This is why we should care about the free flow of data between countries

The internet today, with its 3.2 billion-plus users, is as essential to core business functions and daily life as electricity. More specifically, the flow of digital information between countries, companies and citizens is increasingly recognized as a critical driver of economic growth and innovation, particularly in the age of the knowledge economy.

The free flow of data across borders generates a wide range of positive economic impacts. In 2011 in the United States, digital trade was credited with an estimated increase in gross domestic product (GDP) of 3.4% to 4.8% and with the creation of up to 2.4 million jobs, according to the United States International Trade Commission. A recent study from McKinsey estimates that in 2014 data flows accounted for US $2.8 trillion of global GDP in 2014 and that cross-border data flows now generate more economic value than traditional flows of traded goods.

Data without borders

Beyond the economic impact of free-flowing data, its effect on innovation is unequivocal. It allows the sharing of ideas and information, the dissemination of knowledge, and the collaboration of individuals, businesses and governments with one another, regardless of geographic boundaries.

As highlighted by the World Economic Forum’s latest Global Information Technology Report, new types of innovation, such as changes to business models, look set to become an important part of the innovation story. And it is precisely the ability to transfer data across borders that is optimizing business operations and allowing companies to reimagine their approach.

As the internet continues to evolve, however, so do barriers to digital flows. The number of restrictions imposed around the world have increased, with localization mandates topping the list of most frequently identified digital trade barriers. Restrictions like these impose significant business costs and ultimately hinder innovation. What’s more, data localization requirements lower a country’s GDP, at times by multiple percentage points.

Conversely, when countries take steps to limit or eschew barriers to cross-border data traffic, their efforts drive GDP growth. Countries adept at fostering digital activity have witnessed the emergence of new industries as well as the accelerated development of traditional sectors. In fact, companies in traditional industries capture an estimated 75% of the internet’s benefit.

Four steps forwards

There is no doubt, however, that national concerns over privacy, security and local economic activity exist and may prompt regulations to curb some data flows. So what is the path forward? In seeking to address these issues, governments should take care to:

Ongoing trade negotiations, such as the Trade in Services Agreement (TiSA) or the Transatlantic Trade and Investment Partnership (TTIP), also allow an opportunity for barriers to be eliminated and for agreeing a framework to enable digital trade and cross-border data flows.

It is vital to establish a sound regulatory framework to turn the potential of data flows into a success and ensure the internet continues to serve as a driver for innovation, economic growth and social development. If you get it wrong you can miss the opportunity and find yourself playing catch up.

Read the full Cisco chapter on Cross-Border Data Flows, Digital Innovation, and Economic Growth in the World Economic Forum’s Global Information Technology Report 2016.

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