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Freshfields TQ

Technology quotient - the ability of an individual, team or organization to harness the power of technology

| 3 minutes read

Regulation of cross-border data flows: increasing frictions in digital trade?

We are witnessing a digital revolution in international trade. As goods evolve into digital services and physical services shift to online platforms, the traditional boundaries of international trade are undergoing fundamental change.

With increasing digitisation of trade comes vast amounts of data created through millions of transactions every day. Access to data provides companies with countless opportunities to improve and personalise their offerings and create new products and services. Governments are also keen to support these activities, from an economic perspective. At the same time, governments are conscious of the need to regulate activities taking place in their territory. Digitisation has also created some qualitatively different regulatory challenges.

Digitisation and trade

Much trade that takes place in the physical world – services and goods – is increasingly moving online.

For several years now information-based services, such as financial services, professional and business services, as well as retail and education, have been largely provided online. Digitisation has also led to new types of online services such as platform business models. With the advances in machine learning technology and robotics, it is surely only a matter of time for some physical services, such as surgery, to be supplied, at least in part, online.

But digitisation also affects trade in goods, and in several ways. First, some physical goods have become ‘digital products’, for example books, films and music. Second, digitisation enhances the so-called ‘servicification’ of the economy, whereby sales of goods are increasingly treated as sales of services with goods included. This model frequently comes with a subscription. For example, Schiphol Airport has set up an arrangement whereby it receives LED lighting as a service, rather than buying bulbs.

The digitisation of trade has also made it much easier to buy and sell goods and services by means of online marketplaces, from Amazon to Uber. And, as this last example shows, the availability of inexpensive sensors has meant that the physical world can also now be digitised, so that information on location, weather, speed, for example, can be used to deliver entirely new services. Further advances in AI technology also present incredible opportunities for businesses and consumers, who are increasingly able to draw upon sophisticated data-driven insights.

International rules on cross-border data flows

As these forms of economic activity move online, the opportunities for trade in these services expand dramatically. A service supplier can be located anywhere, provided that it has access to the data needed to supply an online service to a consumer.

This presents governments with a dilemma. On the one hand, governments benefit from exports of digital services through tax revenues and creation of employment. To this extent, they have an interest in facilitating data flows (and digital trade) globally. On the other, ie on the import side, governments have an interest in controlling online activities that involve their consumers, sometimes also for national security reasons. And one way that they can do this is by restricting exports of data overseas, at least to jurisdictions which do not have similar forms of regulation. Even internally, governments can struggle to reconcile these competing interests in allowing and controlling data flows. It is all the more difficult when governments need to coordinate their interests, which they are currently doing by means of international negotiations between governments, which are seeking to draft rules of the road on data flows at the WTO, in free trade agreements, and in standalone ‘digital economy’ agreements.

Two different FTAs show some differences in approach. In RCEP, which covers 15 Asian and Pacific countries (including China and Australia and New Zealand) there is a prohibition on governments limiting data flows when this is for the conduct of a business covered by the agreement. But there is an exception permitting restrictions which a government ‘considers necessary to achieve a legitimate public policy objective’, and that policy objective is entirely to be decided by that government.

The recently signed UK-NZ FTA, on the other hand, has the same basic obligation not to restrict data flows, but its exception is much more limited because whether a measure is for a public policy objective is not left to the regulating party. Rather, it is objectively determined, and in addition the restriction has to be properly necessary to achieve that objective, not just necessary in the eyes of the regulatory party.

These might seem like legalistic differences but in reality they make a huge difference to how much a country is able to restrict cross-border data flows, even for good reasons.

Opportunities for companies

The gradual but inevitable move towards online economic activity has increased the importance of data for companies looking to enter new markets or improve their services.

It is therefore crucial for companies engaged in digital trade to assess how they can best navigate the complex regulatory regimes in the jurisdictions in which they operate, and how they ensure the best use of data they have.

It is also important to underline that the regulatory environment concerning data flows is constantly evolving – companies can therefore get a chance to engage with the institutions and help to shape the regulatory landscape, in particular when international rules on digital trade are being negotiated.   


e-commerce, data, digital payment, global, retail and consumer goods, regulatory, financial institutions, trade