Addressing the Costs of Data Localization Requirements – Can APEC Lead the Way?

Ed Brzytwa
Information Technology Industry Council

At the Asia-Pacific Economic Cooperation (APEC) forum in the Philippines, government officials, industry representatives (including ITI), academics, and other stakeholders have been discussing how to advance regional economic cooperation and break down barriers to trade and investment in the Asia-Pacific region. During the forum’s three weeks of meetings and sessions, these experts have been communicating with their constituents at home as well as with each other primarily through digital means. Their communications burst through the Internet all over the world at the speed of light in the form of digitized data crossing borders many times over. That amazing connectedness acts as a metaphor for the larger transformations to our world. ITI last week raised awareness of the threat that data localization requirements in the region and around the world pose to that connectedness, economic growth, trade, investment, and job creation.

Today, billions of people go online to work, exchange ideas, explore, learn, engage in commerce, or connect with friends and family, all while taking for granted that their online activities know no boundaries. However, this way of life is increasingly at risk. Some experts argue that government interventions to make the Internet less interoperable are creating a 'splinternet,' wherein the online world is divided into smaller pieces.

Data localization measures – government mandates to store, route, process, or otherwise use data within the territory of a country – contribute significantly to this fragmentation. Whether the requirements are designed to exert greater government control over data flows or to boost local companies in the short-term, they are detrimental to innovation, job creation, and economic growth--both locally and globally. Data does not recognize borders. Instead, it crisscrosses the globe through data centers and resides in the cloud, often by design for efficiency or as a safeguard in case of a disaster or technical failure. Restrictions on the movement of data dilute the lifeblood of the global economy.

APEC is a key international organization for discussions on trade and investment policy issues in the Asia-Pacific region. Its 21 member-economies account for approximately 41% of the world’s population, 54% of the world’s total GDP, and 44% of the world’s trade.

APEC has an opportunity to play a leadership role in raising awareness about the costs of data localization and in presenting better policy options to the rest of the world. A number of APEC economies, including China, Russia, Indonesia, and Vietnam, intend to implement requirements to keep personal data about their citizens within local data centers in their territories and to restrict the flow of such data out of their territories. This means that both foreign and domestic companies would not be able to process or analyze data in lower-cost, highly (and likely more) secure cloud servers available all over the world. Instead, they would have to use local data centers that may or may not meet global standards for privacy and security.

However, rather than helping their domestic industries – whether in the tech sector or in other industries – these measures would actually weaken economic growth and undermine the ability of local companies, particularly micro-, small-, and medium-sized enterprises (MSMEs), to grow and innovate. Data localization requirements lead to increased costs for both companies and consumers by making the use of local data centers more expensive. Under these circumstances, foreign companies are likely to exit or avoid the market, thereby leading to a less competitive environment where domestic companies can capture greater market share, raise prices, and have less of an incentive to invest. Regulators responsible for these requirements may not intend to produce these economic impacts, but recent studies from the Organisation for Economic Co-operation and Development (OECD) and the European Centre for International Political Economy (ECIPE) demonstrate such effects.

APEC has long-standing goals of promoting greater economic integration and increasing economic growth among its 21 members. To achieve these goals, APEC has worked to break down barriers to trade and investment among its members. Given the economic scenario described above, data localization requirements are significant obstacles in this regard. This year in APEC, the Philippines as host country has focused on helping MSMEs access global and regional markets through digital means. The data localization requirements that some APEC members would like to put on the books would, however, would disproportionately raise costs for MSMEs, making it difficult for these enterprises to comply with the requirements and depriving them of meaningful opportunities to go global.

What can APEC do to halt the increasing and concerning trend of data localization? At an event on addressing localization policies on Friday last week, ITI recommended that APEC work toward crafting commitments for ministers and national leaders to make during their annual meeting in November, this year in Manila, as they consider how to achieve the Philippines’ primary objective of making economic growth in the region more inclusive and advancing APEC’s long-standing goal of greater regional economic integration:

• Undertake a study on the macro and micro costs of data localization in APEC economies and the impact on regional economic integration.

• Together with the OECD, provide new guidance to APEC economies on how to ensure that government officials coordinate with one other when developing regulations and take into account the trade and investment impacts of proposed regulations concerning cross-border data flows.

• Clarify that the annual APEC Leaders’ anti-protectionism pledge (see paragraph 8 of the 2014 APEC Economic Leaders Declaration) covers digital protectionism and therefore data localization requirements.

• Craft commitments for APEC Leaders to avoid requirements to store data locally or condition the provision of a service on building a local data center.

Resolving these challenging issues will present significant opportunities and benefits to innovative companies, MSMEs, and people all over the world. ITI will work with other stakeholders in APEC to ensure that the Internet remains a durable, evolving, life-changing innovation for today’s users and an even greater number of users across the world in generations to come.

This article was first published on: http://www.itic.org/news-events/techwonk-blog/addressing-the-costs-of-data-localization-requirements-can-apec-lead-the-way and appears here with the express permission of the author

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