Challenges in Achieving Consensus on Data Localization: Digital Inequality of Digital Service Trade

Abstract

The disagreements on data localization policies significantly hamper the progression of digital service trade and free cross-border data flow. This study adopts the Theory of Comparative Advantage and the Heckscher-Ohlin Theory (H-O Theory) to construct an analytical model that investigates the inequality of digital service trade on the well-being of nations and the valuation of digital factors. Our findings suggest that digital service trade exacerbates the terms of trade for developing countries. In an environment of unrestricted data flow, developed countries capitalize on the data resources from developing nations, thereby augmenting their digital comparative advantages and factor endowments. The dynamics foster a state of digital inequality or digital poverty, where late-developing countries are disadvantaged in keeping pace with their developed counterparts. Notably, data localization, while seemingly a protective measure for developing countries, may not be the optimal strategy. It potentially undermines the overall well-being of all participants by diminishing network effects. The paper argues that the path towards the liberalization of digital trade and data flows will be a lengthy and complex one, demanding concerted international efforts to overcome entrenched trade barriers JEL Codes B12, F11, F18