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Cross-Border Data Flows, Digital Innovation, and Economic Growth

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Cross-Border Data Flows, Digital Innovation, and Economic Growth

Forty years ago, the queen of England became one of the first individuals, and the first head of state, to transmit real-time electronic data over national borders. In 1976, just three years after the United States connected ARPANET to London’s University College and the Royal Radar Establishment in Norway, Her Majesty Queen Elizabeth II sent an email under the username “HME2.” Today over 3.2 billion people across the world have access to and use the Internet, and the flow of digital communication between countries, companies, and citizens, as a component of the “knowledge economy,” is recognized as a critical driver of economic growth and productivity. Countries adept at fostering digital activity have witnessed the emergence of new industries as well as the accelerated development of traditional sectors. However, despite the intensive and extensive growth of the global Internet, concerns over growing barriers to digital flows are mounting.

The development of the commercial Internet has occurred concurrently with a massive expansion of the global economy. Internet protocol (IP) traffic continues to grow rapidly, with 2019 traffic projected to be 64 times its 2005 volume. Global Internet bandwidth accounts for much of this growth, more than quadrupling between 2010 (<50 terabytes per second) and 2014 (>200 terabytes per second). More importantly, total cross-border Internet traffic increased 18-fold from 2005 to 2012.

This cumulative growth impacts all facets of national economies, not just their budding technology sectors—in fact, an estimated 75 percent of the Internet’s benefit goes to companies in traditional industries. A wide range of positive economic impacts stems from the flow of digital data across borders. For example, 61 percent (US$383.7 billion) of total US service exports were digitally delivered in 2012, and 53 percent of total US imports were digitally delivered. In absolute terms, the amount of digitally delivered exports and imports is even larger in the European Union, which digitally delivered US$465 billion in exports in 2012 and spent US$297 billion on imports. Digital trade is credited with an estimated increase in US gross domestic product (GDP) of 3.4 percent to 4.8 percent in 2011 and with the creation of up to 2.4 million jobs.

The United Nations Conference on Trade and Development (UNCTAD) also estimates that about 50 percent of all traded services is enabled by innovation stemming from the technology sector, which includes the facilitation of cross-border data flows. Data flows account for US$2.8 trillion of global GDP in 2014 and “cross-border data flows now generate more economic value than traditional flows of traded goods”, according to a recent report by McKinsey & Company.

Beyond this economic impact, the free flow of data is, itself, a significant driver of innovation. It allows the sharing of ideas and information and the dissemination of knowledge as well as collaboration and cross-pollination among individuals and companies. Internet-enabled innovation requires an environment that encourages individuals to experiment with new uses of the Internet. In places with severe restrictions that inhibit digital collaboration, people are less likely to experiment and, as a result, innovation is less likely to emerge.

Cross-border data flows acutely impact the ability of firms to conduct business internationally. In a recent report, Business Roundtable identifies different areas of activity whereby firms may transmit data across national borders to support business operations. These include interconnected machinery, big data analytics, back-office consolidation, supply-chain automation, digital collaboration, and cloud scalability.

Cross-border flows (data and voice, in particular) reduce costs related to both trade and transactions. This includes customer engagement (finding and fulfilling orders) as well as other operational costs associated with doing business. One recent report by the US ITC estimates that the Internet reduces trade costs by 26 percent on average. Additionally, small- and medium-sized enterprises that utilize the Internet to trade on global platforms have a survival rate of 54 percent, which is 30 percent higher than that of offline businesses.

The Internet was architected with protocols to identify the fastest possible route to transmit packets of data between any two points. However, increasing concerns of national governments around privacy, security, and local competition have resulted in some policy and regulatory impediments. Difficulties arise when overly restrictive regulations on cross-border data flows create trade barriers and impact business models. Overly burdensome regulations can slow or prevent business transactions, which increases costs and obstructs the delivery of products to the market.

The number and impact of restrictions that are implemented around the world appear to be increasing. The US ITC identifies localization requirements as a barrier for 82 percent of large firms and 52 percent of small- and medium-sized enterprises in the digital communications sector. Localization mandates are the most frequently identified digital trade barrier.

These restrictions impose significant business costs. The burden of compliance related to both cost and logistics can slow or stop business activity and limit innovation. For example, one analysis estimates that disruptions to cross-border data flows and services trade could result in a negative impact on the European Union of up to 1.3 percent of GDP as well as a potential drop in EU manufacturing exports to the United States of up to 11 percent. In seven different countries and regions of the world studied in one analysis, data localization requirements would also result in lower GDP. Conversely, efforts to decrease barriers to cross-border data traffic have been shown to drive growth and, based on 2014 estimates, the removal of obstacles to the flow of data could increase GDP by 0.1 percent to 0.3 percent in the United States.

As demonstrated above, the benefits of cross-border data flows are significant. However, there are still cases where national concerns over privacy, security, and local economic activity may prompt regulations. In those instances, we propose the following guidelines:

• Minimize fragmentation by ensuring that any policy actions are least-trade-restrictive to achieve legitimate public policy objectives.
• Carefully craft regulations that are as narrow in scope as possible, with clearly articulated goals.
• Coordinate globally to minimize conflicts in regulations between different jurisdictions.
• Evaluate the full costs of any proposed regulation and ensure that costs of compliance do not outweigh the quantifiable benefits.
• Adhere to trade obligations.

In summary, any limitations on cross-border data flows should address specific concrete—not merely theoretical—problems, be least intrusive, be minimally restrictive, and, if possible, be time-bound. In cases where market-driven forces justify fragmentation because of business-enhancing reasons, such as when intellectual property may be affected, segmentation should be driven by the market rather than by government requirements.

These actions would minimize any collateral damage done to the economy imposing restrictions, and they would ensure that the Internet continues to serve as a driver of innovation, economic growth, and social development.

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