Regulating at the international data and technology frontier, together
International regulatory cooperation could foster economic growth and deeper sharing of digitally stored information as modern technology evolves
‘Data’ is the electronic storage of information, and having more and better quality data should increase a country’s ability to make valuable goods and services that it can sell to foreign consumers. Britain’s Open Data Institute recently published scoping research by me and my former colleagues on three priority issues for data and trade competitiveness: ‘factor conditions’, or how domestic arrangements affect the availability and use of data at home; ‘market access’, or the ease with which firms trading with data across borders can sell into foreign markets; and international regulatory cooperation (IRC) between countries that could improve the compatibility of their approaches to the collection and use of data, lowering friction for firms trading with electronically stored information and boosting the gains from greater international data access. I summarise our work here, and point to what countries considering these issues could do next.
The degree to which countries give each other access to data they control has become a priority for trade deals that have been negotiated in recent years, like the United States-Mexico-Canada Agreement, which addresses open government data, data privacy, and restrictions on cross-border flows. Chile, New Zealand, and Singapore recently signed the Digital Economy Partnership Agreement (DEPA), which seeks to create deep digital trading relationships between the signatories and uses data stipulations — for open data, high value data, and in open banking — to underpin that ambition. In our ODI blog on the growth of data stipulations in trade deals, we discuss these developments.
Despite international data flows rising by 45 times between 2005 and 2016, according to the telecommunications research company, Telegeography, there is considerable friction preventing firms across the world from sharing data across borders in economically productive ways. The European Centre for International Political Economy in Brussels has shown that restrictions on cross-border data flows have been accumulating across the world for decades, as shown by the graph below.
Some of these restrictions are necessary for protecting privacy, but others are driven by public preferences for data to be stored domestically. A survey in 2014 by Canada’s Centre for International Governance Innovation found that majorities in countries like Indonesia, Mexico, and others, simply wanted personal data about them to be stored nationally.
As technology evolves and the spread of data-hungry artificial intelligence invites regulatory responses, such frictions will get worse. But if countries had better schemes between them for discussing such changes, and considering regulation in ways that make it easier for firms to work and invest with data and associated technology across borders, they might hold such frictions down. Many countries, and especially technologically advanced ones like, say, Australia, Britain, Japan, South Korea, could use international regulatory cooperation (IRC) to increase mutual understanding, anticipate technological change, and flatten regulatory humps that reduce innovation-encouraging data flows.
Knowing more, making more, trading more
In my report for the ODI on the links between data infrastructure and trade competitiveness, I brought together two policy areas: how domestic conditions for data collection, sharing and use affect the amount and quality of data available to companies and entrepreneurs; and what the classic trade competitiveness literature, particularly that of the World Bank’s diagnostic toolkit, says about market access and factor conditions.
The creation, understanding, and use of information has long been a parameter in how rich a country is. It is not a coincidence that socioeconomic advancement has historically been associated with the depth of a country’s national library, like the Library of Alexandria in antiquity, the British Library, and America’s Library of Congress. But once information began to be switched from books that can only be used by a limited number of people, for a limited time, to data— storage in electronic pulses —the possibilities for using it to address more problems, for longer periods of time, using the best minds and organisations available, expanded considerably.
When a company wants to give access to data that it holds to a foreign firm, sends a copy of some data abroad when providing a service, or sells the control of a database to an organisation abroad, international trade with data takes place. And these interactions involve different degrees of access — with data sometimes being the sole focus, and other times being what holds the information that enables the provision of a service — that are changed by restrictions on users. When McKinsey and others claim huge numbers like cross-border data flows in 2014 being worth USD2.3 trillion, they’re estimating the value of data being used by parties in such interactions. But in a report for the ODI and the Bennett Institute for Public Policy on the value of data, I and my fellow researchers discussed why it is hard to be confident in such valuations; and the report’s lead academic, Professor Diane Coyle of the University of Cambridge, has worked with David Nguyen of Britain’s National Institute of Economic and Social Research on the challenges in measuring cross-border data flows and cloud computing.
The complexities of growth
The storage of economically productive information in data should mean that an economy is able to create more complex and useful things, as long as it can find ways to turn that information into valuable products and services. The Economic Complexity Index measures the amount of knowledge — information, plus the combination of skills across an economy to make the thing in question — that goes into making a country’s products, and finds that the greater depth of knowledge used in its economic output, the wealthier it is likely to be. If information becomes easier to pass between agents in an economy, that should raise the chances of it being combined in new and better ways, a bit like Lego bricks.
But the use of information between multiple parties to a transaction can suffer from many problems. If I have a dataset that is well structured and valuable, I’ll probably want to keep it away from you as revealing it could mean that I lose the competitive advantages that come, say, from knowing more about how consumers are buying things in shops. A company may hide data on the real performance of its products to make them look more attractive, duping consumers or making them fear buying anything at all. And if two companies engage in the research and development of something that involves valuable and sensitive information, they may not trust each other to use it in mutually beneficial ways, leading them to avoid collaborating in the first place. These problems are all part of the economics of information — which I wrote about for the ODI’s data sharing model — and they might be worsened by the more that an economic activity comes to rely on the collecting, analysis, and sharing of data.
Sending data across borders during international trade creates an extra level of problems. As we pointed out in our ODI blog on the questions that Australia faces in its international data strategy — how should the country coordinate between the APEC Cross-Border Privacy Rules, GDPR adequacy, US standards, and its trade with China? — many countries are faced with navigating approaches to data collection and use across what the Centre for International Governance Innovation called the ‘four internets’: Silicon Valley’s Open Internet; Brussel’s Bourgeois Internet; Beijing’s Authoritarian Internet; and Washington DC’s Commercial Internet. The Fletcher School’s Digital Planet reports have argued that there are wildly different levels of trust in various ‘digital ecosystems’ around the world, as mapped by the graph above. When a company does not know how the data it controls is going to be used abroad, believes that it does not understand a business culture elsewhere, and doubts that it could get compensation for data use that violates its expectations, it is much less likely to engage in cross-border exchange that relies on sharing data. This could mean that trade with data behaves like trade in services, where institutions and business networks create trust that facilitates trade, as we discussed in our ODI blog on what affects the flow of data in international trade.
The nature of data collection and use is also likely to keep changing, meaning that countries will change regulations as new problems arise. America’s National Bureau of Economic Research has described the many ways in which the economics of artificial intelligence may alter the nature of work, anti-competitive collusion, and much else; and London-based OpenCorporates have predicted a huge rise in the quantity and speed with which company registrations are made, used, and disappear, making them more like fireflies in the economy rather than predictable, traceable entities that hang around for regulators.
These changes could have profound effects on the ways that data is used and shared across an economy, inevitably attracting the attention of governments. In our ODI blog on regulation and combinatorial innovation, we discussed how countries may view the uncertain technological frontier and its applications in sensitive areas like medical research and healthcare, in two ways: one, through ‘permissionless’ innovation — allowing entrepreneurs to innovate without fear of punishment, with governments instituting regulations as problems arise, as advocated by Adam Thierer of America’s George Mason University; or two, by anticipatory regulation, in which governments seek to predict and test technological change alongside regulatory evolution.
Searching for solutions
The problems in economic exchange that involve data, and the extra hurdles in cross-border flows presented by technology, culture, and domestic regulation, suggest the need for international collaboration. In our ODI blog on the options for international coordination over the collection and use of data across borders discussed at the World Trade Organization’s 2019 Public Forum, we relayed ideas for using the WTO, UN bodies, developing industry standards, and undertaking more ambitious trade deals.
International regulatory cooperation could address some of the problem that arise in cross-border data flows. IRC is a broad hold-all for the different ways in which countries can coordinate around respective regulations, from harmonisation — which is the European Union’s approach over GDPR — through agreements like the APEC rules that at the regional level encourage alignment of rules over time, down to loose memoranda of understanding and fora for discussion. Forms of IRC that foster collaboration — and are more than just stipulations in trade deals— could raise market access for companies exporting, say, digital services.
In two blogs at the ODI, we laid out why IRC matters to trade and the benefits it could have for cross-border data flows, as well as the approaches available. Applied to data regulations and with the aim of encouraging trade in mind, appropriate IRC schemes would be those that foster mutual appreciation between the countries involved as to their attitudes towards data — particularly of personal data and the use of it in sensitive areas like healthcare — generate common understanding of technology developments and how they affect data use; encourage entry by firms into foreign markets; work towards rules, norms, and standards that are transparent, stable, and can be shared or recognised as appropriate by the parties involved; and run schemes that encourage regulatory learning as companies test new ideas, often in foreign jurisdictions. In our work at the ODI, we considered hundreds of examples of IRC that might show how such principles have been applied in areas of frontier technology, and what they could suggest for collaboration over data regulations.
The International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) is a good example. According to a report in the year 2000 by the ICH, the organisation was founded in 1990 to foster global acknowledgement of the common scientific and technical standards in the development of pharmaceuticals, thereby encouraging mutual standards and processes for the approval of new drugs. A paper from 1996 by Fernand Sauer, formerly of the European Medicines Agency, describes the hurdles then existing in international innovation of new drugs and treatments, and relays the ICH’s terms of reference as being to foster ‘scientific dialogue’ on registration requirements and how they might be harmonised, and identifying opportunities for mutual recognition of research and development processes. According to the ICH, it has since gone on to establish a Common Technical Document for regulatory review across the world; publish a Medical Dictionary for Regulatory Activities that fosters use of similar terms; written over 60 guidelines on technical requirements; put in place Electronic Standards for the Transfer of Regulatory Information; and installed a process for the consideration of new pharmaceutical research, helping the ICH and participating countries to get ahead of new developments and appreciate how respective national regulators see them. The ICH appears to have fostered mutual approaches between countries over pharmaceutical approvals standards, leading to common information expectations and an appreciation of technological change, that has boosted international trade in pharmaceuticals.
In our ODI blog on the Global Financial Innovation Network, we discuss the initial steps that the network has taken to ease trade in fintech services and encourage learning between its 50 member regulators across the world’s major financial centres and beyond. It aims to ‘lower barriers for financial startups that want to enter foreign markets, helping to improve sector dynamism that benefits consumers’ and ‘govern emerging technology issues that are not restricted to one jurisdiction’. To do so, the network has run a pilot regulatory sandbox in which small fintechs enter a leading, foreign jurisdiction with the cooperation of the local regulator, and from which the firm more quickly learns about rules it needs to adapt to and the regulator gains a close appreciation of barriers to market entry. In its ‘lessons learned’ report, the GFIN states that it will write a ‘regulatory compendium’ that helps firms know how to work with regulators, and a single application form across all regulators, ahead of a planned second cohort. As we discuss in the blog, Starling Trust, a data analysis company, was attracted to the sandbox because of the frictions they hoped it would reduce in the cross-border use of data.
Coordinating for permanent change
The world’s leading economies have rearranged themselves around information technology in recent decades, and will continue to do so for the foreseeable future. Artificial intelligence applications will spread, the COVID-19 pandemic might force the use of technology for distant communicating, and governments will use more sophisticated analytics. Data will be at the centre of all of it.
These developments will continue to force their way into the questions countries ask about trade competitiveness. Many of the answers will be in their use of data regulation to affect economic dynamism at home, and how they relate to regulatory regimes abroad during trade that involves data.
Trade deals and other agreements will set the framework for data flows in global trade, but much of the flexibility towards the use of data in modern technology will come through schemes for international regulatory cooperation. DEPA has established a model for how to bring data into a modern trade agreement, and has articles on ‘financial technology cooperation’, competition in digital markets, the growth of small and young firms, and other areas, that only invite long-term cooperation. There are few models for how to do it with modern technology, but the ICH and GFIN give a good idea: through international working groups that try to anticipate technological evolution; expert discussion that develops mutual understanding; common systems that cut reporting burdens; and learning through the experience of market entry by foreign firms, using regulatory sandboxes.
For countries that can be nimble in their international trade relations, perhaps a scheme for data along these lines could be called something like the ‘Data for Economic Dynamism Network’. The DEPA signatories would be obvious participants, while countries such as Australia might like the idea of regulatory partnerships for data in trade with countries outside APEC. The United Kingdom, which has a long history of invention with data and exports many services that rely on it, could spur it with Brexit energy. Perhaps such a partnership could be spread to the European Union and the United States in time. The scheme could also relate to the multilateral trading system through having working groups at the World Trade Organization that report on developments and helps other countries adapt with a view to joining or relating in some way. Developing countries could be a priority in this.
The collection and use of data is going to affect every country’s trade competitiveness for years to come. But the use of data will keep changing as technology evolves, and countries will benefit from flexing their regulatory regimes with it — together.
