iicfreport appendixa-e-final 10dec web

8/9/2019 IICFReport AppendixA-E-Final 10Dec Web

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1stExecutive MeetingIndonesia ICT Consultative Forum

April 1st, 2014

Welcoming Remarks

Luky Eko Wuryanto, Deputy Minister for Infrastructure and Regional Planning,

Coordinating Ministry for Economic Affairs (CMEA)

! Opened the forum, encouraging the sharing of perspectives, the involvement ofhigher officials and focused on outcomes that will result in concrete

improvements

Alex Feldman, President, US-ASEAN Business Council (USABC)

USABC looks forward to an ongoing and long-term programme. Indonesia is one of the

top five countries when it comes to tech use, including mobile technology, Facebook, and

Twitter. The Indonesia ICT Consultative Forum aims to spur ICT in industry in

Indonesia, as well as connect Indonesia to opportunities outside the country.

2014 is a big year:! The Councils30thanniversary

! Indonesias Parliamentary Elections

! USABC is launching ASEAN Matters for America and American Matters

for ASEAN

! USABCs CEO Missionto Vietnam and the Philippines, where CEOs will

meet with the President and members of cabinet and leaders of businesscommunity. This follows a CEO Mission in 2013 to Indonesia and

Malaysia.

Indonesia is half the population of SE Asia and more than half of its economicactivity. As economic activity continues, ICT will play a critical role in growth

and Indonesiassuccess. Getting policies right is critical to ensuring peoplebenefit and growth continues across the world. There are opportunities in the

region, as demonstrated through entrepreneurs in the region making headlines

through development of apps and games that are becoming some of the most

popular in the world. Indonesia has a lot to gain in this sector, and there is greatexcitement for this new collaborative platform.

Presentation on IICF Concept & Plan

Eddy Satriya, Deputy Assistant for ICT and Utility, CMEA

Purpose


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The Indonesia ICT Consultative Forum (IICF), an initiative started by the US-ASEAN

Business Councils ICT Committee and Coordinating Ministry of Economic Affairs aimsto create a collaborative platform between government and industry to support

Indonesias long-term policy of building a local ICT industry and toward fulfillment of a

shared goal of creating an innovation and knowledge-based economy in Indonesia.

Currently, every ministry has their own pilot projects involving ICT applications, thusthese experiences can be shared and learned from. The Forum will also serve to improve

mutual understanding in the areas of innovation, investment and regulation and will assist

in the development of future ICT policy in Indonesia.

He welcomes comments on the draft decree and proposes that the forum name IICF can

still change.

Implementation

Several objectives of the work streams include reducing coordination issues and

providing timely information before policies are made. In addition, they can be used to

promote local ICT industries.

Structure

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Key purpose of the IICF is to ensure greaterpredictability, so that companies can

see where the government is coming from and how the business community canhelp meet the common objective of a vibrant ICT sector in Indonesia.

Shared objectivesGovernment and companies want the same thinga vibrant

ICT sector. IICF envisions working toward shared objectives, not as individual

companies or ministries, but as thought leaders toward development of an

innovative, knowledge based community with local ICT industry development asan enabler to achieving this goal.

WorkstreamsWorkstreams are tools to discuss relevant issues in depth and

serve as a starting pointing. Given that this is a consultative forum, the scope is

open and subject to change. Identified work streams are:

! Emerging Digital TrendsThe transformational nature of ICT is an

enabler for economic growth. This includes new areas like: cloudcomputing and analytics, as well as others new styles of IT. These new

trends need to be understood and regulatory frameworks need to bealigned with the new trends, thus providing an environment to expand

business and create a knowledge base. To be led by Microsoft and

Qualcomm.

! Incentivizing LocalizationThis workstream looks at how to increaseinvestment interest. There is a need to level playing field and remove

barriers, but also incentives need to be in place encourage investments. In

turn, greater ICT investment leads to job creation. To be led by Intel.

! Regulatory InsightsInitially, regulatory framework changes triggeredthe need for forum. IICF wants to understand challenges and looking

forward to share best practices from other countries who are also creatinga domestic ICT industry. This information exchange helps address

Indonesiasneeds and allows companies to be more effective. To be ledby Google.

Outcomes -Today is an outcome. At a minimum, the outcome IICF hopes toachieve are regular dialogues to minimize surprise. Such that if new

regulations come up, there is a chance for consultation to allow companies to

prepare operations to remain in compliance of the new policies. Beyond

sharing of information, there can be a sharing of best practices anddevelopment of a roadmap toward the vision to create a knowledge base.

"#$%&'$# ()&* +,,- ./0)1-/2 3#%40- 5$$1$0/'0 (&) 678 /', 901:10-2 7;+5

Last September during USABCs ICT Business Mission to Indonesia this Forum was

)%'4/ *&$*#%5#1 %$ &'1#' /& *'#+/# + '&B04/ 8-@ #*&4C4/#.?

PredictabilityA win-wincan be established using the input of governmentlocal incentives, timely regulation and using the expertise of companies.


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Outcomes: In addition to reporting our findings from the work streams, we

should consider other measures of success including other metrics or mediainvolvement.

Participation: Attendeesideas and interaction are welcome. Questions to

consider: Which workstream is of most value? What topics would you like to

hear from experts about?

Work stream leaders presentation on objectives & plans

Emerging Digital Trends - Ruben Hattari (Microsoft) and Nies Purwati (Qualcomm)

Purpose: Provide updates to stakeholders on global industry trends;international best practices; case studies; government policies for long term

growth in the ICT sector.

Cloud technology: how it can help government and businesses, like SMEs.! Used in healthcare, politics and education to improve the sectors

! Important for SMEs in Indonesia given their desire for flexibility,collaboration, mobility and low costs. Also, considering around 90%

of industries in Indonesia are SME, this amounts to a large number of

companies.

! Broadband connectivity is difficult given Indonesias largeanddispersed geography/size, particularly in Eastern Indonesia where

connectivity is needed.

Concerns: cyber security, online privacy

Potential technology, such as smart cities and smart phones, will be discussedin this workstream, as well as policy challenges that new technology creates.

Incentivizing Localization, Deva Rachman (Intel)

Local demand - The education sector has the biggest need for ICT industry

Local government needs to add input but also the upcoming new government[national election coming up] requires leadership in this area as localizationneeds to be in line with Medium Term National Plan 2019.

Regulatory Insights, Shinto Nugroho (Google)

Regulatory insightGovernment needs to be in dialogue with private sectoras another source of information on how to make regulations that will

continue to create jobs and opportunities. Companies can share their good and

bad experiences in regards to the impact regulations had on the ICT sector.

TimelinessGovernment needs robust regulations to help Indonesia buildhuman resources to increase competitiveness.

Q & A

Suggestion that high-level meetings be moved forward to allow

recommendations for ICT industry to be put forward for the incoming

government and ask for chance to present to the new leadership.


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Presentation: Cloud Computing and Its Impact on Our LivesSpeaker: Tony Seno Hartono, National Technology Officer, Microsoft

Key points

Cloud computing touches all aspects of our lifesocial, economic, political,healthcare

Cloud technology provides choicesPrivate, Public, Hybrid (Public/Private)and Community clouds exist. Each option provides a different level of

privacy.

! Clouds allow for automization, massive scalability and connectivity,

which is relevant given Indonesias size/population/dispersed islands.

Therefore, the Indonesia government should create positive policies forcloud computing given these important benefits.

! Allow software developers to use the online market to download and get

revenue, or regional governments with no infrastructure to manage

infrastructure using eservices.

ISO 31,000 Risk Management framework can help make decisions aboutpublic/private cloud and when to use each. Some require services on premise,

others off-premise or some in-between.

Need to have back-up/baskets depending on expected service level agreement(SLA) and solutions need to be designed accordingly.

Digital trends in Indonesia

Young demographic in Indonesia - 54 million students = cloud computing

opportunity.

Population growth will increase internet use, particularly the 12-34 year oldsusers who are often with a higher education.

Growth is primarily in mobile phones

High social media use.

Opportunities for cloud computing in education, healthcare, and politics

Shared responsibility - Government and citizens working together providehighest ROI thus internet access should be shared responsibility betweengovernment and citizens.

Challenge of internet connectivity

!

TV Band White SpacesUse unused frequency spectrum of TV fordata

! Potential to provide all citizens with free internet access to equalize

access

The power of cloud computing to transform government services such ashealthcare and education. Thus, we should maximize benefits of cloud

computing.


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Open Discussion

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Asks how to collaborate between the government and private sector on ICTissues.

Proposes for next meetings:

! Look at how ICT has increased investment in Indonesia

!

Look at how to grow the local ICT industry. The benefits of cloudcomputing are known but the ministry struggles with how to support ICT

growth and grab the local market.

! Proposes looking at practices to grow local ICT industry in other countrieslooking at bad practices and also incentives needed to support ICT.

Workstream on incentivizing localization will address the creation of local

demand and will bring best practices, case studies . (i.e. Vietnam). These case

studies will be from closer to Indonesia and other emerging economies.

.#>4)10-

Concerns expressed regarding data security with cloud computing. Point of view

that certain data may be considered strategic thus making data security andprotection very important.

Security and privacy are important issues that must be addressed. However, this isa period of transitioning from data in a physical way to where data is on the cloud.

There are different levels of data security and privacy such that government data

is different and private. Today, data doesnt have boundaries such that data is anew form of currency. We need to think that data is accessible globally by banks


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or enterprises and need to maximize this digital economy, particularly to the

benefit of SMEs to facilitate turning them into global players.

Financing / SMEs

Local industry needs to be supported, especially in ICT because it is hard forstart-ups to get funding from banking institutions. Start-ups usually get funding

from venture capital firms and telcos.

Investment is needed but also there are lots of SMEs who need coordinationunderMinistry of Industry and Communication. In this context, the ministry is

concerned about security but cannot avoid new technologies so instead require

assistance for training and education. Ministry is challenged by all the new

concerns and balancing the need for technology with the need to comply to

legislative measuresbecause this is the way forward.

Financial services

Bank of IndonesiaRecommends inviting Indonesia Financial Authority (OJK) to join

IICF

Regulates non-banks and banks.

Given cross-over with financial services, Financial Services Committee should

also be included.

Infrastructure requirements

KOMINFOThere is a need for a responsive regulatory environment and askswhat this new environment would look like. But also raises concern on what

infrastructure is needed and the funding required; what infrastructure is needed to

ensure is internet free and once it is built how to maintain good quality

infrastructure and continuity of infrastructure operators.

Need to collaborate with other systems like transport and logistics. However, itsalso important to consider the soft infrastructurei.e. human capital. Hard andsoft infrastructure are both needed. There is currently US government support for

entrepreneurship support in Indonesia such that companies can help with

training, entrepreneurship, and promotion of hackathons in tech space.

Discussion of IICF Next Steps

Workstream leaders will make respective work plans. Companies are encouragedto sign up, if they havent already. Also, there is a need to reach each out todifferent agencies so these meetings can be taking place on a regular working

level.

There is a need for case studies, experts and guest speakers to share moreinformation on this ICT transition in Indonesia.


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Appendix

Resources

Presentation: IICF Concept & Plan

Draft decree

Presentation: Cloud Computing and its Impact on Economy

ASEAN Matters for America report

Partners in Prosperity: US Investment in Indonesia

Attendees

GOI

Luky Eko Wuryanto, Deputy Minister for Infrastructure and Regional Planning,CMEA

Eddy Satriya, Deputy Assistant for ICT and Utility, CMEA

Coordinating Ministry for Politics, Law and Security

Ministry of Industry

Ministry of Trade

Fiscal Policy Agency, Ministry of Finance

Ministry of Communication and Informatics

Bank of Indonesia

BKPM

Ministry of Tourism and Creative Economy

Partners

Didie Soewondho, Vice Chairman of Telecommunication, InformationTechnology and Broadcasting, KADIN

Eddy Thoyib, Executive Director, MASTEL

Andrew White, Managing Director, AmCham Indonesia

Sri Lakkundi, ICT Committee Co-Chair, AmCham Indonesia Jim Caruso, Economic Counselor, US Embassy

Phil Nervig, Economic Officer, US Embassy

USABC Members

Nazrya Octora, Associate Consultant, APCO Worldwide

Seow Hiong Goh, Executive Director, Global Policy & Government Affairs,Cisco Systems


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Satria Gunayoman, Consultant, Cisco Systems - HD Asia Advisory

Shinto Nugroho, Head of Public Policy and Government Relations, GoogleIndonesia

Agung Yudhawiranata, Analyst - Public Policy & Government Relations, GoogleIndonesia

Suren Velappu , Director of Corporate Affairs, South East Asia, Hewlett-Packard

Elizabeth Hernandez, Vice President of Corporate Affairs, Asia Pacific Japan,Hewlett-Packard

Ananta Gondomono, Governmental Programs LeadIndonesia, IBM

Darryn Lim, Director, Trade and Innovation Policy, Microsoft

Nies Purwati, Director of Government AffairsIndonesia, QUALCOMM

Claudia Chan, Head of Government Relations, Asia Pacific and Japan, Seagate

Ruben Hattari, Director of Corporate Affairs-Indonesia, Microsoft

Tony Seno, National Technology Officer, Microsoft

Deva Rachman, Corporate Affairs Director, Intel Indonesia Corporation

Arnold Djiwatampu, Motorola Solutions

Alexander Feldman, President, US-ASEAN Business Council

Kathy Santillo, Regional Managing Director, US-ASEAN Business Council

Desi Indrimayutri, Senior Country Representative, US-ASEAN Business Council

Shay Wester, Manager, US-ASEAN Business Council

Caroline Tanjaya, Country Representative, US-ASEAN Business Council


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2

ECIPE OCCASIONAL PAPER

No. 3/2014

When you can measure what you are speaking about, and express it in numbers,

you know something about it; but when you cannot express it in numbers, yourknowledge is of a meagre and unsatisfactory kind.

Lord Kelvin

SUMMARY

This paper aims to quantify the losses that result from data localisation require-

ments and related data privacy and security laws that discriminate against foreign

suppliers of data, and downstream goods and services providers, using GTAP8.

The study looks at the effects of recently proposed or enacted legislation in seven

jurisdictions, namely Brazil, China, the European Union (EU), India, Indonesia,

South Korea and Vietnam. Access to foreign markets and globalised supply chains are the major sources of

growth, jobs and new investments in particular for developing economies. Manu-

facturing and exports are also dependent on having access to a broad range of ser-

vices at competitive prices, which depend on secure and efficient access to data.

Data localisation potentially affects any business that uses the internet to produce,

deliver, and receive payments for their work, or to pay their salaries and taxes.

The impact of recently proposed or enacted legislation on GDP is substantial in all

seven countries: Brazil (-0.2%), China (-1.1%), EU (-0.4%), India (-0.1%), Indone-

sia (-0.5%), Korea (-0.4%) and Vietnam (-1.7%). These changes significantly affect

post-crisis economic recovery and can undo the productivity increases from major

trade agreements, while economic growth is often instrumental to social stability.

If these countries would also introduce economy-wide data localisation require-

ments that apply across all sectors of the economy, GDP losses would be even high-

er: Brazil (-0.8%), the EU (-1.1%), India (-0.8%), Indonesia (-0.7%), Korea (-1.1%).

The impact on overall domestic investmentsis also considerable: Brazil (-4.2%),

China (-1.8%), the EU (-3.9%), India (-1.4%), Indonesia (-2.3%), Korea (-0.5%) and

Vietnam (-3.1). Exportsof China and Indonesia also decrease by -1.7% as a conse-

quence of direct loss of competitiveness.

Welfare losses (expressed as actual economic losses by the citizens) amount to

up to $63 bn for China and $193 bn for the EU. For India, the loss per worker is

equivalent to 11% of the average month salary, and almost 13 percent in China and

around 20% in Korea and Brazil.

The findings show that the negative impact of disrupting cross-border data flows

should not be ignored. The globalised economy has made unilateral trade restric-

tions a counterproductive strategy that puts the country at a relative loss to others,

with no possibilities to mitigate the negative impact in the long run. Forced locali-

sation is often the product of poor or one-sided economic analysis, with the sur-

reptitious objective of keeping foreign competitors out. Any gains stemming from

data localisation are too small to outweigh losses in terms of welfare and output in

the general economy.


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INTRODUCTION

Over the past few years, there has been a widespread proliferation of regulatory restric-

tions of the internet, in particular for commercial use. Whereas governments earlier en-

deavours to increase control over the internet had the implicit aim of keeping information

outside state borders, this new breed of regulation aims at keeping data in. With the pretext

of increasing online security and privacy, some governments are requiring mandatory stor-

age of critical data on servers physically located inside the country, i.e. data localisation. Also,

some data protection and security laws create barriers to cross-border data transfers to such

an extent that they are effectively data localisation requirements.

The belief that forcing personal information, emails and other forms of data from leaving

the country would prevent foreign surveillance or protect citizens online privacy is flawed

in several ways. First, many of the recent legislative proposals pre-date the surveillance rev-

elations, and are not designed for addressing these issues. Second, information security is

not a function of where data is physically stored or processed. Threats are often domestic,

while storing information in one physical location could increase vulnerability. Thirdly, datalocalisation is not only ineffective against foreign surveillance, it enables governments to

surveil on their own citizens. Moreover, users and business do not access data across borders

with the purpose of evading domestic laws, while legal obligations do not always depend on

where a server is physically placed.

As a result, data localisation, or discriminatory privacy and security laws to similar effect,

has spawned severe protest from advocates for open internet and the global trading system.

Forced localisation is often the product of poor or one-sided economic analysis, with the

surreptitious objective of keeping foreign competitors out, or creating a handful of new jobs

in e-commerce, data centres or consultancies. However, any job gains as a result of data

localisation are minuscule compared to losses in terms of jobs and output in other parts of

the economy.

Access to foreign markets through trade liberalisation and globalised supply chains are major

sources of growth, jobs and new investments in particular for developing economies. Given

the nature of todays globally interconnected economy, poorly designed national policies

that increase data processing costs have a severe economic impact as many sectors of the

economy rely on digitally supplied services and goods. Manufacturing and exports sectors

are also dependent on having access to a broad range of services at competitive prices such

as logistics, retail distribution, finance or professional services which in turn are heavily de-

pendent on secure, cost-efficient and realtime access to data across borders. When data must

be confined within a country, it does not merely affect social networks and email services,

but potentially any business that uses the internet to produce, deliver, and receive payments

for their work, or to pay their salaries and taxes.

This paper aims to quantify the economic losses that result from data localisation require-ments and related data privacy and security laws that discriminate against foreign suppliers

of data. It does so by using a computable general equilibrium model (CGE) called GTAP8

(see Annex II), which is a well-acknowledged methodology that is frequently used for trade

and economic impact analyses by academia and policymakers worldwide. The study looks

at the effects of the recently proposed or enacted legislation in seven jurisdictions, namely

Brazil, China, the European Union (EU), India, Indonesia, South Korea and Vietnam. Some

of these countries have conducted quantitative impact studies (notably the EU) measuring

institutional or firm-level costs.1Yet, no public study by a market regulator has investigated


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the effects on exports, gross domestic product (GDP) and consumer welfare as a result from

proposed data localisation requirements or privacy laws.

OVERVIEW OF RELEVANT INTERNET AND PRIVACY REGULATIONS

The analysis looks at a number of recently introduced or proposed measures with respect

to data localisation by conducting a survey in each of the aforementioned countries juris-

dictions. The measures are assumed to alter the costs of engaging in commercial activities

in the selected countries (a brief description of all measures in each country can be found in

Annex I). The way in which these primarily privacy and security related measures operate is

of principal importance for accurate data modelling. For instance, data localisation require-

ments are effectively disruptive bans of data processing and hence the foreign provision

of that service into the domestic territory. The ban can be introduced economy-wide (e.g.

China, Vietnam), or selectively to a particular sector (e.g. only financial services in Korea).

Besides data localisation, a number of administrative regulatory barriers could be introducedthrough additional legal obligations that increase compliance costs, such as stricter con-

sent requirements, a right to review personal information held by firms, the requirement to

notify a market regulator and/or data subjects in case of potential security breaches. Some

measures are institutional such as the requirement to appoint a data privacy officer (DPO)

within the organisation; while others increase business risks by introducing sanctions for

non-compliance (in many cases with ambiguous laws), or a governments right to access a

business proprietors or its clients data.

Overall, compliance with these measures increases the operational expenditure of firms

which raises domestic prices and non-tariff barriers (NTB) on imports. Therefore, in order

to measure the actual or potential costs of introducing these measures, for this paper we have

estimated the costs of all data localisation measures using two different scenarios:

Scenario 1, which is based on the actual proposed regulations as defined in Table 1,

including data localisation in each country as per today.

Scenario 2, which is based on the actual proposed regulations, but with the addi-

tion of a data localisation requirement applied to all sectors in each country.

TABLE 1: OVERVIEW OF REQUIREMENTS IN LEGISLATIVE PACKAGES

Brazil China EU28 India Indonesia Korea Vietnam

Data localisation requirement No Yes No Partial Yes Partial Yes

Consent required for datacollection

Yes Yes Yes Yes Yes Yes No

Consent required for transfer

to third partiesYes Yes No Yes No Yes No

Right to review No No Yes Yes Yes Yes No

Right to be forgotten Yes Yes Yes No No Yes Yes

Breach notification No Yes Yes No Yes Yes No

Impact assessment No Yes Yes No No No No

Data privacy officers No No Yes No No Yes No

Sanctions for non-compliance Yes Yes Yes Yes Yes Yes No

Government access required Yes No No Yes No No Yes

Data retention requirement Yes No No Yes No No Yes


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CONCEPTUAL MODELLING

The scenarios are calculated using several economic shocks caused by data restrictions.

If new regulations restrict businesses and individuals from using data in a reasonable man-

ner prices of any good or service that uses data in its production would also increase. For

example, the input costs for a logistics company would increase as they can no longer process

data on its customers or shipments using their existing IT suppliers or infrastructure, or are

faced with some compliance costs for doing so. This new cost is passed on to its customers

who may be manufacturers, exporters and consumers. Thus, increased regulation leads

firstly to domestic productivity losses for various sectors of the economy. Secondly, it creates

an additional trade barrier against data processing and internet services, or any service (to a

lesser extent also goods) that depends on the use of data for delivery. Thirdly, as the competi-

tiveness of the economy changes, investments (both domestic and foreign) will be affected.

Finally, the effectiveness of R&D is affected to the extent that product development depend

on customer and market data to compete in the market place.

The first shock, which measures the effect on productivity, is created using a so-called aug-mented product market regulatory (PMR) index for all regulatory barriers on data, including

data localisation, to calculate domestic price increases or total factor productivity (TFP) loss-

es.2 It sets out what domestic companies will have to pay additionally for sourcing domestic

data services by first estimating the general effect of administrative burdens in data process-

ing services on prices and TFP in each sector of the economy. Data processing services is an

important input for production and by using existing indexes from the OECD measuring

administrative barriers in services over time, we evaluate the extent to which these admin-

istrative barriers in data services affect other parts of the economy through the use of data

services. For example, the telecommunications sector is very data intensive (with 31% of its

inputs being data-related) and should be more heavily affected by regulation; similarly, data

processing is 5 to 7% of the total inputs used by business/ICT and financial services.3

The index is then raised based on the regulatory barriers as given in Table 1 for each coun-try. Not all of these measures are equally restrictive, and their relative importance is there-

fore weighted according to their relative cost impact.4By benchmarking the resulting index

against the estimate prior to the legislation and data processing intensities for all sectors, we

compute the price and TFP changes for all sectors in each country as a result of data localisa-

tion and administrative barriers.

The second methodology computes cost differences between countries as a result of data

localisation requirements in each of the countries. Two types of data are primarily used

namely the Data Centre Risk Index,5and an empiric observation of cost differences.6The

first source ranks countries according to a number of risk factors that affect the costs of oper-

ating a data centre a ranking that closely follows the general cost structure across countries

of setting up a centre as a consequence of data localisation measures. The observations of

actual costs are broadly in line and thereby confirm the Risk Index.

These costs are up-front trade costs each firm will need to incur when investing in and ex-

porting to one of our selected countries (see Annex II). These trade costs are allocated across

all sectors in each economy based on the intensity with which each sector uses data services.

The final numbers are interpreted as the additional costs a firm will need to pay for using data

services when entering one of the countries in which data localisation laws are implemented.

The third shock occurs on investment, which forms a major driver for economic growth for

developing countries in particular. However, as the regulatory environment imposes more


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those for Vietnam, India and Indonesia seem low. Yet, it should be taken into account that

the average workers salary is much lower in the latter countries. To give an example, using

comparable average workers salaries across countries the negative welfare effect would still

cost the Indian worker almost 11 percent of one average month salary. Similarly, for China,

this impact would come down to almost 13 percent, and even much higher for Korea and

Brazil around 20 percent for both economies.

CONCLUSION

Industry and internet advocates have warned against an Internet which is fragmented

along national borderlines. Some of them are going as far as calling balkanisation the great-

est threat to the Internet today, even greater than censorship.9One comprehensive study by

Chander and L (2014) from the California International Law Centre established that data

localisation threatens the major new advances in information technology not only cloud

computing, but also the promise of big data and the Internet of things.10It is not unlikely

that future trade agreements will include disciplines against data localisation requirements,as there are often less trade-restrictive measures available to address privacy and security.

However, the more immediate effect of data localisation measures the impact on economic

recovery and growth is even more dangerous. As this study has shown, this impact is a

direct consequence of the complex relations between cross-border data flows, supply chain

fragmentation and domestic prices. These are complexities that are generally not understood

by policymakers, who are often in the field of security and privacy law, rather than interna-

tional trade. The findings regarding the effects on GDP, investments and welfare from data

localisation requirements and discriminatory privacy and security laws are too considerable

to be ignored in policy design. It is also reasonable to assume that SMEs and new firms are

the first to be displaced from the market, as they lack resources to adapt to the regulatory

changes.

In the current security policy context, many regulators and privacy advocates stress the

importance of discretion to tackle problems at a national level (e.g. NetMundial 2014 draft

conclusions)11. The economic evidence however proves that unilateral trade restrictions are

counterproductive in the context of todays interdependent globalized economy. The self-

incurred losses make data localisation a policy that unilaterally puts the country at a relative

loss to others while the possibilities for offsetting the negative impact through trade agree-

ments or economic stimulus are relatively limited over the long term.


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ANNEX I

Brief overview of proposed and enforced acts reviewed

Brazil

The Brazilian internet law Marco da Civil started out its life as a crowdsourced legislative

proposal in 2009. While it emphasised the fundamental principles of internet freedom and

net neutrality, following revelations that Brazilian entities had been subject to US surveil-

lance, new privacy related amendments were made to the bill , including strict consent re-

quirements for data collection, internet users right to be forgotten and a clear data localisa-

tion provision the controversial article 12, which was later withdrawn.

China

The existence of a plethora of overlapping data privacy laws has traditionally made compli-

ance a very difficult issue in China. Driven by an increasing number of reports on identitytheft and illegal trade in personal data,12rather than surveillance concerns, China has how-

ever taken steps towards privacy reforms the Resolution relating to Strengthening the Pro-

tection of Information on the Internet of December 2013 includes general rules for internet

service providers (ISPs) and other businesses prohibiting the collection of personal data

without consent and the illegal transfer or sale of personal information to third parties.13In

the same year, the Standardisation Administration and the General Administration of Qual-

ity Supervision, Inspection, and Quarantine published new national standards that prohibit

overseas transfers of data to an entity absent express user consent, government permission,

or other explicit legal or regulatory permission. Despite the voluntary character of these

guidelines, they serve as regulatory baseline for law enforcement and are de facto data lo-

calisation laws for all business sectors.14The Peoples Bank of China (PBOC) has also issued

a Notice to Urge Banking Financial Institutions to Protect Personal Financial Information, 15

which explicitly prohibits off-shore storing, processing or analysis of any personal financial

information of Chinese citizens; meanwhile the Ministry of Industry and Information Tech-

nology (MIIT) has banned collection of personal data without consent or without specific

and clear purpose.16The Telecommunications and Internet Personal User Data Protection

Regulation also requires regular risk impact assessments to be conducted by data processors.

The European Union

In January 2012, the European Commission proposed a reform of the EUs data protection

regime, which is currently based on the 1995 Data Protection Directive. The aim of the new

proposal, dubbed the General Data Protection Regulation (GDPR), is to establish a single

European-wide data protection law. Aside from simplifying administrative procedures and

centralizing supervisory authority, GDPR also introduces strict consent requirements, aright to review, a right to be forgotten, and the obligation for businesses to appoint a data

protection officer (DPO) and perform an annual data protection impact assessment (DPIA).

If implemented, the GDPR reform could lead to a stoppage of cross-border data flows from

the EU to important data processing countries such as the US and India, which are deemed

to have adequate data privacy safeguards in place under the EUs current regime.

Aside from GDPR, the Commission has also adopted a strategy for Unleashing the Potential

of Cloud Computing in Europe. The strategy aims to unify rules and standards related to

cloud computing within Europe. If these standards will be designed in a way that decreases


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the interoperability with other countries regulatory regimes, this could lead to a de facto

data localization.

India

In 2011, the Indian Ministry of Communications and Technology implemented certain pro-

visions of the 2000 Information Technology Act by publishing privacy rules. These Reason-

able Security Practices and Procedures and Sensitive Personal Data or Information Rules

introduced a strict consent requirement that only allows for sensitive personal data to be

transferred abroad when necessary or when the individuals consent has been obtained.17,18

These rules also introduced the right to access and review personal information that a com-

pany holds. The mercantilist intent of the law is clear, as the government of India issued a

clarification to emphasise that the rules do not apply to its expanding outsourcing business. 19

The laws have also been amended with a data retention requirement (with duration at the

discretion of the government) for intermediaries that so far has not been implemented.

National media in India have reported that the National Security Council Secretariat (NSCS)

is considering proposals that incorporate strong elements of data localisation, mandating all

email providers to set up local servers, or that all data generated from within India should be

hosted in these India-based servers and this would make them subject to Indian laws. The

strategy also includes creating an Indian email service and ensuring Internet traffic data is

routed within India as much as possible, including precedents of forced data localisation for

selective cases and services, e.g. BlackBerry mail services in 2012.20

Indonesia

ata protection is covered by Law No. 11 of 2008 regarding Electronic Information and Trans-

action (the EIT Law) and Government Regulation No. 82 of 2012 regarding the Provision ofElectronic System and Transaction (Reg. 82), which went into force on 15 October 2012. In

order to collect and process data, the data controller needs a legitimate reason for collection

and the individuals consent.21Regulation 82 further requires a broad and undefined group

of companies, electronic systems operators for public service to set up a data centre and

disaster recovery centre in Indonesian territory for the purpose of law enforcement and

data protection. The scope of this requirement is unclear however, as electronic systems op-

erators for public service are not clearly defined. Draft Regulation Concerning Registration

Procedure of Electronic System Provider and January 2014 Draft Regulation with Technical

Guidelines for Data Centres contain same ambiguity, although a ministry spokesperson was

quoted saying: [the draft] covers any institution that provides information technology-

based services.22

Korea

In the Republic of Korea, the Personal Information Protection Act (PIPA) has been in force

since 30 September 2011 and covers all sectors. In addition, the sector-specific Act on Promo-

tion of Information and Communication Network Utilisation and Information Protection

(IT Network Act) regulates the collection and use of personal data by IT service providers.23

Under these acts, every data handler (including businesses, individuals and government

agencies) must appoint a data protection officer (DPO), and consent must be obtained both


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for the initial collection and processing of personal data and prior to any transfer abroad or to

third parties. PIPA gives individuals the right to review and delete personal data that pertain

to them and obliges data handlers to notify the data subjects without delay in case of a data

breach. If the number of individuals affected exceeds 10,000, the data handler must also no-

tify the relevant authorities. In addition, Korea prohibits the outsourcing of data-processing

activities to third parties in the financial services industry. Banks can therefore only process

financial information related to Korean customers in-house, either in Korea or abroad.

Vietnam

In 2013, the Vietnamese government issued Decree 72, on Management, Provision, and Use

of Internet Services and Information Content Online, which came into effect on September

1st.24The Decrees main aim seems to have been to tighten the governments grip on the

Internet and limit free expression,25with a broad range of prohibitions under article 5 in-

cluding opposing the state. The Decree requires ISPs to obtain a license and to register with

the Ministry of Information and Communications before providing online services, and all

organisations establishing general websites, social networks and companies providing ser-

vices across mobile networks are required to establish at least one server inside the country

containing the entire history of information posting activities on general information web-

sites () and sharing on social networks.


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ANNEX II

Description of the GTAP8 model

1. The Model

The model applied in this study is GTAP 8, a computable general equilibrium (CGE) mod-

el.26The most recent model setting accounts for inter-sectoral linkages between 129 regions

while capturing inter-regional trade flows of 57 commodities. The framework thus allows

for a general equilibrium analysis of the economic effects (e.g. GDP effects and changes in

trade flows) resulting from the regulation of cross-border data flows. In this model, regional

production is characterized by constant returns to scale and perfect competition. Private de-

mand is represented by non-homothetic consumer demands. The structure of foreign trade

is based on the so-called Armington assumption, which implies imperfect substitutability

between domestic and foreign goods.

The most recent GTAP 8 dataset includes national input-output data as well as trade, tariff

and demand structures. The models base data are primarily benchmarked to 2007. Trade

data are based on 2004 and 2007 values while the reference year of protection data is 2007

(see Narayanan et al 2012).27 Like any applied economic model, this model is based on a

number of assumptions. In order to account for recent changes in regional macroeconomic

variables, the GTAP 8 dataset on the global economy is extrapolated to 2014.

The exogenous variables used for the extrapolation are macroeconomic variables, i.e. the

size of GDP, total population, labour force, total factor productivity and capital endowment

as provided by the well recognised database of the French research center in international

economics (CEPII), which is documented by Four et al (2012).We apply the estimates of

these macroeconomic data projections in order to calculate the best estimate of the global

economy in 2014. Preferences and production structures as described by the models struc-

tural parameters have been left unmodified.

The model we use in this study is comparative static. This model does not account for endog-

enous productivity growth and may thus under-predict welfare effects, economic growth and

increases in trade flows that result from the imposition of NTBs due to regulations of cross-

border data flows.28The interdependence between, on the one hand, productivity growth

and, on the other hand, exports, imports and investment is neglected in static CGE models.

2. Treatment of Investment

GTAP is a pure real goods model that does not account for financial instruments. Thus, the

standard GTAP model does not take into consideration supply-side impacts of capital market

conditions. In the model, investors are represented by a global bank allocating regional sav-

ings and investments around the world. Investment itself is represented by a stock of capitalgoods (CGDS), which is treated as a commodity that is purchased by the global bank and al-

located to regions following a return-equalising rule. The capital goods commodity does not

employ any primary factors of production. It rather absorbs a mix of intermediate goods such

as construction, machinery equipment, vehicles, and services etc. In addition, capital goods

cannot be traded across regions. Instead regional capital goods formation is determined be

regional savings, which are absorbed by the global bank and reallocated to regions thereaf-

ter.29For a detailed description of the treatment of capital goods in GTAP see Malcom (1998).


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In order to estimate the economic impact of decreasing returns on capital due to data locali-

sation barriers to trade, we follow an indirect expected rate of return approach. It is assumed

that the global bank allocates investment across regions in such a way that risk-adjusted rates

of returns are equalised across regions. Thus, in GTAP a change of the expected rate of return

in a given region results in corresponding changes in the amount of regional investment. The

underlying assumption is that equilibrium rates of returns on investment are equal across

regions and equal to a global rate of return. In addition, it is assumed that expected returns

in a specific region will fall as the amount of investment rises. Thus, a difference between the

global rate of return and a regions rate of return triggers a reallocation of investment across

regions until regional rates of investment are equalised again. The difference between risk-

adjusted regional rates of return can be read as a region-specific risk premium decreasing

the regions attractiveness to investors. In line with this assumption, an increase in regional

investment risk reduces capital goods formation and decreases demand for factor inputs to

investment in the region concerned. At the same time, investment would increase in regions

not affected by decreasing investor appetite.

The results of our experiment only have indicative character, meaning that we are not able

to forecast the precise investment effect due to data localisation barriers to trade mainly

for two reasons: 1) The shortcomings in the treatment of investment in GTAP and 2) the

transformation of expected returns on investment into investors risk appetite, which is an

empirical problem in general. Yet, the methodology we apply allows us to forecast and trace

the direction of investment flows.


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