Thursday 1 December 2016

Data localization in the EU: The threat from inside

As growth in the EU has remained low and the usual channels for recovery such as greater investment or an increase in the working-age population remains far-fetched, the omen is on creating higher productivity to restore economic recovery. Here, the EU finds itself in a difficult situation as it has been caught in a productivity slump now for many years.

Therefore, any measure that would further hurt EU’s productivity would be a reasons for great concern.

One example is the measure of data localization that is now threatened to be on the table again. Data localization concerns stem from the fact that citizens feel that their data is not sufficiently protected when sent and stored abroad. That concern is legitimate and policy makers should be aware of that.

Yet data localization is not the right answer. Although policy makers should strike the right balance between societal needs and economic benefits, data localization has proven to hurt the EU's economy more than it would protect European citizens. A few factors may explain this.

First, data localization and its associated regulations excessively hurts producers and users of data as they significantly hurt EU productivity, which is a measure of the way in which we effectively use our economic resources. Our research has shown that implementing regulations related to data will ultimately render prices higher of consumers and lower economic output.

Second, data localization as such does not provide more security per se. On the contrary, data localization brings together the many data of producers and consumer making it more interesting target for cyber security attacks. Instead, spreading data would be a better option so as to make it more difficult for hackers to target a so-called “honey pot” of data.

Third, spreading the storage of data also let the best suited servers to do the job of providing safe and secured data. Obliging each member state to store its own consumers’ data on its own servers is no recipe for best practise. Some member states are just better equipped to provide good storage of data than others because they are better endowed with the economic necessities of doing so.

Fourth, upfront short-term economic losses would have to incurred by everyone. Our study shows that assuming the existing explicit barriers on internal EU free flow of data are removed, it would result in GDP gains that are estimated to be up to 0.06% of GDP, equivalent to 8 billion euros.

In short, the EU has created a single market in great part to enhance economic wellbeing of its citizens. That has been done through abolishing burdensome regulations that otherwise would inhibit productivity, ultimately hitting on economic growth.

The EU’s future economic growth lies in the digital age in which data flowing across European borders is a crucial factor, just as services, goods, capital and people. Establishing a truly single European market now also demands one for data. 

Thursday 24 November 2016

A US retreat from TPP: What does services trade tell us?

During last weekend’s summit meeting of Asia-Pacific leaders in Peru, President Obama made the case that failure to sign on to TPP would “undermine our position across the region”. It would mean that if the US would not sign on the trade agreement, China would assert more leadership in the Asia-Pacific and opening a way to negotiate trade rules.

Trade patterns between countries underpin the economic diplomacy behind any potential trade agreement. That too for the TPP. If we focus on one area in which most TPP members have an interest for future trade, namely services, that concern of changing trade leadership may be true.

The picture below shows the so-called Trade Complementarity Index (TCI) for both the US and China with regards to all TPP members (excluding US). This index provides us with an idea how much the exports and imports of the US and China separately match with other TPP members’ needs, or are complementary. A high index means a good “fit” in terms of trade relations and indicates a great potential for a trade agreement between members. 

Note that this picture tells us the trade complementarity of cross-border trade in services or what others have called “digital deliverable services”, which are services that are traded over the Internet. Incidentally, TPP has the standard when it comes to the cross-border flow of data, a factor that reinforces trade in digital services.

The pattern that arises is that initially the gap between the US’s and China’s trade match with other TPP partners in services trade narrowed. However, since 2008 it has widened pointing out that the US has found better trade complementarity with other TPP members. Around that time the US entered the trade talks.

Whether the widening gap is really due to US involvement remains to be seen, but what clearly stands out is that at some point China was as much a good fit for trading services with these TPP partners as the US was.

Yet, already before the US jumped in the negotiation talks, China’s services trade complementarity diminished in the region. This downward trend seems to be of a longer nature, which may be due to China’s regulations in the digital economy over these years. If that’s the case, it puts a serious question whether China can lead the region in terms of services trade, an item the Chinese government is eager to capitalize on.

On the one hand, therefore, in a scenario that the US won’t ratify the trade pact, nothing tells us that this pattern could return. This would reinforce China’s role in the region regarding services trade that can be traded over the internet and indeed may therefore assert its influence to set the rules in this area.

On the other hand, Chinese decline of the trade pattern in digital delivered services is no good recipe to underpin China’s potential future role in the region. If China was serious about fortifying these trade relations, it should start thinking about some of its digital regulatory policies that enable digital services trade. 

Thursday 17 November 2016

How should the EU Article 29 Working Party look like?

As traditional trade measures at the border such as tariffs have come down and as more items in the economy have become tradable, policy reform has focused on dismantling trade barriers that are “behind-the-border”. 

These measures span a wider variety of goods and services on which traditionally only domestic regulators had a quasi-monopoly on to develop and advice policy. Over time, as these behind-the-border measures inhibit trade, regulators need to strike a balance with trade negotiators.

This is also true for “trade in data” or the cross-border flow of data. Data has become an item that crosses borders many times and which form an item in trade agreements these days such as in TPP. 

This is also true for the EU where the Privacy Shield has been developed, which is a framework that provides companies on both sides of the Atlantic a mechanism to comply with EU data protection requirement when transferring personal data from the EU to the US in support of transatlantic trade. 

Before the European Commission could adopt the shield, the Article 29 Working Party committee or the data protection authority, which is in fact not the regulator, but a platform that provides general expert advice on data protection matters and advised the Commission by giving an opinion on the proposal. This is a good thing as certain rights need to be protected in light of an item that becomes increasingly an economic one. 

It’s a classic example where policy makers need to strike a fine balance between an economic need (commerce) and a noneconomic goal (right of privacy). The point for this platform, which is composed of National Data Protection Authorities from each member state, the European Data Protection Supervisor and the European Commission, is to provide an opinion that would entail a removal of overly burdensome and restrictive regulations in attempt no efficiency is lost and yet secure the concern of data subject. 

However, the issue here is the configuration of the Working Party committee itself. Since the Working Party committee will ideally need to strike this balance between commerce and societal benefits, one would expect that their membership composition would be distributed accordingly. 

This is not the case however. Far from it as a matter of fact. The platform has in total 30 members (excluding one member from the European Commission). One from each member state plus a supervisor and an assistant supervisor. By checking each member’s background, the figure below presents the composition of the committee members by professional background. 

What strikes me is that a large majority of its members have a noneconomic background. The fact that most members are lawyers comes as no surprise and no reason for worry as the platform advises on European Community law. However, there are only two members with an economic background and a third one with a business background. Other educated professions that were included ranges from policeman to journalist. 

In age where the issue of data becomes an essential ingredient for economic activity, data subjects need protection. Yet, reaching the fine line between economic and noneconomic concerns starts in my view with a balanced composition of expertise and skills of those who provide expert advice upon policy. 

Tuesday 25 October 2016

Wallonia's CAN trade continued

A couple of questions have been posed regarding the graph I developed for Wallonia’s trade share with Canada. Here are some of my explanations and further thoughts on the issue.

One remark that was made related to the fact that these figures would be biased because Flanders has Antwerp. Antwerp, like Rotterdam, are known for what trade-economists call their “entrepôt” activities. These two cities import lots of goods because of their ports, store them, and then re-export them again to other parts of Europe, i.e. the hinterland, which I indeed allude to in the piece.

This bias is true, but only to some extent. The NBB source that separates regional trade between Flanders and Wallonia on the one hand and Canada on the other presents data at a level where these imports and re-exports of non-residential entities are excluded, i.e. pure transit trade appears to be out. 

Friday 21 October 2016

Wallonia's 0.45% EU-CAN trade

Since there is a crisis around CETA this week where the Wallonia region appears to be reluctant to sign the deal, I thought some economic numbers might be in place. It got me inspired by Politico who used rough community-level numbers for Belgium. Below you find my numbers:

The figure of Wallonia’s trade relations with Canada, compared to the rest of the EU, are astonishingly low with an overall figure of 0.45 percent. Note that I have been generous here with my back-of-the-envelope calculations.

In 2015, Wallonia seems to export more than it imports with Canada with a figure of almost 9.5 percent of total bilateral trade between Belgium and Canada. However, Wallonia barely imports anything from Canada, a low 1.37 percent of total bilateral trade between Belgium and Canada.

Now, a couple solutions to this puzzle might help explain Wallonia’s opposition. One, import-competing sectors are extremely powerful in this region. Second, Antwerp is in Flanders, not in Wallonia. Third, Wallonia’s current Minister-President has another agenda for which he likes to use CETA. 

Wednesday 19 October 2016

Why concluding CETA is so important for the EU

Passions have been running high this week as the EU failed to get an agreement about signing off its trade deal with Canada, what is called CETA. As it stands now, some countries remain critical of the deal, or cannot sign the deal because of internal political differences. Whatever those reasons may be, they should think twice. Other countries have been catching up with the EU in the past decades and are already today more attractive places to trade with. 

Trade agreements are concluded with one simple goal: to lower the costs of trading between countries. In other words, the objective is to lower the costs of imports and exports of goods, with the view of staying competitive in the world. The most efficient way of doing this is through the multilateral system. If that doesn’t work, trade costs could be lowered between countries directly, i.e. through bilateral or regional trade agreements.

The CETA agreement is no exception. The figure below shows that trade costs between the EU and Canada have been decreasing over time starting from a common base, i.e. 100, as illustrated by the dark blue line except during the Global Financial Crisis. Note that trade costs include tariffs as well as non-tariff measure. This picture shows a rather good sign and therefore one may wonder why a trade agreement is necessary in the first place.

The answer to that is related to the orange line, which denotes the trend of trade costs between China and Canada. Trade costs between these two countries have been decreased more rapidly over time suggesting that it has become more advantageous for Canada to deal with China than with the EU. 

Read more about this in ECIPE's Bulletin that just came out!

Thursday 13 October 2016

The Digital Trade Estimates (DTE)

Yesterday, me and my colleague Martina Ferracane at ECIPE launched the DTE database which describes all digital trade policies for 65 countries worldwide.

The DTE database is part of the wider DTE project that aims to provide transparency regarding digital trade policies in the world of international trade and trade policy. Besides the database, the project also covers an index summarizing all these cost-enhancing measures in the digital economy for all countries and issue areas. It also provides a website where you can find all this information and a final report.

The DTE database covers 13 chapters, each comprising a digital trade policy area, namely (1) Tariffs and trade defence, (2) Taxation and subsidies, (3) Public procurement, (4) Foreign investments, (5) IPRs, (6) Competition policy, (7) Business mobility, (8) Data policies, (9) Intermediate liability, (10) Content access, (11) Quantitative trade restrictions, (12) Standards, and finally (13) Online sales and transactions, i.e. e-commerce.

Although the full index and report will come out in November, people can already access the database as of now through the following website: Moreover, during yesterday’s presentation of the database, I showed a small snapshot of the index as shown below. Note that all other countries that are coved by the DTE project, including all EU member countries separately, will be disclosed during the launch of the report which will also explain our methodology.

The index ranges from 0 (most open) to 1 (least open). Unsurprisingly, one can see that China is the country with the highest score, meaning it is least open of all countries covered whilst the US and the EU have a far lower index score though still higher than the average score of the entire range of countries covered. Note that the EU score is a weighted average in the sense that this score corrects for the size of each member country’s market. If this weren’t taken into account, the index for the EU would be somewhat lower, i.e. a score of 0.22.

One surprising result, however, is the fact that that the US and the EU are actually on (almost) equal par with each other when taking into account all 13 chapters. The main reason for this outcome is that the US still has quite some cost-enhancing digital trade measures in place when it comes investment and competition policy, but also related to public procurement and even standards.

More on that in the database and the report that will come out soon!

Monday 10 October 2016

Russia in a Post-sanctions Era

Later this year EU leaders will be sitting together to discuss the Russia sanctions. Some countries are in favor of dropping these sanctions, others want to stick to the current approach. At the same time, according to this source it seems EU member countries are willing to nonetheless explore “other ideas for improving ties with Moscow including encouraging more trade”. This idea seems nice for European exporters, but if such statement also aims at helping Russia to develop it can really only do so much.

Although the EU is Russia’s most important trading partner, most of trade policies that helps Russia to develop would need to come from inside. Moreover, Russia is hyper-dependent on oil and gas and other raw materials. This pattern as such does not necessarily need to be bad for economic development, but if Russia had any intention to sophisticate its export to profit better from trade, it would have to start thinking about becoming (a) more globalized, (b) improve its services markets, and (c) develop its domestic institutions.

On the first point, a recent World Bank study that examines Russia’s performance across its regions shows that those Russian regional areas which have most open trade and investment policies are also the ones having higher economic performance. In fact, Russian regions have very unequal development levels which is in great part explained by their very uneven degrees of foreign orientation. Hence, one development strategy for Russia is to lower its investment policy. Currently, Russia ranks above the non-OECD average in terms of FDI restrictiveness. Russia would also need to respect its WTO commitments.

On the second point, those richer regions are dependent on mineral exports. If Russia wants to diversify into other (sophisticated) industries, moving away from this one-sector dependency would be a prerequisite. One way to do that would be through opening up its services sectors as another World Bank report argues. However, today Russia’s services policies are clearly less trade-friendly. In particular, some business services that are so important to differentiate into other sectors such as banking, telecom or insurance are still highly restricted.

On the third point, if Russia decides to capitalize on becoming more globalized by receiving more investments in other areas than oil and gas and / or through opening up its domestic services markets, it might as well improve its domestic institutions such as rule of law. There is vast evidence that economic development through services depends on strong institutions so that contracts of the many services that function as inputs in to Russia’s value chains are guaranteed, enforced and ensured.

In short, although potential bilateral trade policies between Russia and the EU can certainly help stimulate trade on both sides to some extent, most of the work for Russia to develop really would have to come from Russia itself. 

Wednesday 5 October 2016

EU Services Part II

Today the new EU Regional Economic Report from the World Bank together with its background paper came out which I have co-authored. The report and paper focus on how to increase EU growth. The EU’s growth record has been sluggish, which is particularly due to its low productivity. And productivity is today’s engine of the EU’s economy.

How to revive this productivity? One big answer the report provides is through services reform, particularly in Eastern European countries. I agree, but would also look at Germany and France. Three focus points that arise from the report are important in this regard.

First, reforming services markets any further is important. Of course, this can be done by lowering burdensome services regulations through, for instance, abolishing state interventions so that new services firms can have easier access to the market. However, a particularly striking feature that we find is that eliminating entry barriers is not sufficient. On the contrary, regulations on how firms operate appear to be a particular negative factor for EU productivity. These regulations include administrative rules on the form of businesses, rules on inter-professional cooperation in professional services or even rules on regulatory transparency among many others.

Second, the report also emphasizes that EU countries’ domestic institutions matter. What do we mean by that? Various items such as a lower level of corruption, a stronger judicial system that enforces business contracts when things go wrong or just the quality of regulations implemented by qualified and competent market regulators. With these institutions in place, some European countries would gain a lot more from liberalizing services markets. This can be seen in the figure below.

EU change in productivity levels with or without strong institutions
Source: Author’s calculations; horizontal line reflects percentage changes in productivity (TFP) levels in 2013.

On the whole, countries that gain a lot from lowering regulations in services markets are in fact some of the Eastern European countries as shown by the blue bars. That is no surprise as these countries have lower productivity levels to start with and services regulations in some of these countries are still high. Hence, the greatest bang for the buck would be realized there from reforming. Other countries have already reformed a lot such as Denmark, Finland or the Netherlands. Reforming any further would still give productivity gains, but to a lower extent.

But, the figure also shows that if Eastern European countries (and others) had better institutions in place, their productivity would be much higher as seen by the red bars. Conversely, if Denmark hadn’t developed good functioning institutions, its productivity would have been lower. The point is that good institutions are important for productivity dividends to be realized when reforming services markets.

Third, reforming in professional markets would be particularly rewarding. These include accountants, lawyers, architects or engineers. Benefits from reforming professional services would accrue to all EU countries, but let’s focus on those countries which already have strong institutions in place.

The figure below shows two panels for productivity growth as opposed to levels that was presented in previous bar chart. The reason is because ultimately, this is what matters most to push for further economic growth. The left-hand panel shows realized productivity growth for countries with strong institutions, but who still have high professional services regulations in place. They include countries such as Germany, France, Austria or even Belgium and Luxembourg. Lowering regulations (albeit at small changes) results in some productivity gains, but not much.

On the other hand, the right-hand panel shows the reform efforts implemented by countries that also have strong institutions, but have reformed whilst already having lower services regulations in place. These countries are for instance Netherlands, Sweden, Denmark or Estonia. Their productivity pay-off for growth has been considerably higher compared to the first group of countries. The bottom line here is that some countries are actually ready to realize greater growth benefits from services because of their strong institutions, but all that is holding them back is a lack of reform in services themselves.

  Strong institutions, but high regulations  Strong institutions and low regulations
Source: Author’s calculations; World Bank; productivity growth is TFP percentage changes computed over 2006-2013.

In sum, several conclusions can be derived for EU growth. One is to focus on services. Second is to focus on regulatory reform in services, particularly in professional services that will push EU growth further. Third is to focus on countries with weak institutions since a lot of potential growth from services reform can still be realized from this part of Europe. Fourth, focus on countries with stronger institutions, but still have higher professional services regulations in place such as France, Germany or Austria. Here too, potentially greater EU growth could come from here provided that these latter countries are willing to unlock their service sectors further.

Friday 30 September 2016

New Handbook on Trade in Services

The new Handbook on Trade in Services is out now! Don't miss the many interesting chapters, also the one I wrote called "Ricardo Does Services: Services Sector Regulation and Comparative Advantage in Goods". See here for more information about the handbook

Ricardo Does Services is a chapter about how capable regulators can help services liberalization by introducing accompanying "good" regulatory policies so as to make services markets more competitive and not just only "free". This is important factor as many services markets actually need more careful policy design since they suffer from certain market failures. 

The chapter shows that when countries do actually have these capable regulators in place they experience a significantly better effect on exporting goods, particularly those goods which depend on services. The question of course is: what makes a capable regulator? Three things. One, skills and expertise about the market. Two, independence from government interference. And third, a well-defined mandate about what to do. Have a good read!

Tuesday 27 September 2016

EU Services Part I

The issue of immigration is currently a hot debated topic and is often put in connection with globalization and the current political backlash. Both are actually two sides of the same coin. If goods which are produced by labour in one country cannot move across borders to another, then people themselves carrying along labour can always decide to move.

This substitution-effect is for economists nothing new as it has been found in several studies regarding trade and immigration. In other words, immigrants displace specific offshore tasks that could otherwise be imported by firms.

Yet, there is more to this relationship between immigration and trade, particularly when looking at services. For instance, this recent paper by Ottaviano, Peri and Wright (2015) finds that next to the reassignment of offshore tasks to immigrants, immigration also has a positive effect on the receiving country’s exports. How does that work?

First, this effect is bilateral between countries. This means that immigrants of a specific country promote exports significantly to that country where they come from. This is predominantly so for services which are known to be language-intensive and institutional-knowledge intensive such as legal or accounting services, recruiting and training services or advertising services, etc.

Obviously, it helps for a firm’s exports when it employs immigrants that know their origin country’s language and institutional structure where these sophisticated services are going to. Second and more interestingly, however, is that this paper also finds an additional aggregate productivity effect. That is, next to their bilateral export effect, immigrants also cause the economy overall and on the whole to have greater levels of productivity and exports.

Putting this in EU context, what does that mean in terms of policy? In my view, a couple of messages come out. For one, it clearly helps to have open borders across countries in that the free flow of skills complement trade, which results in greater economic benefits. In that regard, the four freedoms of the EU, namely those of goods, services, capital and people, are economically at least a rock-solid principle to stick at.

But there is more. It also means that diversity or a multi-cultural workforce is important for economies thriving on services and most EU countries do so. Although that may be an unpopular message in some EU countries right now, fact is that services which carry along most value-added are precisely those that actually benefit from having immigrants in the labour market and are precisely those that many EU countries produce.

Third, the EU needs to deregulate further its services markets. Although all the above results are “corrected” for the effect of burdensome regulations in services sectors, they nonetheless still matter. Many EU countries still have substantial trade and domestic regulations in services in place. A forthcoming World Bank report on the EU shows that lowering services regulations matters a lot for the EU in order to reap productivity benefits.

Fourth, and most important in my view, these results mean that policies related to the movement and employment of labour skills are important. Or, in other words, more efficient labour markets are necessary to foster benefits from cross-border skill movements. For instance, some EU countries have an oversupply of architects whilst others within the EU have a shortage. Making EU labour markets more flexible might bring another big push to unlock exports and productivity effects in services, a much needed factor for overall EU growth. 

Tuesday 13 September 2016

Home-Market Effect Tested

The home-market effect is a theory that is part of the so-called New Trade Theory and which states that because of increasing returns to scale and trade costs countries are likely to exports those goods which are consumed most in their markets, or in other words, for which they have relatively large domestic markets. 

The increasing returns to scale will make it that firms are willing to locate in one market whilst trade costs will trigger firms to locate in larger markets. Hence, there is a link between market size (i.e. demand) and exports, not necessarily only imports as classical trade theory would predict. A sophisticated test of the home-market effect is now available in a new NBER paper from Costinot, Donaldson, Kyle and Williams. 

Monday 12 September 2016

Question: What Do You Think about the WTO?

Upon invitation I recently attended a seminar discussion at a corporate firm in Brussels. In that firm some people of the global foresight department organized a very good seminar in which they wanted to have feedback from me and my colleagues think-tankers about various global trends in today's world economy and what implications that may have for the future. 

Various items passed the table and when it came to international trade, eyes were heading in my direction. In particular, one question about the WTO came up. Of course, that's an often-asked question nowadays, specifically with regards to the possibility that the Transatlantic Trade and Investment (TTIP) may run into difficulties. The question was, therefore, what would happen to the WTO if TTIP fails? Would countries re-direct resources towards the multilateral trading system again, or not?

Well, that's a hard one to predict I said as that question depends on many economic and political factors. However, I did have a couple of things to say, mainly three observations I have come across in the last three years since I have been in Brussels and have visited many seminars, high-level discussions and other events. 

One is that recently I attended a seminar discussion in Florence where quite a few notable economists and policy makers / advisers were present. When discussing the WTO, somehow a generational division seemed to appear in the sense that the older people in the room found it a lot more unacceptable that the multilateral trading system would become in danger compared to the younger generation. This may have long-run implications I said about any real efforts to revive the WTO by future policy makers. 

Second is that in Brussels at least, I often heard the same comment from Commission officials occupied with trade strategy that the ultimate goal of TTIP is to bring back countries, and in particular emerging economies, to the WTO. TTIP could then be seen as an important instrument to revise the WTO. True, without the big economies such as the EU and the US not much gets started in Geneva. Hence, a successful revival of the WTO in the short-term at least could stand or fall with the outcome of TTIP. 

Third, a successful come-back of the WTO will also depend on the future of trade. Although goods trade may peter out, new trade issues may inevitably come up in the future such as digital trade. At ECIPE we have been doing a lot of research on that and to us it seems that precisely developing and emerging economies are more restricted in this area of the global economy than developed countries. This could therefore lead to new tensions at the WTO during negotiations as we have seen in the passed rounds. 

The WTO has several functions of which the most important ones are monitoring member countries' trade regime, dispute settlement resolution and providing a negotiation platform to solve trade issues. Particularly the latter function has been running into difficulties. Hopefully these three observations won't put too much weight in finding a new way for the WTO to negotiate trade. 

Saturday 10 September 2016

Digital Services Exports and Networks

This picture below shows for a large set of countries the relationship between their ability to capitalize on the digital economy and their exports in digital services. 

More precisely, on the horizontal axis an index measuring the so-called network readiness of countries is plotted. This variable comes from the World Economic Forum. It measures the extent to which an economy is prepared to apply the benefits of information and communications technologies (ICTs) in order to promote economic growth and well-being. On the vertical axis on the other hand the amount of digital services exports is plotted for each country.  

This variable comes from the World Bank's Trade in Services Database. Together these two variables illustrate that countries which have a stronger ranking on the network readiness index also show a greater level of digital services exports as their is a positive relationship. 

In particular, countries such as Ireland, Luxembourg and the United Kingdom are relatively strong in exporting digital services compared to what one can expect based on their levels of network readiness. These countries are therefore placed above the orange line. 

Wednesday 20 July 2016

The Privacy Shield and then what?

The coming into force of the Privacy Shield comes at a crucial time for trade negotiations. Now free data flows and digital services can move centre-stage in TTIP, TiSA, and the WTO. Read more here at Borderlex: