The Costs of Data Localization
Subjects: Digital Economy Far-East Regions South Asia & Oceania
In the aftermath of recent revelations on mass-scale electronic surveillance, there has been a widespread proliferation of internet restrictions. One of the most drastic, yet a common policy response to the problem has been the mandatory requirement on storing critical data on servers physically located inside the country. This policy of data localisation has been considered by a number of countries including Brazil, where the multistakeholder summit NetMundial 2014 is taking place this week.
What Brazil and other countries like China, the European Union, India, Indonesia, Korea and Vietnam (who all have considered similar strategies) fail – or choose to fail – to see, is that information security is not a function of where data is physically stored or processed.
A forthcoming [released on May 15th] study by ECIPE economists shows that cross-border data flow is essential for developing economies to secure access to foreign markets and participation in global supply chains. Thus, data is a major sources of growth, jobs and new investments. Manufacturing and exports are highly dependent on access to support services at competitive prices – services that depend on secure and efficient access to data. Forced data localisation affects any business that uses the internet to produce, deliver, and receive payments for their work, or to pay their salaries and taxes.
- The results of our study show that even the current language of Brazil’s Marco Civil da Internet (without mandatory data localization) results in a GDP loss of -0.2%; EU GDPR results in -0.4%. Other results include China (-1.1%), India (-0.1%), Indonesia (-0.5%), Korea (-0.4%) and Vietnam (-1.7%) for their internet policies.
- An economy-wide data localisation requirement (or discriminatory barriers to that effect) would substantially increase the GDP loss if they are enforced: Brazil (-0.8%), the EU (-1.1%), India (-0.8%), Indonesia (-0.7%), Korea (-1.1%). Even conservative estimates are sufficient to eradicate all post-crisis economic recovery, benefits from all their currently negotiated trade agreements, or may even cause social unrest in some countries.
- Impact on investments is also considerable: Brazil (at least -4.2%), China (-1.8%), the EU (-3.9%), India (-1.4%), Indonesia (-2.3%), Korea (-0.5%) and Vietnam (-3.1%). Exports of China and Indonesia also decrease by -1.7% as a direct consequence of loss of competitiveness.
- Welfare losses (expressed as actual financial loss by its citizens) are up to 63bn USD for China and 193 bn USD for the EU.
The findings show that the negative impact from disrupting data should not be ignored. The globalised economy has made unilateral trade restrictions a counterproductive strategy that puts the country at a relative loss to others, with no possibilities to mitigate the negative impact in the long term. Forced localisation is often the product of poor, one-sided economic analysis, often with the surreptitious objective of keeping foreign competitors out – although economic and security gains are too small to outweigh losses in terms of jobs and output in the general economy.