SUMMARY
The absence of a data adequacy agreement could create a post-Brexit “data wall” between the United Kingdom and the European Union. Clear the UK will be badly hurt, but the EU has much at stake as well. First, a data adequacy agreement will enable UK digital workers and firms to continue to contribute to the scale of the EU digital sector. Second, the technological resources of the UK digital sector in areas such as artificial intelligence can help the EU keep up with the U.S. and China–but only with the right rules in place. All told, we believe that the lack of a data adequacy agreement could effectively slow the development and absorption of new technologies in the EU by a year or more while alternative data transmission channels are put into place.
INTRODUCTION
As of March 2019, the United Kingdom will have the status of a “third country” from the perspective of the European Union and the General Data Protection Regulation (GDPR). Will the EU accept that UK data protection standards are high enough to grant them the status of “adequacy,” which will allow data to flow more easily between the UK and the EU? Or will a “data wall” appear overnight between the UK and the EU? The answers to these questions obviously matter to the UK. These data-related issues arise at a crucial moment in the development of the EU economy, which will be badly hurt by a post-Brexit data wall. The UK finance and tech sectors are at special risk, since they require a firehose of cross-border data transfers.
On the one hand, the region’s digital sector has been growing at a rapid pace, fed in part by the strength of UK tech. As of April 2018, for example, the UK led Europe with 353,000 App Economy jobs, followed by Germany and France with 327,000 and 314,000 App Economy jobs, respectively.1 Overall, the UK had 960,000 information and communications technology professionals as of 2016 – almost as many as France and Germany combined (1.1 million).
On the other hand, the growth of the EU digital sector has been lagging that of the U.S. Between 2007 and 2016, the last date when a full set of data is available, the EU digital sector grew by 29 percent. That’s strong growth, but less than the 43 percent gain reported by the U.S. digital sector.
Looking beyond the tech/telecom industries, digitization has been essential for financial services and professional services such as accounting – dramatically changing the nature of the business. Small and medium-size enterprises now have access to services that were formerly too expensive.
Even more important, the benefits of digitization are just now spreading to “physical” industries such as manufacturing, agriculture, distribution and healthcare, which still make up the great majority of employment in both the EU and the U.S. Manufacturing is a particular problem, where productivity growth in the EU has slowed to a crawl in recent years. Similarly, productivity gains in much of the service sector, including wholesale and retail trade and transportation, have been weak.
In this paper we will make the case that the way the EU handles post-Brexit data flows could significantly affect future EU growth. First, a data adequacy agreement will enable UK digital workers and firms to continue to contribute to the scale of the EU digital sector. Particularly important are fast growth socalled tech ‘startups’ who would be at higher risk if the EU and the UK agreed to a different kind of structure for data transfers. That, in turn, will boost the productivity of financial and professional services, and accelerate the digitization of physical industries and the development of “manufacturing platforms” that could pull the EU ahead of the U.S. Second, the technological resources of the UK digital sector in areas such as artificial intelligence can help the EU keep up with the U.S. and China – but only with a data adequacy agreement.
Conversely, the lack of a data adequacy agreement between the UK and the EU will significantly slow technological progress – not just in the digital sector, but across the entire EU economy. We don’t want to exaggerate the damage – the nature of the Internet and the global economy is that information will eventually get through the Brexit “data wall,” especially for the biggest global firms. But small and medium-size businesses will find themselves falling further behind the global standard, especially high-growth companies from Europe’s startup sector.
All told, we believe that the lack of a data adequacy agreement could effectively slow the development and absorption of new technologies in the EU by a year or more while alternative data transmission channels are put into place. A year may not sound like much, but it’s a delay the EU can ill afford at this critical juncture. The United States and China are leading a massive global push to apply digitization to the physical sector, and the EU doesn’t want to fall behind.
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