Going with the data flow: things every business should know

What is digital trade?

The term “digital trade” refers to any and all places where trade and digital activity meet. ?

If you send a digital invoice, live-streaming media content, email reports, use a digital payment system, or ship goods through customs using a digitalised compliance system then you’re engaged in digital trade. In short, “digital trade” matters to all businesses with international suppliers, customers or clients.

I find it helpful to think about digital trade under three separate headings: (a) digitalising and automating trade administration to make it more efficient and transparent for everyone concerned; (b) how technology is changing the way that businesses trade; and (c) how digital trade is made safe and secure for users.?I might well take a longer look at each one in subsequent blogs.?

But the common thread throughout is data.??

Data as the common thread

All digital trade activities rely on cross-border data flows.?This was something I discussed recently in the specific context of financial and related professional services at the launch of a report by our collaborative partners, Flint Global, for the City of London Corporation, focusing on The Practical Implications of Digital FTA Provisions on the UK Financial Services Sector.

There were so many highlights at the City of London Corporation’s inaugural event of the same name. But, to me, the pressing need from businesses for both certainty and dynamism from international data flow regulation is a thought I shall be mulling over for a long time to come.

Trade talk – barriers to data flows are barriers to trade

Our team spends a lot of time talking to businesses and governments about barriers to trade.

When considering data flows, the top three to have on your radar are: tariffs; regulatory fragmentation; and data localisation.

Tariffs

Tariffs are often seen as the most traditional barrier to trade; they don’t currently apply to data flows but that could change.

Since 1998, the members of the World Trade Organization (“the WTO”) have been signed up to a rolling “eCommerce Moratorium”, committing not to charge customs duties on data moving across borders. However, a number of members – notably India and South Africa – are increasingly unhappy with the current arrangement, raising questions as to whether the Moratorium will be renewed at the next WTO Ministerial Conference (expected to take place in 2023).

Regulatory fragmentation

These days, tariffs often take a back seat to concerns around the limitations placed on trade by non-tariff measures. Regulatory fragmentation is in itself a potential hurdle to businesses expanding in overseas markets.?The harder it is for people to comply with mismatched or even directly contradictory regulation in different countries, the less likely they are to bother trading.?

This issue is particularly acute in the context of regulation of personal data.

Personal data protection overlaps with policy issues around privacy, national security, sovereignty, and the commercial value of data. Very different approaches have developed in the data cultures of three of the most important stakeholders in the debate - the European Union, the United States and China – with numerous commentators referring not just to fragmentation but indeed “balkanisation” of the internet as a result of the localisation requirements imposed on personal data.

Data localisation

Data localisation requirements do what they say on the tin – require data to be stored and used within, or routed through, a particular geographical location. This constrains the ability of overseas companies to serve clients and may mean they need to set up in-country servers in order to conduct business.

A recent report by the OECD shows that data localisation measures affecting all types of data are increasing rapidly. Using OECD data a 2021 ITIF study “estimate[d] that a 1-point increase in a country’s data restrictiveness reduces its gross trade output by 7 percent, slows its productivity by 2.9 percent, and increases downstream prices for data-reliant industries by 1.5 percent over five years.”

That said, many regimes which impose data localisation requirements do allow exceptions, where data can be transferred across borders if particular conditions are met. For example, under the EU’s General Data Protection Regulation (“the GDPR”), personal data can be transferred to countries outside the Internal Market for which an “Adequacy Decision” has been issued, recognising that functional equivalence may be achieved by a different regime. It may also be possible to transfer data within a company group or under contractual arrangements, if these transfers meet particular criteria. Understanding precisely when and how such transfers can take place is important to of all aspects of data-handling, including storage and so needs to be considered e.g. when appointing a cloud storage provider.

How can trade arrangements help?

Digital provisions in trade agreements could be better.?Historically, they have not provided additional market access; instead they lock in the status quo and prevent the creation of new barriers to trade – for example by ensuring that discriminatory regulations cannot be introduced.

More recent trade agreements often include provisions which purport to remove barriers to data flows and introduce provisions to prevent data localisation requirements. However, in practice many countries claim that legitimate public policy exceptions disapply these provisions (for example to address national security, privacy, and prudential and other regulatory or law enforcement concerns).?

Which isn’t to say that the existing provisions are without value. They, and indeed the very fact of negotiations themselves, can play an important role in fostering regulatory dialogue. But if we want to get serious about guaranteeing the free flows of data then we have to see digital provisions beefed up.??????????

Harnessing the tide

Successful digital trade relies on the ability to navigate a host of data channels. The sheer pace of change in the digital landscape compounds the importance of aligning trade and data aspects of a business’s international strategy.

Just to stay compliant, businesses need to be aware of digital policy developments and regulations.

But there is scope to go beyond mere compliance, and structure operations to minimise potential constraints. Indeed systems such as the GDPR were actually designed to facilitate the responsible use of data: fully engaging with what data regimes do permit frees businesses from the potential of adopting an overly cautious approach that fails to make use of data in ways that are permitted.

As governments grapple with balancing data protection with fostering innovation and boosting trade, now is the ideal time for businesses to engage with regulators and trade departments to drive future policy to support digital trade.

Explore the latest thinking from EY's Trade Strategy team?here.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.?