This paper examines whether restrictive data policies impact trade in services over the internet. We have collected comparable information on a variety of policy measures that regulate data for a wide group of countries for the years 2006-2016. This information is compiled in a weighted index that assesses the restrictiveness of these countries’ data policies. We distinguish between policies regulating the cross-border movement of data and policies regulating the domestic use of data. Using econometric estimations, we show that strict data policies negatively and significantly impact imports of data-intense services. Therefore, countries applying restrictive data policies, in particular with respect to the cross-border flow of data, suffer from lower levels of services traded over the internet. This negative impact is stronger for countries with better developed digital networks. The results of our analysis are significant and hold for various robustness checks.
Corresponding authors: firstname.lastname@example.org, Senior Economist at ECIPE & Université Libre de Bruxelles (ULB), ECARES, Avenue des Arts 40, 1000, Brussels; Martina Francesca Ferracane, email@example.com, PhD candidate at Hamburg University, Young Policy Leader Fellow at the European University Institute (EUI) and Research Associate at ECIPE. We thank Giorgio Garbasso, Nicolas Botton, Valentin Moreau and Cristina Rujan for their excellent research assistance. Comments from Ben Shepherd, Sébastian Miroudot, Sebastian Sàez, Cosimo Beveralli, Ruchita Manghnani and Rebecca Freeman are very much appreciated. We also thank the participants of the ADBI conference on development and services, the CEP-IMF-WorldBank-WTO workshop on services, the EUI seminar on Empirical Investigations in Services Trade, and the 2018 World Trade Forum for their excellent feedback.
Trade in services over the internet has grown steadily in the last two decades and now represents a share of more than 20 percent of total trade worldwide (Loungani et al. 2017). Technological developments, in particular information and telecommunication technologies (ICT), and open regulatory regimes regarding services have both contributed to the expansion of services trade. A third factor has also played an important role in expanding the scope of cross-border trade in services, namely the global nature of the internet, which is the focus of this paper.
The global internet relies on the flow of data worldwide. Many digital services are data-intense as they employ a high amount of electronic data in their production process that cross borders multiple times before the service is consumed (Figure 1). This facilitates the trade of services over the internet. The free movement of data across borders allows services producers to source and send data where its value is best used, reinforcing their comparative advantage in digital services. However, over the years, countries have introduced policies that restrict the cross-border flow and the domestic use of data (Ferracane et al., 2018b). These policies threaten the global nature of the internet and are expected to increase the costs of trading services online. This paper is the first to assess whether data policies adversely impact trade in services over the internet.
We define data policies as those regulatory measures that restrict the commercial use of electronic data. We limit our analysis to policy measures which are implemented at the national or supranational level (such as the EU). Although there is a great number of data policies implemented by local public entities, these are not the policies on which we focus on this paper. We identify two main categories of data policies. The first category covers those policies that impact the cross-border transfer of data; the second category covers policies that apply to the use of data domestically. The former category deals with all measures that raise the cost of conducting business across borders by either mandating companies to keep data within a certain border or by imposing additional requirements for data to be transferred abroad. The latter category refers to all measures that impose certain requirements for firms to access, store, process or more generally make any commercial use of data within a certain jurisdiction.
More specifically, this paper employs an empirical approach to assess whether data policies implemented in 64 countries between 2006 and 2016 have a significant impact on imports of services over the internet. For this analysis, we develop a so-called data policy index that measures how restrictive countries are in regulating both the domestic use and the cross-border movement of data. Through an econometric specification, we relate this index with cross-border trade in services to study whether indeed restrictive data policies reduce the imports of services traded over the internet. To analyse this question, we use an advanced identification strategy to evaluate whether more data-intense services are relatively more hurt by higher levels of restrictive data policies following the methodology pioneered by Arnold et al. (2015; 2011).
The topic of data policies and services trade is new. Previous literature on data policies is limited to analysing whether data policies have a significant effect on productivity. For instance, Ferracane et al. (2018a) use firm-level data to assess whether data policies inhibit firm-level productivity performance in data-intense goods and services. The authors conclude that restrictive data policies negatively affect productivity in these (downstream) sectors. The authors also find that domestic regulatory policies on the use of data tend to have a marginally stronger impact on the productivity of firms compared to restrictions on the cross-border flow of data. One potential explanation is that policies restricting the free flow of data first and foremost impact countries’ ability to trade (i.e. import) services, which in turn affects productivity given that data is an input.
This paper focuses on whether data policies inhibit imports of services traded over the internet. To robustly assess whether different types of data policies affect trade in services differently, this paper splits up the data policy index into two sub-indexes. One sub-index merely covers restrictions affecting the cross-border (CB) flow of data, and one takes up all other domestic regulatory (DR) policies affecting the domestic use of data. To estimate our model, the identification strategy we develop relies on the intuition that more data-intense services are proportionately more affected by stricter data policies.
One additional reason for employing this identification strategy is that simple correlations show a negative link between data policies and trade in services, particularly for some technological-intense services. A substantial number of technological-intense services are also data-intense. Table 1 reports regressions as correlations for the two data policy’s sub-indexes that we later use in our regressions. The table shows that sectors such as postal and courier services, IPR, information services, R&D and audiovisual services show negative coefficients. This negative result means that more restrictive data policies are associated with less trade in these sectors. This pattern motivates us to develop a cleaner methodology to precisely identify which sectors are more data-dependent, and to eventually come up with more robust and generic conclusions regarding the impact of data policies on trade in services. To make sure this channel of reduced performance is not spurious, we provide alternative indicators of data-intensities and include different control variables for services regulation, and use different sources of trade in services data.
The remainder of this paper is organised as follows. The next section provides a short literature review discussing all relevant previous works on how data policies impact the economy. Section 3 provides the empirical strategy of our econometrical assessment and presents the various data sources for trade in services and data-intensities. This section also discusses how we construct the data policy index. Section 4 presents the results of our empirical model and robustness checks. Finally, the last section concludes and puts the empirical results in a wider policy context.
 In WTO speak, the cross-border trade of services over the internet is commonly referred to as Mode 1 trade in services, which is defined as “services supplied from the territory of one Member into the territory of any other Member” pursuant to Article I:2 of the GATS. It is worth mentioning that WTO members have so far not agreed upon a clear determination of whether the electronic cross-border delivery of a service is a service supplied through GATS mode 1 (cross-border) or mode 2 (consumption abroad).
 Restricting data flows limits countries’ ability to import digital services against lower prices and greater quality of new services and varieties, which then affects productivity. Moreover, the goods trade literature has shown that restricting intermediate inputs constrains countries’ potential to reach greater levels of productivity. See, for example, Amiti and Konings (2007) and Goldberg et al. (2010; 2009) in the case of goods.
 Note that some coefficients show a positive result which may be due to omissions of control variables such as services regulations. However, due to insufficient observations when including these controls, regressions become impossible. This also provides us with a pragmatic reason to use our preferred identification strategy of data-intensities by sector. See further in the paper.