Issue Brief: The Great Transatlantic Data Disruption

(This issue brief is a joint publication of the International Center for Law & Economics and the Progressive Policy Institute)

Executive Summary

Data is, logically enough, one of the pillars supporting the modern digital economy. It is, however, not terribly useful on its own. Only once it has been collected, analyzed, combined, and deployed in novel ways does data obtain its highest utility. This is to say, a large part of the value of data is its ability to flow throughout the global connected economy in real time, permitting individuals and firms to develop novel insights that would not otherwise be possible, and to operate at a higher level of efficiency and safety.

Although the global transmission of data is critical to every industry and scientific endeavor, those data flows increasingly run into barriers of various sorts when they seek to cross national borders. Most typically, these barriers take the form of data-localization requirements.

Data localization is an umbrella term that refers to a variety of requirements that nations set to govern how data is created, stored, and transmitted within their jurisdiction. The aim of data-localization policies is to restrict the flow of data across a nation’s borders, often justified on grounds of protecting national security interests and/or sensitive information about citizens.

Data-localization requirements have in recent years been at the center of a series of legal disputes between the United States and the European Union (EU) that potentially threaten the future of transatlantic data flows. In October 2015, in a decision known as Schrems I, the Court of Justice of the European Union (CJEU) overturned the International Safe Harbor Privacy Principles, which had for the prior 15 years governed customer data transmitted between the United States and the EU. The principles were replaced in February 2016 by a new framework agreement known as the EU–US Privacy Shield, until the CJEU declared that, too, to be invalid in a July 2020 decision known as Schrems II. (Both complaints were brought by Austrian privacy advocate Max Schrems).

The current threatened disruption to transatlantic data flows highlights the size of the problem caused by data-localization policies. According to one estimate, transatlantic trade generates upward of $5.6 trillion in annual commercial sales, of which at least $333 billion is related to digitally enabled services.[3] Some estimates suggest that moderate increases in data-localization requirements would result in a €116 billion reduction in exports from the EU.

One difficulty in precisely quantifying the full impact of strict data-localization practices is that the list of industries engaged in digitally enabled trade extends well beyond those that explicitly trade in data. This is because “it is increasingly difficult to separate services and goods with the rise of the ‘Internet of Things’ and the greater bundling of goods and services. At the same time, goods are being substituted by services … further shifting the regulatory boundaries between what is treated as goods and services.” Thus, there is reason to believe that the true value of digitally enabled trade to the global economy is underestimated.

Moreover, as we discuss infra, there is reason to suspect that data flows and digitally enabled trade have contributed a good deal of unmeasured economic activity that partially offsets the lower-than-expected measured productivity growth seen in the both the European Union and the United States over the last decade and a half. In particular, heavy investment in research and development by firms globally has facilitated substituting the relatively more efficient work of employees at firms for unpaid labor by individuals. And global data flows have facilitated the creation of larger, more efficient worldwide networks that optimize time use by firms and individuals, and the development of resilient networks that can withstand shocks to the system like the COVID-19 pandemic.

In the Schrems II decision, the court found that provisions of U.S. national security law and the surveillance powers it grants to intelligence agencies do not protect the data of EU citizens sufficiently to justify deeming U.S. laws as providing adequate protection (known as an “adequacy” decision). In addition to a national “adequacy” decision, the EU General Data Protection Regulation (GDPR) also permits firms that wish to transfer data to the United States to rely on “standard contractual clauses” (SCC) that guarantee protection of citizen data. However, a prominent view in European policy circles—voiced, for example, by the European Parliament—is that, after Schrems II, no SCC can provide a lawful basis for data transfers to the United States.

Shortly after the Schrems II decision, the Irish Data Protection Commission (IDPC) issued a preliminary draft decision against Facebook that proposed to invalidate the company’s SCCs, largely on the same grounds that the CJEU used when invalidating the Privacy Shield. This matter is still pending, but a decision from the IDPC is expected imminently, with the worst-case result being an order that Facebook suspend all transatlantic data transfers that depend upon SCCs. Narrowly speaking, the IDPC decision only immediately affects Facebook. However, if the draft decision is finalized, the SCCs of every other firm that transfers data across the Atlantic may be subject to invalidation under the same legal reasoning.

Although this increasingly restrictive legal environment for data flows has been building for years, the recent problems are increasingly breaking into public view, as national DPAs grapple with the language of the GDPR and the Schrems decisions. The Hamburg DPA recently issued a public warning that the use of the popular video-conference application Zoom violates GDPR. The Portuguese DPA issued a resolution forbidding its National Institute of Statistics from transferring census data to the U.S.-based Cloudflare, because the SCCs in the contract between the two entities were deemed insufficient in light of Schrems II.

The European Data Protection Supervisor has initiated a program to “monitor compliance of European institutions, bodies, offices and agencies (EUIs) with the ‘Schrems II’ Judgement.” As part of this program, it opened an investigation into Amazon and Microsoft in order to determine if Microsoft’s Office 365 and the cloud-hosting services offered by both Amazon and Microsoft are compatible with GDPR post-Schrems II. Max Schrems, who brought the original complaint against Facebook, has through his privacy-activist group submitted at least 100 complaints as of August 2020 alone, which will undoubtedly result in scores of cases across multiple industries.

The United States and European Union are currently negotiating a replacement for the Privacy Shield agreement that would allow data flows between the two economic regions to continue. But EU representatives have warned that, in order to comply with GDPR, there will likely be nontrivial legislative changes necessary in the United States, particularly in the sensitive area of national-security monitoring. In effect, the European Union and the Unites States are being forced to rethink the boundaries of national law in the context of a digital global economy.

This issue brief first reviews the relevant literature on the importance of digital trade, as well as the difficulties in adequately measuring it. One implication of these measurement difficulties is that the impact of disruptions to data flows and digital trade are likely to be far greater than even the large effects discovered through traditional measurement suggest.

We then discuss the importance of network resilience, and the productivity or quasi-productivity gains that digital networks and data flows provide. After a review of the current policy and legal challenges facing digital trade and data flows, we finally urge the U.S. and EU negotiating parties to consider longer-term trade and policy changes that take seriously the role of data flows in the world economy.

Read the full issue brief here.

President Joe Biden has made broadband build-out part of his Build Back Better plan, arguing that it constitutes essential infrastructure, much like electricity and water. The plan calls for $100 billion in subsidies for “future-proof” broadband—that is, connection modes that are expected to meet, or can be readily upgraded to meet, future connectivity needs—with a particular focus on municipal broadband and other nonprofit Internet service providers (ISPs). Congress also has taken up the question of broadband subsidies as part of its ongoing debate over infrastructure spending. But while it is important to get subsidies right, the most expedient public-policy change to ensure greater deployment and adoption of broadband would be to reform policies that needlessly impede the construction and efficient operation of broadband services.

Broadband connectivity continues to be a top priority for the Federal Communications Commission (FCC) and for state and local governments. But to build out wireline broadband, ISPs need access to poles, many of which are owned by electric cooperatives, utilities, and municipal governments. Unfortunately, these entities can charge exorbitant prices to access the necessary inputs. Moreover, the cost to replace, repair, and improve these poles is frequently offloaded onto ISPs and other attachers. These practices drive up the cost to deploy broadband, leading to slower deployment and higher prices for consumers.

The more expensive deployment becomes, the more difficult it is for providers to realize sustainable profits on those investments. This dynamic invariably leads to more selective use of scarce resources, to the detriment of costlier, less-profitable rural deployment. The challenge confronting policymakers and industry alike is how best to equitably and cost-effectively allocate the expenses associated with pole attachments.

The FCC has authority under Section 224 of the Communications Act to review the rates charged for pole attachments to ensure that they are “just and reasonable.” Pursuant to that authority, the FCC recently found that “utilities throughout the country have disparate and inconsistent practices with regard to cost responsibility for pole replacements.” The FCC also declared it unreasonable for utilities to “impose the entire cost of a pole replacement on a requesting attacher when the attacher is not the sole cause of the pole replacement.”

In order to facilitate greater broadband deployment, the FCC should consider rulemaking governing how to allocate pole-replacement costs more equitably. States should also reform how the costs of upgrades are distributed when municipal governments and electric cooperatives own the poles.

Read the full issue brief here.

• To the extent it is necessary at all, public investment in broadband infrastructure should focus on providing internet access to those who don’t have it, rather than subsidizing competition in areas that already do.
• Highly prescriptive mandates—like requiring a particular technology or requiring symmetrical speeds— will be costly and likely to skew infrastructure spending away from those in unserved areas.
• There may be very limited cases where municipal broadband is an effective and efficient solution to a complete absence of broadband infrastructure, but policymakers must narrowly tailor any such proposals to avoid displacing private investment or undermining competition.
• Consumer-directed subsidies should incentivize broadband buildout and, where necessary, guarantee the availability of minimum levels of service reasonably comparable to those in competitive markets.
• Firms that take government funding should be subject to reasonable obligations. Competitive markets should be subject to lighter-touch obligations.

Read the full brief here.

This study examines the heightened scrutiny of four to three mergers by competition authorities in the current regulatory environment, using the potential merger of two of the world’s largest elevator and escalator businesses — Germany’s ThyssenKrupp and Finland’s Kone — as a case study.

In recent years, regulators have become more aggressive in merger enforcement in response to populist criticisms that lax merger enforcement has led to the rise of anticompetitive “big business.”  In this environment, it is easy to imagine regulators intensely scrutinizing and challenging or conditioning virtually any merger that substantially increases concentration.

The next opportunity for antitrust authorities to dispel criticism by flexing their muscles in a four to three merger review may be just around the corner. It is widely reported that ThyssenKrupp is contemplating the sale of its elevator business, with Kone as a potential buyer. This potential deal provides an opportunity to highlight the likely challenges, complexity, and cost that regulatory scrutiny of such mergers actually entails — and it is likely to be a far cry from the lax review and permissive decisionmaking of antitrust critics’ imagining.

In the case of a potential ThyssenKrupp/Kone merger, the combined entity would face lengthy, costly, and duplicative review in multiple jurisdictions, any one of which could effectively block the merger or impose onerous conditions. It would face the automatic assumption of excessive concentration in several of these, including the US, EU, and Canada. In the US, the deal would also face heightened scrutiny based on political considerations, including the perception that the deal would strengthen a foreign firm at the expense of a domestic supplier. It would also face the risk of politicized litigation from state attorneys general, and potentially the threat of extractive litigation by competitors and customers.

Whether the merger would actually entail anticompetitive risk may, unfortunately, be of only secondary importance in determining the likelihood and extent of a merger challenge or the imposition of onerous conditions.

Summary

Amazon has largely avoided the crosshairs of antitrust enforcers to date (leaving aside the embarrassing dangerous threats of arbitrary enforcement by some US presidential candidates). The reasons seem obvious: in the US it handles a mere 5% of all retail sales (with lower shares in the EU), and it consistently provides access to a wide array of affordable goods. Yet even with Amazon’s obvious lack of dominance in the general retail market, the EU and some of its member states are opening investigations.

This isn’t new: the EU and its member states have pursued many competition claims against the big tech platforms. In the last two years alone, the EU imposed over $9B USD in fines on Google for “harms” that were highly speculative and hard to square with concern for consumers.

The theories of harm in the pending investigations of Amazon demonstrate some of the same confused antitrust theories that cropped up in the EU Google Shopping case. Platforms like Amazon and Google are criticized for allegedly discriminating against certain platform users who are also competitors or potential competitors of one or more of the platform’s services (or, in some cases, the platform itself).

Commissioner Margarethe Vestager’s probe into Amazon came to light in September, and centers on whether Amazon is illegally using its dominant position vis-á-vis third party merchants on its platforms in order to obtain data that it then uses either to promote its own direct sales, or else to develop competing products under its private label brands. More recently, Austria and Germany have launched separate investigations of Amazon rooted in much the same concerns as those of the European Commission.

The Austrian investigation will examine “whether Amazon abused its dominant position against retailers, that are active on the Amazon market place.” According to Andreas Mundt, president of the German competition authority, “Amazon functions as a kind of ‘gatekeeper’ [for sellers’ access] to customers. Its double role as the largest retailer and largest marketplace has the potential to hinder other sellers on its platform.” The German investigation also focuses on whether the terms of the contractual relationships that third-party sellers enter into with Amazon are unfair because these sellers are “dependent” on it.

Claims of competitive harm arising from this so-called vertical discrimination or bias are light on both theory and empirics. One of the fundamental, erroneous assumptions upon which they are built is the alleged “essentiality” of the underlying platform or input. But these cases are more often based on stories of firms that, unfortunately, chose to build their businesses to rely on a specific platform. In other words, their own decisions — from which they substantially benefited — made their investments highly “asset specific” and thus vulnerable to otherwise avoidable risks. When a platform on which these businesses rely makes a disruptive move, the third parties cry foul, even though the platform was not — nor should have been — under any obligation to preserve the status quo on behalf of third parties.

This issue brief explores the flaws in designating Amazon as something like an “essential facility,” as well as the attendant errors of treating the distribution mechanism of Internet-based commerce as though it were a market definition, and the problems with failing to learn the innovation-damaging effects of the Microsoft case.

Click here to read the full issue brief.

Click here to read the full issue brief. 

Introduction

How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter who found that monopoly was optimal, through Arrow who concluded that competitive market structures were key, to the endogenous growth scholars who empirically derived an inverted-U relationship between market concentration and innovation. Despite these pioneering contributions to our understanding of competition and innovation, if the past century of innovation economics has taught us anything it is that no market structure is strictly superior at generating innovation. Just as the SCP paradigm ultimately faltered because structural presumptions were a weak predictor of market outcomes, so too have dreams of divining the optimal market structure for innovation. Instead, in any given case, the right market structure likely depends on a plethora of sector- and firm-specific characteristics that range from the size and riskiness of innovation-related investments to the appropriability mechanisms used by firms, regulatory compliance costs, and the rate of technological change, among many others.

Against this backdrop, it may come as a surprise that the European Commission believes it has cracked the innovation market structure conundrum. Throughout its recent competition decisions, the Commission has almost systematically concluded that more firms in any given market will produce greater choice and more innovation for consumers. I call this the “Structuralist Innovation Presumption.” Notably, this presumption seems to have played a pivotal role in the recent Google Android decision (although the text of the Commission’s decision is not yet publicly available).

In what follows I argue that the Structuralist Innovation Presumption is a misguided heuristic that antitrust authorities around the globe would do well to avoid. Although it has been almost unequivocally endorsed by the European Commission, the presumption is at odds with the mainstream economics of innovation. To make matters worse, structuralist innovation also ignores the complex second-order effects that may arise when antitrust intervention tampers with rapidly evolving markets.

Click here to read the full paper.