Financial Data Does Not Need or Deserve Special Treatment in Trade Agreements

By pushing for a financial data carve-out in the TPP, the United States has undermined its own interests and sent a dangerous message that may encourage countries to enact more protectionist data policies.

In today’s economy, data is to global trade what manufactured goods were in the post-War Bretton Woods system—its lifeblood. However, the data-driven economy is under increasing threat as countries impose a slew of nontariff trade barriers that limit the flow of data across borders. Some of these measures stem from privacy and security concerns, but many constitute naked protectionism. 

This trend should be of particular concern to the United States, because it holds a leadership position in many of the technologies at the heart of the data economy. Yet the United States has effectively undermined its own interests in one of the most significant trade deals in a generation, the Trans-Pacific Partnership (TPP), by pushing for the financial sector to be exempted from the agreement’s prohibitions on measures that would force data to be stored within a country’s geographic borders, a practice known as “data localization.” 

Giving countries a free pass to require certain data to be stored inside their borders will raise costs for financial services firms, and the firms will have to pass those costs on to the businesses and customers they serve. Furthermore, the carve-out validates the false belief that storing data outside a nation is somehow inherently riskier than storing it locally. Such a belief may embolden data mercantilists, such as China, Indonesia, India, Nigeria, and Russia, to use the U.S. approach as cover for further digital protectionism, undermining U.S. efforts to push back against such measures. 

The report finds that the rationale for the carve-out is faulty and redundant. Firstly, concerns about access to financial data that arose during Lehman Brother’s bankruptcy during the global financial crisis have been addressed through the Dodd-Frank Wall Street Reform and Consumer Protection Act. Secondly, the TPP includes a provision which allows wide-ranging U.S. regulatory action in the banking and financial sector, including the hypothetical scenario where regulators needed a bankrupt financial institution to store data locally during a financial crisis. This “prudential exception” provision allows regulatory actions even if this contravenes other parts of the trade agreement, such as the TPP’s rules against data localization. 

The report underscores the need for the United States to not only change its current approach to financial data, but also to pursue broader international rules to support the free flow of data. Specifically, the United States should pursue the following policies:

  1. The United States should work with other parties in the TPP to narrow this loophole through side agreements;
  2. The United States should work to exclude this carve-out in future trade agreements, such as the Trade in Services Agreement and the Transatlantic Trade and Investment Partnership; 
  3. The U.S. government should focus more time and attention on hiring, developing, and consulting with people with relevant digital economy and information technology expertise during future negotiations; 
  4. The United States should redouble efforts to use international financial forums to address jurisdictional concerns over data access during a financial crisis; and 
  5. The United States should step up its efforts to build a multilateral policy framework to support the free flow of data.