Data Localization Would Harm U.S. Economy, Tech Experts Warn

A growing global trend of data localization, also called data nationalization, is threatening firms’ ability to conduct business around the world. It could jeopardize the American economy more than other countries if it grows, tech experts warned Wednesday.

Data localization laws include things like a Chinese policy that bars companies from processing or storing Chinese citizens’ financial and credit data offshore, one that several panelists at a House Ways and Means Subcommittee on Trade pointed to as particularly egregious. There are also laws in Malaysia and South Korea requiring all data about citizens to stay on local servers.

A key step for international tech openness, according to the witnesses, will be passing the Trans-Pacific Partnership, the massive trade deal signed by the United States and 11 other countries on Feb. 4. Members of Congress from both parties, as well as both presidential candidates, have expressed doubt to outright opposition to TPP because they say it puts the United States at an unfair disadvantage in many areas. GOP leaders say there is almost no chance that Congress will vote on TPP this year.

But some in the tech community, including the Internet Association, have come out in support of the deal for acknowledging digital trade and including requirements for nations create safe harbors regarding intellectual property law.

Subcommittee Chairman Rep. Dave Reichert (R-Wash.) called the “arbitrary blocking of cross-border internet traffic” a long-term problem for the U.S., especially since digital trade can be such a boon for small businesses.

Reichert said Wednesday that TPP holds “great promise to tear down barriers hurting digital trade” by prohibiting tariffs on digital goods, encouraging paperless trading, and mandating the recognition of electronic signatures.

Tech industry witnesses agreed. “If we don’t pass the TPP with these very strong provisions to have digital openness and digital trade, I would predict that what we’re going to see is the tipping point going the other way to essentially a regime of digital nationalism,” said Rob Atkinson, president of the Information Technology and Innovation Foundation. “That’s going to be bad for the global economy, but in particular that’s going to be bad for us.”

“Forced localization is nothing more than protectionism really, and it hurts trade and investment,” Michael Beckerman, president and chief executive of the Internet Association, told the House panel. “The way the internet works is a free flow of information across borders and not requiring companies to build data centers. And so that needs to be fixed.”

“American companies are leaders in digital trade, and therefore we have the most to lose from data protectionism or data nationalism,” concurred Christopher Padilla, vice president of government and regulatory affairs at IBM Corp.

Reichert cited Amazon.com Inc., and payment systems such as PayPal Holdings Inc. as businesses that foster growth.

Beckerman, whose group represents both Amazon and PayPal, agreed.“Our companies are platforms that are helping to connect people around the world,” 

PayPal’s head of global public policy, Usman Ahmed, told the committee that although his company’s payment service fuels global transactions for some of the biggest companies, it assists “hundreds of thousands of small business” across the U.S. to expand globally.

“A small business can now use the internet in combination with a host of online service providers to engage in trade at a geographic scale similar to the largest businesses,” Ahmed said. “This democratization of trade has tremendously positive development, inclusion and growth implications.”

Ahmed added that about 25 percent of PayPal’s volume is for cross-border transfers.

Prohibiting companies from sending data to and from certain markets dents the potential of these technologies to facilitate a sales network, Reichert said. “Restrictions on cross-border data flows clearly would make it difficult to maintain an efficient payment network that is global in scope.”

The hearing came just a day after the European Union officially approved a massive new commercial data-transfer agreement with the United States allowing businesses operating in the EU to send Europeans’ data across the Atlantic.

Securing a new deal had been a big headache for U.S. businesses. Without the legal framework, companies would have been forced to spend massive amounts on legal counsel or build servers abroad to keep the European parts of their businesses going.

Padilla argued that Europe’s recent movement in the past few years to keep data within the EU shows the widespread desire to keep all data local. Europe has pushed to keep their data from going stateside due to fears of U.S. government bulk surveillance following the revelations of Edward Snowden.

Both Padilla and Atkinson criticized that argument as misguided. “The geographic location of the data doesn’t really make a difference with regard to what privacy or security laws apply,” Padilla said. “This is an increasing trend, this doesn’t just happen in China,” he added.