Growing risk of ‘splinternet’ as digital protectionism surges

Press release
17 August 2022

A new report from TheCityUK warns that the world risks fragmenting into regional and national ‘splinternets’ unless governments can agree on a shared approach to data regulation and cross-border data transfers.

Digital trade has become ever more important over the last decade, with 86% of UK financial services exports, equivalent to over £53bn in 2020, being delivered digitally. However, such digital trade is becoming more difficult, with digital trade barriers doubling between 2009-2019, and restrictions on international data transfer more than doubling since 2017.

In ‘Digital trade: a commercially viable approach,’ TheCityUK sets out detailed recommendations for how the UK can strengthen its position as a global centre for data, and what actions it can take to address the growing tide of protectionism surrounding cross-border data transfers and processing. Doing so would ultimately see the UK benefit from greater innovation, a wider choice of digital services and more high-skilled jobs and sustainable development.

Nicola Watkinson, Managing Director, International Trade and Investment, TheCityUK, said, “In a highly-digitised world, digital supply chains are just as crucial as physical ones and we must treat any fragmentation just as seriously.

“Digital trade is vital to the operation of all aspects of financial and related professional services, just as it is to many of the service-based industries on which the British economy relies. It is, therefore, essential for the UK to strive to prevent further moves toward international digital protectionism to champion an open approach, refine its data policies, and agree on new bilateral and multilateral partnerships. Britain must also continue to seek more digital trade deals and build a broader global consensus toward the trusted free flow of data.

“Our industry is ready to work alongside government to help progress digital trade agreements and ensure the UK continues to be globally recognised as a safe reliable and attractive hub for data-driven businesses. A good start has been made but there is more to be done to genuinely make the U.K. the stand out global leader in this area.”

Financial and related professional services firms need to move, store, access, and process data across borders for a wide number of reasons outlined and described in detail in TheCityUK’s report. All these commercial and operational objectives are becoming increasingly difficult, costly or complex to attain as a result of recent data localisation rules and new proposed localisation requirements around the world.

While there are limits to what the UK can achieve on its own to combat digital protectionism, TheCityUK has set out three levels of recommendations on which UK policymakers should seek to take action:

Strengthen the UK as a global data hub

  • UK data regulators should work with industry to shape a Code of Conduct that provides guidance on how to handle cases where it is not clear if data is “personal” or “non-personal”.
  • The UK government should avoid domestic localisation measures where possible including, for example, when implementing the Telecommunications (Security) Act 2021 and offering government procurement.
  • The UK government should review the UK’s subsea data cables every two years to ensure that they are fit for purpose, publishing its findings on the resilience of the UK’s digital infrastructure and recommendations to strengthen it.

Seek bilateral deals with trade partners to ease data flows

  • The UK government should agree FTAs that prevent unjustified data localisation laws, protect digital intellectual property, prevent customs duties on electronic transmissions and support a risk management-based approach to cybersecurity.
  • The UK government should use bilateral economic dialogues to urge countries to reverse or at least revise data localisation laws to enable businesses to conduct essential functions like fighting financial crime.

Strive to build global cooperation and consensus

  • The UK should work with WTO members to conclude a WTO E-Commerce Agreement that prevents unjustified localisation measures (including on financial data), protects digital intellectual property, prevents customs duties on electronic transmissions, and supports a risk management-based approach to cybersecurity.
  • The UK should work with other countries to shape a global data agreement whereby regulators agree to common standards for recognising the validity of each other’s personal and non-personal data regimes.

Full detailed recommendations can be found in the full report: ‘Digital trade: a commercially viable approach.’