Trade in digital goods and services have witnessed increasing growth in recent years, accompanied by a corresponding increase in data flows across national boundaries. At the same time, governments around the world have enacted data policies that restrict such cross border data flows in their effort to claim sovereignty over data generated from within their countries. However, scholars have long proclaimed that any restrictions to the Internet and associated digital trade will have serious economic consequences. Given this context, we analyze the impact of data policies that impose restrictions on digital trade, specifically on cross border data flows. We construct Market Data Restrictions Index (MDRI), that measures the data restrictions faced by an exporting country from their trade partners. We use a variation of random effect model on a panel data set consisting of 60 countries that contribute to more than 50 percent of IT services export during the period 2006–2017. The results indicate that apart from variables such as Foreign Direct Investment, and Service Value Added, the MDRI of partner countries has a moderate negative effect on IT services export. If countries move from liberal policies to stringent data restrictions, the economies of the country that exports its ICT services to these partner countries is affected substantially. Hence government regulators shall be cautious in imposing stringent data restrictions as it affects global digital trade.
Global flows of goods and services that contribute to international trade have reached US$25 trillion as of 2019 (UNCTAD, 2020). Over the last two decades, financial flows including Foreign Direct Investment (FDI) have become significant across countries (UNCTAD, 2020). Recently there is a growing interest amongst researchers to look at digital information flows as another factor of importance in international trade and consequently on growth of the economies (MGI, 2014; MGI, 2016). Between 2004 and 2014, it is estimated that digital trade increased world GDP by more than 10 per cent, equivalent to US$7.8 trillion (Meltzer & Lovelock, 2018). International digital trade that comprises of import and export of digital goods and services, involves significant data flows across national borders.
Most of the data flows of the last decade were primarily attributable to Information and Communication Technology (ICT) services.IT outsourcing firms, especially in countries such as India, benefitted due to free flow of cross border data, thereby providing ICT services to business customers located mainly in the U.S. and Europe. For example, India - one of the world’s leading ICT outsourcing destinations, witnessed exports of ICT services worth US$105 billion in 2019, with an annual compounded growth rate of about 10.23 percent since 2010. Ubiquitous Internet connectivity, digitization of business processes, and large availability of skilled technical manpower has contributed to the growth of ICT outsourcing services in India and has established the country firmly in the global digital supply chain (Carmel & Tjia, 2005; Edwards & Sridhar, 2005).
Conclusions and future research directions
This paper makes two unique contributions to the literature on impact of data related policies on trade, more specifically digital services exports. One, the paper has constructed an index to measure the data policy restrictions a country faces in the market using the restrictions on data cluster of the existing DTRI index. Two, the paper then estimates the impact of such restrictions on the digital services exports of a country along with the traditional variables that have been used in prior literature. The results indicate a negative impact of data policy restrictions on digital services exports.
Since DTRI as a measure of restrictions on digital trade that is time invariant, further research into the impact of a time varying measure of data policy restrictions would add more rigor to the understanding the impact of data restrictions on trade. Furthermore, trade being a bilateral process, regulations imposed by both the trading partners have a bearing on the volume of trade. As such it would be valuable to understand such interactions.