It may not seem important, but it is.

The global economy increasingly depends on data flowing freely across borders.

But some policymakers assume that storing data domestically is a sensible way to protect their citizens’ privacy or security.

In other cases, governments do it for nationalistic or authoritarian purposes. Either way, and in the end, it’s self-defeating.

Restricting data flows damages economies by inhibiting trade, lowering productivity, and raising prices, according to a new report from Washington-based Information Technology and Innovation Foundation (ITIF).

Innovations powered by technologies such as cloud, Internet of Things, artificial intelligence and blockchain don’t just benefit from the movement of data across international borders, they depend on it.

In fact, the number of nations with regulatory barriers preventing that from happening has more than doubled in four years — from 32 countries in 2017 to 66 now, says the ITIF, a think tank for science and technology.

Together, those countries have implemented 154 measures that confine data within their borders — a  concept known as “data localization” — up from 67 such barriers in 2017.  

Using econometric modeling, ITIF has found that restricting data flows with these  localization requirements has a statistically significant impact on a nation’s economy— sharply reducing its total volume of trade, lowering its productivity, and increasing prices  for downstream industries that increasingly rely on data. 

“Data localization is on the rise, and the restrictions make it increasingly costly and complicated to do business in the digital economy,” said Nigel Cory, ITIF’s associate  director of trade policy, who co-authored the report.

Surveying the international policy landscape, ITIF has identified 154 cases of explicit or de facto data-localization regulations currently in effect in 66 countries — plus another 34  policies that countries are considering but have not yet enacted.

Information Technology and Innovation Foundation graphic on International Data Flow.

The most data-restrictive countries in the world are China, which has 29 localization measures in force; India, which has 14; Russia, with 9; and Turkey, with 7.  

Using a data-restrictiveness index derived from OECD (Organization for Economic Co-operation and Development) data on product market regulations, ITIF estimates that a 1-point increase in a country’s data restrictiveness reduces its gross trade output by 7%, slows its productivity by 2.9%, and increases downstream prices for data-reliant industries by 1.5% over five years.  

“China is the best example of how data-localization policies are self-defeating,” said Luke Dascoli, an economic and technology research assistant at ITIF.

“In the five-year period from 2013 to 2018, it added eight new data localization measures. That contributed to its data-restrictiveness score increasing in our model by 0.25 points.

“Based on that, we estimate that China’s data restrictions have decreased its trade output by 1.7 percent and its productivity by 0.7 percent, while increasing prices 0.4 percent among downstream industries that rely on data.

“In that respect, the Chinese government is unwittingly throwing sand in the gears of its grand plan to dominate the industries of the future.”  

The ITIF concludes that like-minded nations should work together to stem the tide and build an open, rules-based, and innovative digital economy. To that end, ITIF offers broad  recommendations:

To advance global data governance: Policymakers should build “interoperability” between different regulatory systems; create health data-sharing frameworks; make the APEC Cross-Border Privacy Rules system a global model for data governance; develop a “Geneva Convention for Data”; and improve legal mechanisms for cross-border requests for data related to law enforcement investigations.

To promote digital free trade: Policymakers should support strict rules that protect data flows and prohibit data localization in e-commerce negotiations at the World Trade Organization; create tools to retaliate against countries that enact digital protectionist rules; and pursue new digital economy agreements, such as those involving Australia, Chile, New Zealand and Singapore.  

For the more than 80% of technology-driven startups with plans to scale internationally, progress can be slowed by restrictions on outbound data flows and challenges in accessing international technology solutions.

Localization regimes also make the country a less attractive destination for foreign investment and local setup, as companies are reluctant to subject themselves and their investments to onerous and costly localization requirements. 

This in turn impedes a country’s ability to innovate, to grow, and to benefit fully from the growth of the digital economy.

“Data localization undermines the potential for an open, rules-based, and innovative digital economy,” said Cory.

“Policymakers should update their countries’ laws to address legitimate data-related concerns — but they also should ensure that people, firms, and governments can maximize the enormous societal and economic benefits of data and digital technologies.”  

“The pandemic made clear that data flows are critical to the global economy. The task now is to ensure that the digital economy remains an engine of economic growth and recovery,” Cory concluded.

“Thankfully, some countries share that goal and are collaborating on new agreements, frameworks, and legal mechanisms to promote data flows …

“The onus will be on like-minded partners such as Australia, Canada, Chile, Japan, Singapore, New Zealand, the United States, and the United Kingdom to press forward in developing these constructive alternatives to data localization.”

Sources: Information Technology and Innovation Foundation, Microsoft News