Washington Needs to Craft New Rules for the Digital Age
(By Matthew J. Slaughter and David H. McCormick - May/June 2021 – Foreign Affairs Magazine)
MATTHEW J. SLAUGHTER is Paul Danos Dean and Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth College. He served as a member of the White House Council of Economic Advisers in 2005–7.
DAVID H. MCCORMICK is CEO of Bridgewater Associates, a global macro investment firm. During the George W. Bush administration, he served in senior positions at the U.S. Commerce Department, the National Security Council, and the U.S. Treasury Department.
Data is now at the center of global trade. For decades, international trade in goods and services set the pace of globalization. After the global financial crisis, however, growth in trade plateaued, and in its place came an explosion of cross-border data flows. Measured by bandwidth, cross-border data flows grew roughly 112 times over from 2008 to 2020.
The global economy has become a perpetual motion machine of data: it consumes it, processes it, and produces ever more quantities of it. Digital technologies trafficking in data now enable, and in some cases have replaced, traditional trade in goods and services. Movies, once sold primarily as DVDs, now stream on digital platforms, and news, books, and research papers are consumed online. Even physical goods come laden with digital components. Cars are no longer merely chassis built around internal combustion engines; they also house complex electronics and software capturing massive amounts of data. Trade in physical goods also comes with digital enablers, such as devices and programs that track shipping containers, and these likewise generate data and improve efficiency. And now, COVID-19 has sped up the digital transformation of businesses, pushing even more commerce into the cloud.
Digital trade and the cross-border flow of data show no signs of slowing. In 2018, 330 million people made online purchases from other countries, each involving the cross-border transmission of data, helping e-commerce hit $25.6 trillion in sales, even though only about 60 percent of the world is online. Imagine how much data will grow as broadband access spreads to the developing world’s rapidly expanding populations, 5G wireless technology allows even more extraordinary amounts of data to transfer at lightning speed, and the so-called Internet of Things dramatically increases machine-to-machine communication.
These massive changes are not merely transforming trade; they are also upending global politics. Even more than other elements of the global economy, data is intertwined with power. As an increasingly necessary input for innovation, a rapidly expanding element of international trade, a vital ingredient in corporate success and an important dimension of national security, data offers incredible advantages to all who hold it. It is also readily abused. Countries and companies that seek anticompetitive advantages try to control data, so do those that wish to undermine liberty and privacy.
Yet even as cross-border flows of data have surged, and data itself has become a critical source of power, it remains largely ungoverned. The current international trade and investment framework was designed 75 years ago, in a very different time. It advanced prosperity and security, helped lift millions out of poverty, and, as part of a broader economic order, encouraged democracy, commerce, and individual rights. But this system is not adequate for the reality of global trade today. Confusion about the value and ownership of data abounds, and major world powers have competing visions of how to manage it.
If the United States does not shape new rules for the digital age, others will. China, for example, is promulgating its own techno-authoritarian model, recognizing that shaping the rules of digital power is a key component of geopolitical competition. The United States should offer an alternative: with a coalition of willing partners, it should set up a new framework, one that unleashes data’s potential to drive innovation, generate economic power, and protect national security.
Economists have long recognized that productivity per worker is the best indicator of a country’s average standard of living and overall economic power. The higher a country’s productivity, the higher the average household income and the higher the population’s material well-being will be. Moreover, the higher a country’s productivity, the larger the country’s overall tax base will be, giving more funds to the government for national defense and other interests.
How can a country raise its productivity? It can invest in the capital used to create things—buildings, machinery, software, and the like. Or it can create new ideas, innovations that allow workers to either make existing products more efficiently or make entirely new products. Indeed, innovation has long driven the United States’ rising productivity—accounting for well over half the U.S. per capita GDP growth over the past century.
Data has always been an essential input for discovering new ideas. Benjamin Franklin needed data on lightning strikes to improve humans’ understanding of electricity; Gregor Mendel needed data on pea plants to discover rules of heredity. But in the past decade or so, data has become far more important to innovation, thanks to major advances in computing power, cloud storage, and machine learning. The algorithms at the heart of artificial intelligence (AI) benefit particularly from vast quantities of high-quality data, which they use to learn and gain efficacy. These and other data-driven innovations will increasingly shape people’s professional and personal lives, improving everything from autonomous vehicles to sports-performance apps to social networks.
The surge in the use of data holds great economic potential for a powerful yet simple reason: data is what economists call “nonrival.” Nearly all economic goods and services are “rival,” meaning their use by one person or firm precludes their use by someone else. A barrel of oil, for instance, is rival. But data is nonrival: it can be used simultaneously and repeatedly by any number of firms or people without being diminished. The widespread notion that “data is the new oil” misses this essential economic difference between the two commodities. Data can power innovation again and again without being depleted—more like the limitless supply of sunshine than the limited supply of oil.
Because data is nonrival, innovation—and thus economic power—increasingly hinges on the quantity and quality of data available to people, companies, and countries. Data can be used and reused, so the more freely it flows, the more likely it is to spark new ideas. Consider the world’s fight against COVID-19. On January 10, 2020, more than a month after the first cases appeared, Chinese scientists posted the genetic sequence of the novel coronavirus online. Armed with this essential data, scientists at the U.S. company Moderna took only two days to create the blueprint for what would become the company’s COVID-19 vaccine. Moderna had already researched the concept of a vaccine based on messenger RNA; all it needed to create something valuable from this new idea was new data.
Access to data has been revolutionizing other areas of the life sciences. In just 13 years, the Human Genome Project, a U.S.-led international public initiative, sequenced and published the data on the three billion DNA base pairs that constitute the human genome. One study estimated that from 1988 to 2010, this project led to a total economic impact of $796 billion—including over $244 billion in additional personal income from over 300,000 new jobs.
Data increasingly drives commercial success. Companies whose competitive advantages are built by aggregating, analyzing, and using data have seized top market positions across the globe. Ten years ago, any list of the ten most valuable firms included oil and gas producers, consumer goods firms, and banks. Today, technology companies that traffic in data dominate the list. BHP Group, Chevron, and ExxonMobil have given way to Alphabet, Amazon, and Facebook. The current crop of technology leaders thrives in no small part because they transform vast amounts of data from billions of individuals and organizations into new economic value for their customers.
Data is crucial to national security, too. It drives productivity and thus the economic power that underwrites the United States’ military edge. It is also a primary domain of U.S.-Chinese competition for economic and geopolitical superiority—as demonstrated, for example, by the two countries’ battle over 5G technology. New technologies offer tremendous economic and strategic advantages. In the words of Eric Schmidt, former CEO of Google, and Robert Work, former U.S. deputy secretary of defense, data-enabled AI will be “the most powerful tool in generations for benefiting humanity,” but it will also be “used in the pursuit of power.”
The country that can harness data to innovate faster will gain enormous advantages. And so the United States’ future prosperity and geopolitical strength will largely depend on the rules governing access to data.
Current international institutions are not equipped to handle the proliferation of data. Nor are they prepared to address the emerging fault lines in how to approach it. The institutional framework for international trade—that of the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade—was built at a time when mainly agricultural and manufactured goods crossed borders and data flows were in the realm of fiction. The WTO’s framework depends on two key classifications: whether something is a good or a service and where it originated. Goods are governed by different trade rules than are services, and a product’s origin defines what duties or trade restrictions apply.
Data defies this basic categorization for several reasons. One is that vast amounts of data—such as one’s online browsing before ordering clothes—are unpriced consequences of the production and consumption of other goods and services. Another is that it is often hard to determine where data is created and kept. (From which country does data on an international flight’s engineering performance originate? In which country does a multinational firm’s cloud storage of its clients’ data reside?) Moreover, there is no agreed-on taxonomy for valuing data. In the event of a trade dispute, WTO members may seek legal recourse and ask the organization to make a one-off correction, but such fixes do not address the fundamental inconsistencies between the WTO’s framework and the nature of data.
The lack of an internationally accepted framework governing data leaves big questions about the global economy and national security unanswered. Should sovereign governments be able to limit the location and use of their citizens’ data within national borders? What does this concept even mean when the cloud and its data are distributed across the Internet? Should governments be able to tax the arrival of data from other nations, just as they levy tariffs on the import of many goods and services? How would this work when the data flows themselves are often unpriced, at least within the firms that gather the data? What controls can sovereign governments impose on data entering their countries? Can they demand that data be stored locally or that they be given access to it?
The absence of an international framework also threatens people’s privacy. Who will ensure that governments or other actors do not misuse people’s data and violate their economic, political, and human rights? How can governments protect their citizens’ privacy while allowing data to move across borders? Today, the United States and the EU do not agree on answers to these questions, causing friction that hurts cooperation on trade, investment, and national security. China, for its part, has shown little commitment to privacy. Without common and verifiable methods of anonymizing data to protect personal privacy, the innovative potential of personal data will be lost—or fundamental rights will be violated.
In the absence of coherent and collective answers to these questions, countries and trade blocs are improvising on their own. This has left the world today with a collection of inconsistent, vague, and piecemeal regulations. Recent regional trade deals have included several provisions regarding data and e-commerce. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which does not include the United States, prohibits requirements that data be stored within a given country and bans duties on cross-border flows of electronic content. It recognizes the growing importance of the digital services sector, and it forbids signatories from demanding access to the source codes of companies’ software. The U.S.-Mexico-Canada Agreement (USMCA) has similar provisions. Both free-trade agreements aim to allow unencumbered flows of data, but they are largely untested and, by virtue of being regional, are limited.
The EU sharpened its data rules on privacy in the General Data Protection Regulation. The GDPR attempts to empower individuals to decide how companies can use their data, but many have voiced concerns that the GDPR has effectively established trade barriers for foreign firms operating in EU member countries by requiring expensive compliance measures and raising the European market’s liability risks. Moreover, the EU’s rules are the subject of continual dispute and litigation.
Of much greater concern to the United States is China’s distinct digital ecosystem. Over a generation ago, China began building its “Great Firewall,” a combination of laws and technologies that restrict the flow of data in and out of China, in part by blocking foreign websites. China has since adopted a techno-nationalist model that mandates government access to data generated in the country. The sheer quantity of that data fuels China’s innovation but also enables the country’s repressive system of control and surveillance—and at the expense of open, international flows of data.
Beijing now seeks to expand this model. It has clear plans to use its indigenous technology industry to dominate the digital platforms that manage data, most immediately 5G telecommunications networks. To that end, it has unveiled an audacious plan, China Standards 2035, to set global standards in emerging technologies. And through the so-called Digital Silk Road and the broader Belt and Road Initiative, it is working to spread its model of data governance and expand its access to data by building Internet infrastructure abroad and boosting digital trade.
And the United States? At the federal level, the country has not settled on any legal framework. Nor, beyond the USMCA, has it engaged in any meaningful cross-border agreements on data flows. So far, the United States has not answered China’s efforts with a coherent plan to shape technology standards or ensure widespread privacy protections. The United States’ ad hoc responses and targeted efforts to encourage other countries to reject the Chinese company Huawei’s 5G technology may work in the near term. But they do not constitute an effective long-term plan for harnessing the power of data.
China has a vision for the digital age. The United States does not. Much of the discussion in Washington is too narrow, concerning privacy, antitrust issues, and liability. These are essential matters. Yet it is vital to keep in mind the immense economic potential of data—and not just data produced in the United States. Because data is nonrival, there will be major potential losses for those countries that fail to access and use it.
Consider autonomous vehicles. This idea is no longer new, and in many countries, new teams of engineers and scientists could, in principle, come together to work on safe and functional autonomous vehicles. But the critical input for success is data: vast quantities of data on driving created by sensor-equipped vehicles. Any country that does not permit companies to access individuals’ driving data will struggle to develop this industry. Or think of all the AI possibilities in health care that will require vast amounts of x-rays, CAT scans, and other diagnostic data to create innovations that will save and enhance the quality of lives. Large countries—with, for example, many people driving many vehicles on many roads or many doctors ordering many CAT scans—have an inherent advantage when it comes to data. If small countries, such as Singapore and Sweden, do not have access to data outside their borders, they could lose out.
To some, this possibility of a data advantage for large nations might not seem worth worrying about. After all, the twentieth century demonstrated that small countries can achieve high productivity and high standards of living. They were able to do so because ideas spread relatively easily around the world and because innovation didn’t require that much data. But there is growing evidence that what’s past will not be prologue: the quantity of data a country can access may result in a sustainable productivity advantage. Today, a vast amount of data is needed to refine ideas into economically productive uses. As the AI expert Kai-Fu Lee has said, “A very good scientist with a ton of data will beat a super scientist with a modest amount of data.”
To avoid missing out on these advantages, and to fill the vacuum being filled by China, the United States should help craft a new multilateral framework for data. Working with all willing and like-minded nations, it should seek a structure for data that maximizes its immense economic potential without sacrificing privacy and individual liberty. This framework should take the form of a treaty that has two main parts.
First would be a set of binding principles that would foster the cross-border flow of data in the most data-intensive sectors—such as energy, transportation, and health care. One set of principles concerns how to value data and determine where it was generated. Just as traditional trade regimes require goods and services to be priced and their origins defined, so, too, must this framework create a taxonomy to classify data flows by value and source. Another set of principles would set forth the privacy standards that governments and companies would have to follow to use data. (Anonymizing data, made easier by advances in encryption and quantum computing, will be critical to this step.) A final principle, which would be conditional on achieving the other two, would be to promote as much cross-border and open flow of data as possible. Consistent with the long-established value of free trade, the parties should, for example, agree to not levy taxes on data flows—and diligently enforce that rule. And they would be wise to ensure that any negative impacts of open data flows, such as job losses or reduced wages, are offset through strong programs to help affected workers adapt to the digital economy.
Such standards would benefit every sector they applied to. Envision, for example, dozens of nations with data-sharing arrangements for autonomous vehicles, oncology treatments, and clean-tech batteries. Relative to their experience in today’s Balkanized world, researchers would be able to discover more data-driven innovations—and in more countries, rather than just in those that already have a large presence in these industries.
The second part of the framework would be free-trade agreements regulating the capital goods, intermediate inputs, and final goods and services of the targeted sectors, all in an effort to maximize the gains that might arise from data-driven innovations. Thus would the traditional forces of comparative advantage and global competition help bring new self-driving vehicles, new lifesaving chemotherapy compounds, and new sources of renewable energy to participating countries around the world.
There is already a powerful example of such agreements. In 1996, dozens of countries accounting for nearly 95 percent of world trade in information technology ratified the Information Technology Agreement, a multilateral trade deal under the WTO. The agreement ultimately eliminated all tariffs for hundreds of IT-related capital goods, intermediate inputs, and final products—from machine tools to motherboards to personal computers. The agreement proved to be an important impetus for the subsequent wave of the IT revolution, a competitive spur that led to productivity gains for firms and price declines for consumers.
At this time of uncertainty about both the future of international institutions and the United States’ commitment to them, orchestrating the creation of this framework would bring Washington many opportunities: to partner closely with like-minded countries, to reform and rejuvenate calcified institutions, and to strengthen U.S. economic power and national security. Indeed, this framework could serve as an important component of a renewed vision of the United States’ role in the world. It would be a vision that recognizes the need to cultivate strong multilateral institutions of like-minded nations to stabilize an entropic world but that does not lose sight of the United States’ economic and security interests, that upholds U.S. leadership but never at the expense of Americans, and that confidently sees the country as a force for good.
There is little doubt that the United States and its allies would face challenges in establishing an international data framework. The landscape today is characterized by a patchwork of inconsistent and vague data standards, and the initial countries and sectors involved would need to work through the thicket of various national data regulations. Some countries would no doubt choose to close themselves off and refuse to share their data. Americans, meanwhile, face deep political divisions, and many of them view global engagement with skepticism. And yet this framework would boost innovation and the United States’ strategic position in an era of trying economic conditions at home and great-power competition abroad. Those are the benefits that American leaders must communicate to the American people.
If creating an international data framework proved too difficult, Washington and its partners could build on existing efforts to address data flows and security. In 2020, the Trump administration created the Clean Network to strengthen data partnerships abroad, empower domestic innovation, and protect data privacy. Likewise, a year earlier, the G-20 leaders produced the Osaka Track vision for “data free flow with trust,” an initiative to produce a coherent international data framework. And the Organization for Economic Cooperation and Development is laying the intellectual foundation for a similar effort. The United States could also build on momentum within the Quad—its cooperative partnership with Australia, India, and Japan—to advance the shared goals of innovation and security. But these would merely be stopgap measures; what is really needed is a major push for a cohesive framework.
In July 1944, just weeks after the D-Day invasion and with the outcome of World War II still hanging in the balance, the United States hosted delegates from 43 like-minded nations in Bretton Woods, New Hampshire, for a conference to agree on new rules for the postwar international monetary system. Out of this gathering came the International Monetary Fund and the World Bank, institutions designed to help rebuild the world after a devastating conflict. In the wake of another crisis, the United States once again has the opportunity to establish new international rules that support peace, prosperity, and security. The question is whether it will rise to the challenge.