The world economy is going digital at a head-spinning rate. Cross-border e-commerce has ballooned 45-fold in a decade to an estimated $2.7 trillion. Today nearly two thirds of global commerce is related to digital technology.

Companies and government are pouring vast sums into digital transformation initiatives: an estimated $6.8 trillion between 2020 and 2023 — equivalent to the combined GDP of France and Germany.

The pace of change can make digitalization feel unstoppable. Yet the big numbers hide a range of unsolved problems. Cross-border data flows are increasingly becoming an arena for friction between states and for frustration among businesses. Fragmented regulatory regimes are holding back what should be an even more transformative — and life-enhancing — digital revolution.

Data flows: an essential part of the modern economy

Everyone has a stake in the issue. Industries that rely heavily on cross-border data flows —professional and technical services, for instance — are among the biggest drivers of global growth. Traditional manufacturing also increasingly relies on data, thanks to the emergence of “smart” factories and shipping networks. Saving the planet requires data too, as information on carbon emissions needs to be traced throughout complex global supply chains.

The basic dilemma is this: countries know that allowing data to flow across borders has wide-ranging benefits, but they are reluctant to give up control. Regulating how data is used within their own jurisdictions is hard enough; they don’t always trust outside organizations — be they governments or technology companies — to steward their citizens’ data responsibly. The result has been a growing number of often confusing, conflicting data regulations. Add in language barriers and other country-specific obstacles, and the task for those who want to want to maximise the potential of data while complying with national regulations becomes even more daunting.

Almost four years ago, Japan proposed a solution to this dilemma. The idea, known as Data Free Flow With Trust, or DFFT, has been endorsed by members of the G20 and G7 and incorporated into numerous international trade agreements. The World Trade Organization (WTO) is using its principles to guide negotiations over global e-commerce rules.

These government-to-government advances have been joined by bottom-up initiatives from the private sector. In Europe, innovators like Catena-X and Gaia-X are developing data-sharing platforms for the automotive and cloud-services sectors. Japan’s Green x Digital consortium is working on similar tools to help businesses achieve carbon neutrality. Such projects are beginning to build the infrastructure needed to support government data-sharing agreements, while broadening the scope of global data flows from consumer e-commerce data to industrial data.

Regulatory fragmentation threatens data flows

Many challenges remain, however. The most serious is regulatory fragmentation, which has, if anything, become a bigger problem since the DFFT concept was first floated in 2019.

Rule-making on data flows is hard to separate from geopolitical rivalry — as China’s blocking of US internet services like Google and Facebook, and US pressure on Chinese internet services like TikTok and WeChat, shows. The US and European Union have also struggled to find common ground on privacy and data protection: Washington and Brussels agreed to a replacement framework for trans-Atlantic data transfers in March, after the Court of Justice of the European Union ruled two years earlier that US data protection rules were inadequate, and the framework for sending personal data from Europe to the US was “invalid.” Meanwhile, there are growing demands for data localization — when countries require data related to their citizens or businesses to be stored domestically and restrict its transfer abroad. Negotiations on government access are also not straightforward.

Strong institutions for cross-border data flows

DFFT envisions promoting cross-border data flows by creating mechanisms for transferring and verification data that are both trusted and flexible enough to accommodate different countries’ values. The Forum’s recent paper reviews the current challenges facing DFFT, offers direction for policy mechanisms and concrete tools for businesses and, more importantly, promotes global discussions about how to realize DFFT from the perspectives of policy and business. Institution-building is crucial to this effort. Concrete institutional frameworks are needed to counter fragmentation and connect the high-level discussions taking place at WTO and elsewhere to the nascent platform-building being undertaken by businesses.

The next major opportunity to fill the institutional gap will come at the 2023 G7 meeting, which will be hosted by Japan, the originator of the DFFT concept. Kono Taro, Japan’s Minister of Digital Affairs, has stated that Japan’s goal is to “build stronger and more effective international alliances and cooperative relationships” in the digital arena.

“While respecting the rules of each country,” Mr Kono said, “we would like to increase transparency regarding which countries are using which rules, and increase interoperability by increasing real-world examples of how data is used.”

Some hints for a potential G7 data-policy agenda can be found in a report published by Japan’s Ministry of Economy, Trade and Industry this winter. The Final Report of the Expert Group on Data Free Flow with Trust proposes establishing a global, permanent forum that includes both an intergovernmental panel and a multi-stakeholder panel for discussing and driving projects: a global system for mapping regulatory information related to cross-border data transfers, certification on data quality, cooperation on privacy enhancing technologies, et al.

The world needs to get behind the DFFT effort. Data is simply too important let stagnate behind national walls.