legal systems keep clashing with one another on the borderless Internet, with companies and Internet users caught in the middle.

Apart from China’s famous censorship requirements, probably the most high-profile clash in recent times was that of Google and the European “right to be forgotten.” While the law in its native U.S. values free speech above privacy, EU privacy laws eventually forced Google (GOOG) to remove results from all its domains in order to protect the privacy of certain Europeans (though the system is only supposed to affect results being served to Europeans).

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Europe’s new general data protection regulation (GDPR) threatens overseas companies with huge fines, based on their global revenues, if they misuse the personal data of EU citizens. Brazil’s bill of Internet rights also gives its government the power to protect the privacy of its citizens, regardless of where their data is stored. The U.K.’s investigatory powers bill, a new surveillance proposal, also claims extraterritorial jurisdiction over foreign communications firms.

Russia is big on censorship and forces overseas companies to store the personal data of their Russian customers on servers within the country (a tactic known as “data localization”).

And the U.S. government is trying to force Microsoft (MSFT) to hand over customer emails that it stores on Irish servers, claiming it has jurisdiction over them because the company is based in the U.S. “We would go crazy if China did this to us,” a Microsoft lawyer said last year.

“The problem we see is 17th century principles of Westphalian territoriality clashing with 21st century digital realities,” Fehlinger, the manager of the Internet & Jurisdiction Project, told Fortune. “The challenge we are confronted with is how to exercise sovereignty in cyberspace without overreaching or fragmenting the Internet.”

This challenge has a global economic effect that doesn’t just affect big players such as Microsoft and Google. According to Fehlinger, promising startups are more likely to suffer.

“Whereas the very large platforms have resources they can allocate to deal with all those tensions, if you have two guys in a garage with millions of users around the world, they haven’t got the capacity for dealing with jurisdictions on the Internet and the capacity to reply to requests from different countries,” he said.

The danger, Fehlinger added, is that small and medium-sized businesses either try to ignore the demands of various governments and legal systems, or cave in to them too quickly.

If they try to stonewall, that will only frustrate the local authorities and increase the likelihood of them trying to take measures such as data localization, which would further fragment the Internet. If they agree to the authorities’ demands too quickly, particularly where surveillance and censorship are involved, that could have an impact on human rights.

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“Especially if we talk about small actors, this really has an impact on investment. For startups, everything is about scalability,” Fehlinger said, adding that startups are key to the success of the global digital economy.

The problem is only getting worse, as restrictions and broad claims of jurisdiction pile up and overlap.

According to the U.S. trade representative, “eight of the top 25 most-trafficked global sites are now blocked in China” as that country tries to combat the influx of information about unwanted subjects. The agency’s report notes that a U.S. home improvement site is, inexplicably, one of the unlucky ones to be blocked in China.

“We hope all countries can respect another nation’s choice of the route for Internet development, Internet management and Internet public policy, as well as its right to participate in regulating the international Internet,” said Chinese foreign ministry spokesperson Hong Lei, according to AP.

So what’s the solution? Fehlinger and his colleagues are recommending the creation of new policy groups that can “establish due process across borders.” This would be a kind of “soft law” that at least sets standards for cooperation between countries and companies, that can one day be enshrined in more formal mechanisms such as treaties, terms of service, and national laws.

Fehlinger and de La Chapelle said specific groups should be set up to deal with particularly problematic areas: domain name seizures, content takedown requests and restrictions, and access to user data by national authorities.

For more on the right to be forgotten, watch: [fortune-brightcove videoid=3937146152001]

Their recommendations will feed into a big report due later this year from the Global Commission on Internet Governance, a body headed by former Swedish prime minister Carl Bildt and featuring politicians and experts from around the world. The commission’s ambition is to help shape how the Internet is run in the future.

There is, Fehlinger claimed, some precedent for this kind of global cooperation—the bodies that help run the technical side of the Internet itself, such as ICANN (which runs the online addressing system), the World Wide Web Consortium (which creates web standards), and the Internet Engineering Task Force (which guides the evolution of Internet technologies).

But even on such relatively mundane technical matters, things can get painfully political—just witness the long-running saga of the U.S. relinquishing control over the Internet’s domain name system.

When it comes to national laws that touch on areas like security, rights, and culture, we find ourselves in the most political arenas out there. It would be great if we could all get along, for the sake of the Internet and everyone who uses it to enrich their minds and wallets, but it’s probably best not to bet on that happening anytime soon.

Still, as Fehlinger notes, there’s every reason to try: All these unilateral moves that countries are taking could soon add up to “unwanted fragmentation that fundamentally changes the character of the Internet as we know it.”