How to regulate cross-border data without creating barriers to growth

Trade economists have long recognised that domestic regulations can affect international trade, even when restricting trade is not their purpose. As more economic activity becomes digital, some of the barriers to international commerce are turning up in less familiar places.

Data regulation is a good example. Businesses routinely move information across borders to supply services, manage supply chains and operate across multiple markets. Yet the rules governing those flows are mostly set nationally, and governments have become more active in regulating where data can go, where it must be stored and how it can be used.

Those rules serve important purposes. Governments have responsibilities around privacy, national security and consumer protection. Done right, these regulations can boost cross-border trade through increased trust in digital trade.

The problem comes when national approaches make it harder or more expensive for businesses to operate across borders.

For a trade economist, this raises a familiar question in a new setting. What are the economic costs attached to data regulation — and can governments achieve their policy objectives at a lower economic cost?

When data rules become trade barriers

The effects are easiest to see with data localisation. Requiring a company to store or process information domestically can mean duplicating infrastructure that already exists elsewhere. Restrictions on transfers can prevent businesses from moving information between operations in different countries. Differences between regulatory systems can add another layer of complexity for firms serving multiple markets.

None of these measures is necessarily intended to restrict trade. But intention is not what determines their economic effect.

The additional requirements raise the cost of cross-border digital trade and, in turn, reduce its volume. And as data becomes embedded in more economic activity, the effects are no longer confined to technology companies or explicitly digital services. They reach into financial services, logistics, manufacturing and the global value chains connecting them.

This is why cross-border data regulation increasingly belongs in the trade-policy conversation.

The costs can be substantial

Modelling by the OECD and World Trade Organization gives a useful indication of what is at stake.

At one extreme, they model a world of “data autarky”, in which economies fully restrict cross-border data flows. Global GDP falls by 4.5%, while exports decline by 8.5%.

The modelling also finds a large difference between targeted restrictions and economy-wide localisation combined with transfer bans. The latter produces an impact almost nine times greater. Removing existing localisation measures, meanwhile, increases both GDP and exports, with larger gains for low-income economies.

These results make the policy choice more interesting than a simple argument for deregulation. Safeguards have value: without confidence in how data is treated, businesses, consumers and governments are unlikely to support unrestricted flows. But the way those safeguards are designed has an economic price.

The relevant question is how much friction is actually necessary to achieve the policy objective.

Behind-the-border policy, cross-border impacts

We have seen a version of this problem in our own research on another part of the digital economy.

Oxford Economics recently examined for the International Chamber of Commerce the potential effects of Article 12AA of the UN Model Double Taxation Convention. The provision affects the treatment of withholding taxes on digital cross-border services.

It has nothing directly to do with data regulation. But it illustrates a broader issue: behind-the-border policies developed to address domestic concerns can change the economics of supplying digital services internationally.

Our modelling found that widespread adoption of Article 12AA could reduce developing countries’ cross-border services exports by around 4.2%, alongside effects on foreign investment, productivity and GDP.

These knock-on effects reduce public revenues, to the point that it completely negates the direct revenue from the higher taxes.

The parallel is useful because many of the policy decisions affecting digital trade are no longer made as trade policy. Tax authorities, privacy regulators, competition authorities and technology ministries have their own objectives and mandates. Yet the businesses affected experience the combined consequences.

For governments seeking to participate in an increasingly digital global economy, that creates a coordination problem. A country can pursue openness through its trade policy while introducing new frictions elsewhere.

Building the evidence base to support data policymaking

Cross-border data policy will inevitably involve choices between competing objectives, and countries will not always strike the same balance.

Economics cannot tell governments how much weight to put on privacy or national security. But it can tell them that different ways of pursuing those objectives come with different costs.

However, those costs are often poorly understood, making it difficult for policymakers to assess the trade-offs on the basis of evidence rather than conjecture. Oxford Economics helps governments and businesses quantify these impacts, compare alternative regulatory approaches, and understand their implications for trade, investment, productivity, and economic growth.

These trade-offs are particularly relevant in Asia-Pacific. Governments across the region are investing heavily in AI and the wider digital economy, while also seeking to attract internationally integrated businesses through China+1 strategies. For many of those businesses, the ability to move data reliably across borders is simply part of operating internationally.

Trade policy in Asia has spent decades trying to reduce the friction of doing business across borders. As more trade and economic production depends on data, governments need to be careful that rules written elsewhere do not quietly put that friction back.

Explore more insights from our Economics in Tech Policy series, examining the economic implications of technology policy across APAC.