European leaders should leave data flows open

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EU leaders convening in Brussels later this month for the 24th-25th October summit will have digital issues on the agenda. They should be careful not to make popular gestures in response to the Prism scandal that result in a freeze in data flows, writes expert Hosuk Lee-Makiyama.

Hosuk Lee-Makiyama is a director of the Brussels based European Centre for International Political Economy (Ecipe), a think-tank

"We may be two decades into the internet age, but the European Summit on 24-25 October will be the first dedicated to “digital issues”. Several member states are already circulating their ideas and pet peeves with the internet – stretching from copyright issues and lost VAT incomes to NSA surveillance and data privacy. 

 
The question of internet governance is complicated by the recent revelations of electronic surveillance. The extent that online businesses (and some European governments) have been accomplices have exasperated the public. From Brasilia and Berlin to Brussels, there is an increased vigilance towards foreign websites and demand for local alternatives – President Dilma Rousseff of Brazil is launching a public email service and forcing foreign businesses to move their data centres into her jurisdiction; In Europe, the much debated data privacy regulation would accomplish similar goals. France and other EU members have emphasised the need for a “European” cloud to break the US dominance, and even considering to tax access of data and content from abroad.
 
However, these knee-jerk responses do little to solve the security issues around the internet that can only be solved through international cooperation and diplomatic channels. Security and personal integrity is not a function of where a server is placed, or the nationality of the people who designed it. Also, government-supported clouds or shutting out foreigners will do very little for privacy – the European experience of authoritarianism is primarily about governments eavesdropping on its own people. Restricting foreign businesses, while not our own governments, does not address our own past mistakes. 
 
Perhaps it is the search for simple answers that have turned European liberals into proponents of similar kind of internet balkanisation that they often accuse China and other countries of. Such answers do not solve the issue of how the digital economy still represents a considerable economic challenge for Europe. Its policy makers and industrial planners are still struggling to grasp how the global network of services have transformed the economy. This is a challenge where the post-war model for industrial policy in Europe, i.e. fostering national champions in manufacturing, soft protectionism and state aid, are effectively defunct. 
 
First, the digital economy thrives on an open competition between innovation, private capital and entrepreneurs. "Le défi digital" simply cannot be won by picking the winners through public investment and research projects. Europe already has the infrastructure and market institutions, but lacked an internet-friendly business environment. As proven by Nokia’s exit from handset making, even market leaders is not guaranteed survival and face huge risks – and further regulatory barriers just add up to those existing risks.
 
Second, competitiveness in the new economy comes from the ability to tap into the skills and technology in other countries, and using them to build your own success. Import barriers no longer create paddocks where national champions can grow, but only rot the grass that feed them. The internet now accounts for 3% of all economic activity in France. This may sound modest, but en par with its priced car industry. It is a fundamental mistake to think of the digital economy as just Google, Amazon and Facebook when also traditional European manufacturing and services – in short, everything from car production and shops to logistics – all depend on data and connectivity.
 
This is why forced data localisation does not create growth. Data-enabled services have now surpassed the importance of raw materials or labour for many export industries, and higher cost for data significantly lowers efficiencies across the EU economy: Trade simulations show that EU exports to the US would drop by 7% while the US exports would increase thanks to the weaker competition from Europe. Restricting free movement of data takes money out of the pocket of all EU exporters, services, e-commerce and consumers – but creates just a handful consultancy jobs in a couple of low cost countries in the EU. 
 
These points may seem be contradicted by the miraculous success of China’s state capitalism, online censorship and investment restrictions. Indeed, China has created a national network delinked from the rest of the world, but even its biggest dotcoms (like Baidu or Alibaba) are minuscule compared to their Western competitors. The service market in China is still in its infancyand account for only 43% of the Chinese economy, a level similar to severely impoverished countries like Laos or Cambodia. 
 
It is important to bear in mind that data barriers have never been imposed across all sectors, let alone in an advanced economy like the EU where services account for 80% of the economy. Tampering with open data flows is a bigger policy gamble than, say, a financial transaction tax – and turn the first digital European Summit into a jamboree of uninformed decisions."
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