Nations Restricting International Data Flow Are Threatening the Global Digital Economy The growth in worldwide commerce in data dwarfs trade in tangible goods but parochial restrictions make the path forward unclear.
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For centuries, many of the most important catalysts for global trade and economic integration have been commodities -- gold, silk, spices, sugar, and of course, oil. A new global commodity -- data -- has the potential to unleash extraordinary opportunities that will shape the world economy of the 21st century. But realizing these opportunities depends on data moving freely across borders, a notion that was once elementary, but today is under threat.
Global data flows are fundamental to the digital economy that's contributing to economic growth, driving innovation and stimulating job creation in the United States and throughout the world. McKinsey estimates that digital trade added $2.8 trillion to global GDP growth in 2014 alone, while also finding that trade in data has expanded 45-fold in the last 10 years. Another 9x growth is expected by 2020. According to the IMF's World Economic Outlook from October 2016, trade in physical goods, by contrast, has been growing at only about three percent annually in recent years, which is less than half the average rate of expansion over the past three decades. Perhaps most noteworthy of all, McKinsey identifies the GDP impact of cross-border digital flows -- a relatively recent entry to the global economy -- as exceeding the impact of trade in goods.
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With so many countries around the world experiencing modest economic growth rates, policymakers should be focused on maximizing the opportunities emanating from the data-driven digital economy. Regrettably, many jurisdictions have instituted measures that threaten these opportunities, with the potential to stifle the long-term growth of the digital economy.
Today, 34 countries have laws and regulations in effect that hinder the flow of data across borders, either making such flows more expensive or restricting them altogether, according to the Information Technology & Innovation Foundation. These policies can be found in countries spanning multiple regions (Africa, Asia-Pacific, Europe, North America and South America) and in many of the world's largest economies. In China, for example, companies must store their data on servers that are based in the country, and there are a number of restrictions on transferring data outside the country.
These data localization laws have the potential to balkanize the digital economy and, in the process, stifle its growth. Companies will face higher costs in a number of areas, such as IT and compliance, both of which will impinge on their competitiveness. And the restrictions will stifle the cooperation that's fundamental to corporate innovation. The net effects will be higher costs to consumers and reduced economic output.
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What's the best way to combat data localization measures? There are no simple solutions, and companies are ultimately obligated to comply with the laws of the jurisdictions in which they're operating. But given data is so intertwined with global economic activity, it behooves U.S.-based companies to press policymakers to treat data the way they treat most physical products. And that would mean enshrining the free movement of data into the world's trade agreements.
The U.S. has an immediate opportunity ahead to lead by example. It has recently started negotiations with Mexico and Canada on how to modernize the North American Free Trade Agreement (NAFTA). One of the agenda items is setting new rules for digital trade, which was largely non-existent when the agreement took effect in 1994. Negotiators should affirm the free movement of data and prohibit it from being "localized" within the borders of one country. These ideas already have mainstream support -- they were agreed to as part of the 12-nation Trans-Pacific Partnership. While that agreement has not been ratified, its data provisions provide a template for the renegotiated NAFTA as well as other trade pacts.
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The free flow of data is one of the underpinnings of today's global economy and has the potential to deliver far-reaching benefits -- helping to make businesses more efficient, more productive and more capable of addressing customers' needs. But realizing those opportunities depends on policymakers coming together to support a forward-looking framework that ensures data -- like other commodities before it -- can be a source of opportunity and prosperity for people in the U.S. and throughout the world.
