Implications of Giving Financial Data Special Treatment in Trade Agreements
The Information Technology and Innovation Foundation (ITIF), a technology policy think tank, in a new report urged policymakers to walk back efforts to exempt financial data from requirements to enable the free flow of data across borders in the Trans-Pacific Partnership (TPP).
ITIF explained that, at the urging of the United States, financial data has been carved out of the TPP’s prohibition on laws that force data to be stored within a country’s geographic borders, a practice known as data localization.
This carve-out for financial data creates two big problems, according to ITIF. Giving countries a free pass to require certain data to be stored inside their borders will raise costs for financial services firms, and the firms will have to pass those costs on to the businesses and customers they serve. The carve-out also validates the false belief that storing data outside a nation is somehow inherently riskier than storing it locally.
ITIF has shown in previous research that it is the technological and procedural method of storing and transferring data that determines how safe it is, not the geographic location. Organizations cannot escape a nation’s privacy or security regulations just by moving data abroad.
“Yet by including this unnecessary exemption,” said the ITIF report, “the agreement could embolden data mercantilists and undermine U.S. efforts to push back against such measures in China, Indonesia, India, Nigeria, and Russia, among others.”
The report goes on to explain that despite claims from the Federal Reserve that this carve-out is needed for financial regulatory oversight purposes, the Dodd-Frank Wall Street Reform and Consumer Protection Act has already given regulators adequate and more appropriate tools to achieve this goal.
“Data flows, which were practically nonexistent just 15 years ago, are now the lifeblood of global trade,” said Nigel Cory, ITIF trade policy analyst and co-author of the new report. “In the globally integrated digital economy, the ability of organizations to collect, analyze, and act on data, including financial data, is critical to driving innovation and growth. Unfortunately, the data-driven economy is under increasing threat as countries impose a slew of barriers that limit the flow of data across borders. This trend should be of particular concern to the United States, because it holds a leadership position in many of the technologies at the heart of the data economy. By exempting financial data from prohibitions on mercantilist policies such as forced data localization, the United States is effectively undermining its own interests, sending the wrong message to other nations, and creating a loophole that other countries could misuse to justify further protectionism.”
ITIF’s recommendations for the U.S. to address this issue in the TPP and for future trade agreements include working with other parties in the TPP to narrow this loophole through side agreements; working to exclude this carve-out in future trade agreements; focus more time and attention on consulting with people who have relevant expertise in digital economy matters and information technology during future negotiations; and stepping up efforts to build a multilateral policy framework to support the free flow of data.
“Giving financial services data special treatment in the TPP sends a false and dangerous message that local data storage is necessary for regulatory oversight,” said ITIF President Robert D. Atkinson, co-author of the report. “Just as economic nationalism inevitably leads to lower productivity for firms and higher costs for consumers, data nationalism will similarly lead to poor economic outcomes. As a leader in the global digital economy, the United States must change its approach to managing financial data and dispel the misguided notion that data must be stored domestically to keep it safe, secure, and appropriately monitored by regulators.”