Global Data Governance

The global digital economy encompasses the vast physical infrastructure enabling the Internet, the full range of Internet-connected user devices, and the immense amount of data flowing through them. The rapid growth of each of these components has collectively generated tremendous economic activity. Over the past 15 years, the global digital economy has grown two and a half times faster than global GDP. One key driver behind this robust growth is the exponential volume of data being generated, processed, and monetized. Every second, there are 2.7 million emails sent, 71,966 Google searches executed, 8,342 Tweets, and a total of 289,351 gigabytes (GB) of new user data generated. For context, 1 GB of data is equal to 677,963 pages of text, meaning that every second the equivalent a 196.2 billion-page book of new data is generated. 5G technology will connect billions more devices to the Internet through the enabling of the Internet of Things (IoT), and the combination of this vast expansion of Internet-connected devices and more of the world coming online in the next decade will exponentially increase the amount of data being generated. Currently, roughly 60 percent of the global population is online, with estimates showing that nearly 90 percent of the world’s population will come online by 2030 as Internet access is expanded throughout the developing world. This growing reservoir of data will fuel the world’s emerging and incumbent technology companies, with the ability to collect and monetize this data a matter of survival for some and a determinant of future growth for all.

Over the past fifteen years, the global digital economy has grown two and a half times faster than global GDP.

Among the digital giants, U.S. companies hold a dominant position, which has been gained largely through first-mover advantage, but Chinese companies are rapidly catching up. Led by Google, Amazon, and Facebook, 19 of the world’s twenty largest Internet companies are either American or Chinese. The five largest tech companies by market cap (Google, Amazon, Facebook, Alibaba, and Tencent) had a combined market value of nearly $3.5 trillion dollars at the end of 2020,8 and held dominant market positions. In 2020, Google accounted for 91 percent of the Internet search market, Facebook accounted for 69 percent of the global social media market, Amazon was responsible for 33 percent11 of the world’s cloud infrastructure services market These companies leveraged first-mover advantage by reinforcing network effects—the more users in the network, the more valuable the network is for all users—accumulating a competitive data edge early on, and turning their data edge into integrated services offerings that increase the cost to users if they switch to a competitor’s platform. Chinese companies have been able to replicate this success with domestic Internet and tech companies—such as Alibaba, Baidu, and JD.com—through a combination of limiting outside competition on the Internet, state funding, and the controversial joint-venture policy--which critics say has enabled Chinese firms to coopt outsiders’ technology. Critically, maintaining these advantages relies heavily on these companies’ ability to collect users’ data across international borders, with minimal if any restrictions, and integrate it into algorithms or sell it to advertisers. The proprietary algorithms used to monetize companies’ collected data are already governed through strict legal protections. However, the broader value of these companies is derived from their ability to generate, freely access, and smoothly transfer vast amounts of usergenerated data with minimal legal restrictions. This access to data enabled the meteoric rise of companies such as Facebook and Google, among others, which rely on being able to collect troves of global data to enable services such as Google Maps. The race to develop artificial intelligence applications is amplifying this demand.

Limited regulation of these companies to date has enabled them to capture the majority of revenue associated with data flows across borders. However, countries are increasingly developing measures to regulate data flows and e-commerce transactions to exert greater control over data generated within, and passing across, their national borders. In fact, data localization laws are becoming a standard mechanism for countries to exert control over the foreign collection of their citizens’ data and capture a share of the value. These laws and associated regulations place restrictions on how data can be stored within, and transferred outside of, a country. Their aims vary, from restricting foreign companies’ and governments’ access to sensitive user data, to boosting foreign and domestic investment in server infrastructure, to, in limited cases, handicapping or completely inhibiting foreign companies’ ability to operate within a country’s borders.

To date, roughly 75 percent of all data localization measures in place are meant to ensure data privacy and security when data is transferred outside of a country. These measures focus on restricting data transfers to countries that are deemed to have inadequate data privacy frameworks. However, roughly 25 percent of existing data localization measures include more extensive restrictions that aim to exert influence over data flows through physical data storage infrastructure. Countries that are intent on boosting their domestic economy (and tax base) through increased foreign investments in server infrastructure, or developing their domestic data storage industry, use data localization laws to mandate that data collected in a country be stored on a server within that country. This strategy is currently being pursued in Indonesia and Vietnam, for example. In a more extreme case, China has combined data localization laws with tight restrictions on foreign companies’ operations, beginning as early as 1996, to protect and foster the rise of its own multinational digital giants, such as Tencent and Alibaba, which use data to drive services from artificial intelligence to e-commerce. China’s development and increasing protection of its digital giants through regulation have provided a roadmap for other countries to emulate. In contrast, the U.S. and its digital giants have greatly benefited from the ability to collect data internationally through open data borders and have generally been at the forefront of opposition to emerging data localization laws.

Data privacy laws have undergone numerous transformations globally since the first national level data privacy law, Bundesdatenschutzgesetz (BDSG), was enacted in Germany in 1970. The rapid advancement of digital technologies in the Internet age and growing consumer awareness, particularly over the past two decades, are putting increasing pressure on countries to update their privacy laws. Currently, 160 countries have a law or laws that reference data privacy, and 102 countries and territories have specific laws dedicated primarily to data privacy. In an early effort to harmonize the increasingly fractured regulatory landscape, international data privacy standardization frameworks emerged. The international framework currently covering the greatest share of global economic activity is the Asian Pacific Economic Cooperation’s Cross-Border Privacy Rules (referred to as the APEC Privacy Framework), which was established in 2011. Twenty-one countries have opted into these data privacy standards, including the U.S., Mexico, Canada, Japan, South Korea, Singapore, and Australia, as well as twenty-three multinational corporations, including Apple, HP, IBM, and Merck. However, this international framework is not legally enforceable as it is not backed by a specific government jurisdiction.

The passage of the GDPR and China’s Cybersecurity Law marked the beginning of a new trend in data governance—the implementation of comprehensive national level data privacy regulations that carry cascading impacts for the global digital economy.

Until 2016, it appeared that the APEC Privacy Framework, and similar international data privacy agreements, would foster harmonization of international data governance going forward. However, in 2016, the APEC Privacy Framework and the global data regulatory landscape were upended with the passing of the EU’s GDPR and China’s Cybersecurity Law. Both laws introduced key changes to how data privacy is regulated and were consequentially enacted in two of the world’s largest economic blocs and most globally influential countries. Driven by concerns over civil liberties and foreign companies’ data collection activities, the GDPR introduced an expansive definition of how personal data applies broadly to any business offering services to EU citizens, set higher compliance standards, and is enforceable directly through fines. China’s Cybersecurity Law uses the GDPR principles as a base but built on the GDPR standards by setting significantly stricter limits on data transfers outside of the country, placing export restrictions on data deemed essential to the public interest and granting the government broad access to data collected within its borders. Critically, China’s Cybersecurity Law adapted the GDPR principles to suit its own national interests, effectively creating its own data governance framework and further dividing digital commerce instead of harmonizing it under GDPR standards. The GDPR initially received some criticism from businesses due to increased compliance costs and the risk of fines, with small businesses in particular struggling to meet new requirements. The GDPR also impacted small businesses with little brand recognition, who lacked the established consumer trust necessary for data collection consent. The end result has been that, in practice, many small businesses in the EU have simply opted not to comply with the GDPR—fewer than half of businesses (44 percent) report compliance with key measures in 2019—leaving them vulnerable to being fined.

The passage of the GDPR and China’s Cybersecurity Law marked the beginning of a new trend in data governance—the implementation of comprehensive national level data privacy regulations that carry cascading impacts for the global digital economy. The U.S. government and private sector are vocal critics of this trend, broadly preferring the APEC Privacy Framework, as it is more flexible and favorable to business, is less costly, and allows companies to expand internationally with greater ease. However, comprehensive national frameworks are shaping global digital commerce, with the volume of goods and services traded under the EU’s GDPR standard ($8.1 trillion) and China’s Cybersecurity Law ($2.5 trillion), dwarfing the volume traded under the APEC Privacy Framework ($1.2 trillion). Additionally, India and Brazil, two of the world’s top-five countries in terms of Internet users, have both adopted or drafted comprehensive national-level data privacy regulations similar to the GDPR. Overall, thirty-five countries, besides the EU countries and China, have updated or adopted more comprehensive data privacy laws since 2016, generally using the GDPR as a minimum standard from which to construct a unique national data privacy framework. This demonstrates a clear trend toward national-level regulation and stricter data privacy standards enforceable through fines.

While there remains a debate on the long-run impact of compliance and which companies it will hit hardest, the GDPR has undeniably impacted EU tech startups, as the overall venture funding for EU tech firms decreased by €12.5 million per month per member state, between May 2018 and April 2019. Additionally, advertisers have been hit particularly hard by the GDPR. Advertising vendors, particularly smaller companies, lost between 18 and 31 percent market reach in the EU, between April and July 2018. If the trend toward more comprehensive data governance regulations modeled after the GDPR standards continues, these impacts are likely to be replicated around the world. As countries adopt similar standards, the ability to fully understand diverse regulatory environments, and to take proactive measures as legislation is adopted, will provide a competitive advantage for businesses with the capacity and resources to comply.