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Report

The Importance of the Internet and Transatlantic Data Flows for U.S. and EU Trade and Investment

Joshua P. Meltzer

The Internet and the free movement of data globally is an important and growing driver of economic growth, jobs and welfare. This growth happens as the Internet increases productivity and reduces trade costs, which also stimulates trade. The United States International Trade Commission (ITC) estimates that digital trade has increased U.S. GDP by 3.4 to 4.8 percent and created up to 2.4 million jobs. The gains could be even higher if countries reduced their barriers to digital trade. Consumers also benefit as they are able to access new and innovative services. Access to the Internet and the ability to move data freely across borders increases the productivity of businesses and reduces trade costs, thereby creating economic growth and jobs. This is providing new opportunities for small and medium-sized enterprises to participate in the global economy. Consumers are also benefiting as they are able to access new and innovative services.

The Internet and cross-border data flows are providing opportunities for small and medium-sized enterprises (SMEs) to participate in the global economy. SMEs can now use the Internet to reach customers globally wherever they have Internet access, process international payments, and, for a range of digital products, deliver them online. For instance, SMEs on eBay are almost as likely to export as large businesses, have a 54 percent survival rate compared with offline businesses (24 percent), and over 80 percent of these businesses export to five or more countries.

The Internet is also giving SMEs access to business services that can increase their productivity and global competitiveness. Such access includes functions like Google search, which helps businesses develop market intelligence on competitors and learn about foreign laws and regulations. The cloud provides access to low-cost software on demand and data flows allow for regular updates and security patches. One report estimates that software has accounted for over 15. percent of all U.S. labor productivity gains since 2004. The Internet also provides opportunities for businesses to become part of global supply chains by providing discrete tasks, and this opportunity is being seized by SME services firms.

As the world’s two largest economies, the U.S. and EU decisions on support for cross-border data flows will also have global implications.

In addition, businesses are increasingly using the Internet in innovative ways. For instance, the Internet has given companies the ability to harness the intelligence of users by interacting with customers, suppliers and other stakeholders in product development efforts. Crowdsourcing is another evolving Internet-based opportunity that allows people situated globally to contribute tasks or become co-creators. All of these new business models require data and information to move freely across borders.

This paper focuses on the importance of the Internet and transatlantic data flows for U.S. and EU trade and investment. Whether the U.S. and the EU are able to take full advantage of the opportunities for international trade and investment presented by their increasingly online and digital populations will affect transatlantic economic relations. As the world’s two largest economies, the U.S. and EU decisions on support for cross-border data flows will also have global implications.

The first part of this paper provides an overview of the U.S.-EU economic relationship and how growth in Internet access and data flows are driving an increasing amount of transatlantic trade and investment. The second part calculates the economic value of the free flow of data for U.S. and EU services trade and investment.

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