Digital Trade, Data Protection and EU Adequacy Decisions

Abstract

Using a structural gravity model, we assess whether EU adequacy decisions on data protection are associated with bilateral digital trade. Controlling for digital-relevant bilateral covariates, including preferential trade agreements with digital trade provisions and other data flow arrangements, we find that countries that obtained EU adequacy exhibit an increase in digital trade ranging between 6-14 percent, representing a trade cost reduction up to 9 percent. This is mostly driven by EU adequacy arrangements with the U.S., reflecting the dominance of the EU and U.S. in global digital trade. Countries granted EU adequacy exhibit more digital trade between each other, suggestive of a club effect. Complementary country-specific analysis of post-adequacy digital trade performance using synthetic control methods confirms our findings.

Keywords: Digital trade; data protection; mutual recognition; regulatory equivalence; clubs

JEL codes: D18; F13; F14: K24; L88; O38

Declaration of interest: None

Digital trade is a fast-growing part of the world economy, accounting for 12% to 22% of world trade, depending on the definition of digital goods and services. Growth rates of digital-based services associated with cross-border data flows over online networks have been outpacing all other types of trade. Such trade is subject to regulations, including requirements pertaining to the protection of personal data crossing borders.

An EU trade partner may request a determination by the European Commission that its regulatory regime offers a level of data privacy protection that is similar enough to that of the EU to enable data to move freely between the two jurisdictions. A positive adequacy evaluation by the Commission requires that the country has a regime that is ‘essentially equivalent’ to the European one. Between 2000 and 2021, the EU granted adequacy status to 15 states or territories. If adequacy is granted, personal data can flow freely to and from the EU, Norway, Lichtenstein, and Iceland and the pertinent jurisdiction, akin to intra-EU data flows.

In this paper we assess the digital trade implications of EU adequacy decisions. Given that there is no official definition of digital trade, we construct four alternative measures. The first comprises information and communications technology goods plus core digital services: computer and information services, publishing and telecommunications. We then progressively add to this (1) business and professional services, (2) financial services, and (3) restaurants, accommodation, health, and education services. Altogether, the four definitions range from a narrow to a very broad set of digital goods and services.

We find that the EU adequacy decisions positively affect digital trade between the EU and the countries that obtain adequacy decisions. Countries that obtained EU adequacy exhibit an increase in digital trade ranging between 6-14 percent, representing a trade cost reduction of up to 9 percent. This positive trade effect is driven to an important extent by the adequacy decisions pertaining to the United States (U.S.).

Beyond the two transatlantic partners, other adequacy-receiving countries appear to have benefitted indirectly from the adequacy decisions granted to the U.S. An additional new finding from the analysis is evidence of a ‘club effect’ of EU adequacy decisions. Countries with adequacy exhibit greater digital trade among each other. This effect appears to be associated with the granting of adequacy to US companies. Countries with an EU adequacy determination benefit indirectly from the data adequacy agreement between the EU and the US, as their digital exports increased following the implementation of transatlantic data deal.

This club effect is reflected in a change in the composition of digital trade within supply chains. We find that approximately 7 percent of digital value-added trade shifted towards the club of adequacy countries, away from other sources. This may reflect the fact that global supply chains in both digital goods and services are spread across many countries. If American firms outsource their data-based activities to third countries with an EU adequacy determination, the trade cost of doing so is lower as no additional personal data protection safeguards are required.

The relationship between adequacy and digital trade might be country specific, with any positive association driven in part by the characteristics of the country considered and those it trades with. To consider such potential country-specificity, we complement our empirical analysis with case studies for Argentina and New Zealand. In each instance we compare the digital trade performance of these two countries, which were granted adequacy by the EU at different points in time, with a suitable comparator group of countries that have similar characteristics to Argentina and New Zealand, respectively, and simulate what digital trade performance would have been had each country not obtained an adequacy decision.

We find that the adequacy decisions had a significant positive impact on digital trade with other countries that also have adequacy status, corroborating the EU adequacy ‘club effect’, but also show that the drivers of increased intra-club trade differ.  In the case of Argentina, the increase reflects trade with the United States. In the case of New Zealand, the club effect reflects trade with countries with adequacy other than the United States.

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