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Unnecessary Barriers to Cross-Border Data Flow Create Considerable Obstacles to Global Trade

By Andreas Hellmann | November 29, 2016

The rise of the digital economy via the Internet, wireless services, emails, and smartphones, has changed the way people communicate and do business. The internet is the new marketplace for businesses and people to buy, sell and interact. In the United States, over ninety percent of adults have a cell phone, and of those, over fifty percent have smart phones. Every phone call, Face-Time conversation, and online purchase requires the transfer of data from point A to point B and sometimes has to go to point C. 

The transfer of information is data flow, and data transferred across country borders is cross-border data flow. With the “Internet-of-Things,” machines communicate over the internet like TVs, smart home applications and vehicle automation require the transfer data over the internet, especially using wireless services.

Far from being exclusive to high-tech firms, data flows are used by almost all businesses and customers. The internet is designed to connect not only one country, but the world so cross-border data flow is very important in our everyday life.

Innovations become more popular in the digital world, some governments are concerned about the unrestricted flow of data across borders.

Governments of nations across the globe are looking into the prospect of restricting the free flow of data between countries, thus hindering users’ ability to connect with others and threatening the economy.

The fundamental problem that the United States has to address is the following: The Internet and similar technologies are supposed to promote open flows of information and trade. However, these networks span the borders of very different countries with very different priorities and laws. Some value freedom of the press, while others do not. Some believe in strong privacy regulations on how businesses can use consumer data, while others prefer a free for all. Some are democracies, others autocracies.

These differences lead governments to regulate information flows to protect and promote their own individual interests and values, even if this means limiting free trade or other economic disadvantages.

The European Union has sought to make U.S. companies respect its understanding of privacy laws, including the so-called “right to be forgotten.” States such as China have tried to get domestic and foreign e-commerce firms to provide information and access that would allow them to keep an eye on what their citizens are doing and to block certain kinds of information flows. Both of these, for different reasons, are at odds with American values.

The answer to these concerns is not to erect more barriers, but to get rid of the regulatory ones that already exist to create a business-friendly environment

Data transfer is inherent to communication and business transactions.  Without the free flow of information we will see delays in innovation and increased business costs, and also delays, stumbling blocks, and increased costs for personal communication.

Karen Kornbluh, the former U.S. ambassador to the OECD, argues that foreign jurisdictions pose an increasing threat to open flows of data across networks such as the Internet. They impose localization requirements, which force companies to uphold personal data within national borders and make it available to government and law enforcement officials. This is unnecessary, and dissuades innovation for U.S. companies. Rather than restrict communication and commerce, governments could leverage data by reducing regulation and negotiating agreements with other countries promoting cross-border data to reduce costs and speed up the movement of goods through customs.

All sizes of business are increasingly using the Internet in innovative ways.  For instance, the Internet has given companies the ability to harness the intelligence of users by interacting with customers, suppliers and other stakeholders in product development efforts. Crowdsourcing and crowdfunding for specific projects are evolving cross-border data based opportunity that allows people from all over the world contributing to tasks or create new projects on a global standard.  For all these tasks and undertaking it is very important to all of these new business models that data and information are able to move freely across borders.

Large-scale data retention of a customer’s personal information is not a typical practice of companies.  Maintaining this data is not typically part of a business model, not only because of storage costs, but also increases vulnerability of private information.

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The Internet plays a vital role in international trade

Cross-border data flows are creating opportunities for small and medium-sized enterprises and are of vital significance for large companies to participate in the global economy. These companies use the Internet to reach customers globally wherever these have access to the Internet, can process payments in an acceptable way, and, for digital products, deliver them online. Even professional sellers on eBay or amazon are almost as likely to export goods and services as large professional companies and have a 54 percent survival rate compared to 24 % offline businesses. Access to websites like Google and Amazon connects buyers and sellers and allows them to settle on desired goods at desired prices. It also allows for more seamless communication and delivery of goods across the border. Online advertising is also often a necessary precursor to the transactions that spur greater international trade.

Cross-border data flow therefore increases the competitiveness of the whole economy and makes it more flexible, less dependent on domestic markets.

For example, in 2013, 72 % of US services exports to the EU alone were digitally deliverable services worth $140.6 billion and $383.7 billion globally. Digitally deliverable services like consulting, engineering, and finance are often the start for the production of other goods and therefore start a value-added chain. The following graph show that taking into account the value of digitally deliverable services in goods and services exports increases U.S. exports of digitally deliverable services to the world from $383.7 billion to $569.2 billion in 2012, equivalent to 32 percent of total U.S. exports. For the EU, exports of digitally deliverable services to the world increase from $465 billion to $748.8 billion, representing 24.8 percent of total EU exports.


Figures: OECD


Cross-border data is also the best aid for developing countries

Many times developing countries do not have the resources to bear the costs of entering into a new market, restricting their global reach. Providing strong rules to protect, and open up cross-border data flows is vital for the success and the growth of these companies.

Improving Internet access and cross-border data flows can be particularly important for fast-growing developing countries. According to a World Bank report, access to the Internet can reduce geographical and financial isolation from major markets by 65% and greatly customer acquisition costs overseas.

Although Africa currently has low levels of internet penetration, it also has some of the highest internet use growth rates. Internet policy issues are increasingly important to Africans, and African internet policy wonks are joining the call for cross-border data access reform.

Entrepreneurs in developing countries also use the Internet to overcome underdeveloped banking sectors by using mobile banking services to manage their international transactions.

Photo credit: Flick Eric Fischer