How and why data must flow freely and responsibly across borders

The world is getting smaller. Powered by the global economy’s digital transformation, countries and people in many ways are growing closer together. Few of the conveniences of modern life — from international travel to purchasing almost anything from anywhere with the click of a button, to the fact that payment methods issued in one country work securely in another — would exist without the free flow of data. In fact, much of the world's present and future economic growth relies on it.

In the face of growing challenges to free-flowing data, the former Japanese Prime Minister, the late Shinzo Abe, created the Data Free Flow with Trust (DFFT) concept based on the idea that open data flows and trust can coexist. As the current host of the Group of Seven (G7), the Japanese government now seeks to build a consensus for operationalising DFFT in a novel Institutional Arrangement for Partnership (IAP). We support proposals for a new permanent institutional mechanism to complement the work of existing international forums on data flows.

To identify a range of emergent opportunities and pressing issues, the proposed mechanism should convene senior government officials and high-level representatives from multiple stakeholders, including the private sector, academia and civil society. To catalyse continuous progress on DFFT, the mechanism should be empowered to test new ideas and pilot practical steps to increase the interoperability of different data rules.

At the national level, data access and sharing across borders may generate social and economic benefits up to 2.5% of GDP (up to 4% of GDP in a few studies). According to the OECD, cross-border data flows are especially important for small and medium-sized enterprises (SMEs). With better and faster access to critical knowledge and information, SMEs can overcome informational disadvantages, allowing them to more readily compete with larger firms.

Other studies show that digitally enabled SMEs tend to have greater resilience and agility, helping them to expand sales volumes and international reach. A recent study that looked specifically at women-led small businesses suggests that greater access to digital tools enhances financial inclusion and contributes to economic growth. Global data transfers also enable a multitude of other important activities, including the sharing of essential information for scientific research and innovation, human trafficking prevention, disaster management and anti-fraud and money laundering efforts, as well as facilitating collaboration on climate change initiatives.

Despite the many clear benefits of open data flows, cross-border data access and sharing continue to face challenges. As digital economic activity continues to expand, a growing number of countries have put forward regulatory frameworks that include data localisation rules – explicit requirements that data must be stored and/or processed within their territory. Others have introduced complex data transfer rules that can have the same effect as data localisation requirements. Data localisation measures may also limit data flows in more than one way, for example, by introducing both on-soil storage requirements and prohibitions on data flows outside the country.

Beyond localisation, international data custodians of all sizes grapple with how best to comply with mushrooming and sometimes contradicting data transfer obligations across countries. For example, across the G20 and Europe there are new data governance rules proposed every day on average in 2023. In a rapidly evolving regulatory environment, international data custodians need to ensure compliance in each of the countries in which they operate at the risk of potentially sizeable fines.

While these rules may be well-intentioned, the reality is that curtailing data flows can have a number of potentially limiting real-world consequences. Data flow restrictions and regulatory fragmentation can have a broad and negative economic impact in slowing innovation, raising costs for businesses and individuals and, ultimately, hurting economic growth. With growing restrictions on data flows and rising digital fragmentation, we risk losing opportunities today and foregoing prosperity tomorrow.

Policymakers, trade negotiators and regulators are actively working to square domestic privacy and security concerns with the free flow of data – and the benefits that come with it. While important progress has been made, existing trade negotiation tracks and regulatory alignment efforts struggle to keep the pace of the digital economy. An effective and trusted international cooperation mechanism would be an important complement to support their progress.

Late Prime Minister Shinzo Abe’s DFFT concept has been endorsed in various international forums, including the G7 and G20, as a framework that can ensure both the protection of sensitive data and its secure transfer across borders. With the Japanese government holding the G7 presidency and championing the cross-border data flows agenda, there is a unique opportunity to operationalise the concept of DFFT, helping to advance international cooperation on issues such as data privacy, cyber security, user consent and data transfers.

The Japanese government’s proposal to establish a new institutional mechanism to operationalise the DFFT and promote regulatory interoperability is a tangible step forward. The new institutional mechanism should have a permanent secretariat to ensure clear focus, continuous progress and meaningful participation. It should engage global stakeholders, including the private sector, academia and civil society to identify priorities and spot opportunities for action. Furthermore, the new institutional mechanism should have the capacity to test and pilot practical solutions to facilitate DFFT to help its participants create multiple paths to increase the interoperability of their data rules.

A new institutional mechanism built along these design choices can bring several additional benefits to the international system. Firstly, it can facilitate the interoperability of data rules across jurisdictions, without interfering with domestic regulations. Secondly, it can provide a laboratory for practical ideas and solutions to continuously advance data-free flow. Thirdly, it can help advance ideas from diverse stakeholders, including government, labour, business and civil society. Finally, it can create consistency, short communication channels and accountability among its participants.

Ensuring that data flows efficiently and responsibly across borders requires addressing privacy, online safety, disinformation, transparency, fairness and other concerns. The free flow of data across borders, while securing trust, is an urgent priority for people, businesses, governments and institutions. Ultimately, if we are to realize the full potential of the digital economy, data must flow across borders. Multilateral, international, public-private cooperation is, now more than ever, crucial for addressing global data policy challenges. Under Japanese leadership, the G7 governments convening in Gunma on 29-30 April 2023 have the real opportunity to make a lasting contribution to secure trusted data flows and the shared prosperity they entail.