Never mind data protection, this is data protectionism

So it begins. Merkel blinked first, talking about protecting European personal data by keeping it in Europe. Now Brazil is about to pass a law making it mandatory to keep Brazilian citizens’ data within the country’s borders. At first glance, this is a kneejerk reaction to the Snowden revelations, intended to punish the US for spying. But is there more to it?

Earlier in the year, the focus was on large (mainly US) tech businesses paying little or no tax in markets where they appeared to transact a lot of business. They managed this in a number of ways, including claiming that the actual transaction happened elsewhere – in a more favourable tax regime.

They’re also building datacentres in locations with favourable tax regimes (and environmental conditions). Famously one of the arguments against apply the Carbon Reduction Commitment tax regime to datacentres was that it would stop large players investing in datacentres in the UK.

Of course, if your citizens’ data has to stay inside your borders, the datacentre has to be there too. And it becomes harder to argue that the value transaction is happening elsewhere. Building a datacentre requires significant inward investment, in the tens or hundreds of millions of dollars. Operating one means material local expenditure, both on utilities and on staff. And forcibly determining the location of transactions makes it much easier to tax them.

Take it another step further. Remember the meme that best describes the current internet economy: “if you’re using a free service that’s ad-funded, it’s not the product: you are”. If you place what are effectively export controls on a key product (personal data in this case), you may also force the development of local services to process it. Just look at China and Russia – we might not want to mirror their social models, or underestimate the effects of a different orthography, but they’re the only major markets with serious home-grown competition to Google, Facebook and Twitter.

Classical economics would see only deleterious consequences from this kind of protectionism – restricting access to the latest technologies and services will hold back local growth, and export controls work both ways. On the other hand, classical economics would also suggest that an apparently frictionless market like the current global internet should have thrown up a much more competitive ecosystem than the one we have.

If the Marco Civil da Internet is passed, and is replicated elsewhere, the ripple effects on the internet economy will be substantial and interesting. Watch this space.