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.
2. Previous Literature
The economic literature that discusses the link between data policies and trade in services is scarce. This is probably due to the fact that this topic is relatively new. Yet some elements of the triangle relationship between data flows, data policies and trade in services have been researched to some degree.
A first set of research papers investigates the economic role of data from a generic point of view. Manyika et al. (2016) for instance claim that the contribution of cross-border data flows to GDP has overtaken that of flows in goods in the current wave of globalisation. The study states that data flows today account for $2.8 trillion of the total increased world GDP over the last decade, thereby exerting a larger impact on growth than traditional goods trade. Interestingly, this work does not dedicate special attention to the inter-linkages that exist between data flows and trade in services but takes the former as being a separate channel that impacts the economy independent from services. Earlier work from Freund and Weinstein (2002) did, however, point to the facilitating role of the internet on trade in services. They state that an increase in internet penetration by 10 percent has the effect of increasing the growth of services trade by 1.1 percentage point for imports and 1.7 percentage point for exports. These conclusions are closely related to the question of whether data flows influence trade in services to the extent that restrictions on data can be seen as a restriction on the use of the internet.
A separate strand of the literature focuses on the mapping of the various policies related to data. A first attempt was performed by Stone et al. (2015) which covers measures of data localisation requirements only. Their study also notes that data flows enhance the efficiency of trade for specialised services firms both domestically and across borders. These services firms include data hosting, processing and mining. However, the study does not underscore explicitly the economic importance of the free flow of data (and therefore also data policies) on many other data-intense services such as information and business services. Furthermore, work by Ferracane (2017) further categorises the different forms of existing data policies that affect the cross-border movement of data and surveys all data policies applied across 64 major economies to show that data restrictions are applied in many countries, in different forms, and on different types of data. Finally, Ferracane et al. (2018b) develop the Digital Trade Restrictiveness Index (DTRI) which assesses the level of restrictiveness for different types of data policies. An expanded version of this index is used in the empirical part of this paper.
A final strand of the relevant literature assesses more specifically whether restrictions on the cross-border movement and the use of data have a knock-on effect on productivity. Bauer et al. (2016) is the first work on this link and it focuses on sector-level productivity. This work investigates how some data restrictions affect productivity in data-intense sectors for a basket of emerging economies and the European Union (EU). Their index of data restrictions is composed by “augmenting” an existing index of product market restrictions (PMR), as measured by the OECD’s PMR database, with additional regulatory restrictions on data. A more rigorous assessment of this empirical relationship is provided by Ferracane et al. (2018a). Using firm-level data across a set of developed countries and by constructing a full-fledged restrictiveness index on data policies, the authors confirm the conclusion that restrictive data policies significantly harm the productivity of firms active in data-intense sectors, with stronger evidence for restrictions on the domestic use of data.
To date, however, there is no in-depth empirical examination on how data policies affect services traded over the internet. This is surprising given the extent to which trade in services today relies on flows of data (see Bauer et al., 2016) and considering the sizable portion of all trade in services being traded over the internet.
Recent work by Goldfarb and Trefler (2018) does, however, discuss the potential theoretical implications of data policies, such as data localisation and privacy regulations, on international trade and how these policies relate to the existing models of international trade. Although this discussion is put in a wider context of Artificial Intelligence (AI), the authors make clear that an expanded AI industry, in which data flows are an important factor, would have clear implications for services trade. Similarly, Goldfarb and Tucker (2012) point out that privacy regulations may harm innovative activities, particularly in services. They present the results of previous case studies they undertook with respect to two services sectors, namely health services and online advertising. In short, both studies show that there are strong linkages between the effective sourcing and deployment of data, the services economy and trade in services.
 Another recently developed report from the USITC (2017) has described and scrutinised the many ways in which digital trade takes place and ends this examination with a list of policy measures relevant for data flows. Examples include data protection and privacy and data localisation rules. Other examples the USITC report includes are more indirectly related to data flows such as cybersecurity measures, censorship and intellectual property rights measures. These measures are not included in our empirical assessment but are nonetheless picked up and discussed in Ferracane et al. (2018b).
 Other channels of trade in services are according to the WTO’s GATS Article 1:2: Mode 2, which covers services supplied in the territory of one country to the service consumer of any other country (also known as “consumption abroad”); Mode 3, which includes services supplied by a service supplier of one country, through commercial presence, in the territory of any other country (also known as “commercial presence”); and finally Mode 4, services supplied by a service supplier of one country, through the presence of natural persons of a country in the territory of any other country (also known as “presence of natural persons”).