# **1. Introduction**

Digital services are one of the fastest growing components of international trade, which creates large benefits for the global economy. The tradability of digital services relies heavily on the ability of companies to process and transfer data across borders (WTO, 2018) and, in turn, this ability is affected by rules governing data. Yet, these rules are increasingly fragmented across the globe. This paper focuses on rules on personal data, whose transfers and processing are treated differently across the globe. Rules governing personal data follow roughly three different regulatory models, based on different features: one model based on open transfers and processing of data, a second model based on conditional transfers and processing, and third a model based on limited transfers and processing. This regulatory divergence is likely to distort trade in digital services across the global economy.

This paper investigates empirically the question of whether sharing a regulatory approach towards the cross-border transfer and domestic processing of personal data is associated with trade in digital services. In other words, do country-pairs adhering to the same data model show positive or negative trade correlations in digital services? To shed light on this question, the analysis considers two components of data regulation for each of the three data models: one component related to rules on the cross-border transfers of personal data, and a second component related to rules governing the domestic processing of personal data. Digital services are defined as those that are classified as intensive users of software technologies over labour as shown in Ferracane and van der Marel (2018), and in particular focus on information and communication services.

The study's the first step is to systematically identify the data models followed by a large range of countries around the world, featuring 116 countries varying from developed to least developed countries.<sup>1</sup> For each country, the study assesses the model implemented with regards to the two components of data regulation. In a second step, the analysis empirically estimates (a) which of the three data models is correlated with greater or lower trade in digital services; and (b) which of the two components is driving these correlations. To investigate this empirical question, a gravity model is used in order to estimate whether country-pairs sharing the same data model exhibit greater or lower digital services trade compared to the benchmark, which are countries that follow different data models.

This paper contributes to the broader literature on the economic impact of regulating personal data. In particular, the analysis combines the legal strand of this literature, such as Aaronson and Leblond (2018), Gao (2018) and Azmeh _et al_ . (2019), that describes the data realms from a legal and political economy perspective; the economic literature that quantitatively estimates the impact of regulatory rules of data, such as Ferracane _et al._ (2020); as well as the literature that investigates the economics of privacy, such as Acquisti _et al_ . (2016). As in Ferracane and van der Marel (2018), this paper assesses whether rules on data are associated with digital services trade. However, the novelty of this paper is that (a) it focuses on rules on personal data rather than more broadly on all types of data; (b) it deepens the analysis by describing and quantifying the three main global models for personal data to which countries are classified, and investigate their regulations regarding both cross-border transfers and domestic data processing; and (c) it uses a gravity model of trade, covering bilateral trade flows of digital services. As such, the paper investigates the relationship between sharing a regulatory model for personal data and digital services trade.

> 1 The selection of countries is performed in accordance with the World Bank World Development Report 2021 and driven by data availability.

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