Data Sovereignty: The Hidden Economic Tradeoffs


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Data sovereignty – the principle that each country can regulate the storage of data within its borders – has become an important political cause. The European Union, the United States, India and many other jurisdictions are working to [subscription required] comprehensive legal frameworks that strictly govern how data is collected, stored and distributed across borders.

Much of this debate has been viewed through a political and philosophical lens, portrayed as a battle of individual privacy versus technological innovation, or a power struggle between big tech and national governments.

Although these are the major elements of the debate around data sovereignty, they hide another part of the debate that we do not see much discussed: the economic trade-offs that arise from these laws. Behind the lofty proclamations about protecting the privacy of citizens’ data lie uncompromising nationalist economic considerations. Policymakers and industry players need to understand the true costs and benefits of data sovereignty laws, both political and economic.

The benefits: more jobs and investments

In their implementation, data sovereignty laws will require users to explicitly consent to the transfer of their data to another jurisdiction. For large organizations and businesses, this means it could be illegal to move their customer data outside of the country in which it is collected. Thus, data sovereignty laws may require organizations to store data locally, even though it may cost more. Storing many pockets of data in different countries can not only be more expensive, but it could also significantly complicate data analysis and normal business processes.

Essentially, organizations should invest in local data storage rather than taking advantage of less expensive storage that may be available outside their borders. For example, a company in India may not be allowed to store its data in England, and a company in Brazil may not store certain data in the United States. For storage providers, and cloud storage providers in particular, data sovereignty means having to build physical facilities in every country in which they want to market their services.

While one can debate the benefits of protecting the privacy of citizens’ data by prohibiting its storage in foreign countries, there is no debating the economic benefits of forcing providers to build data centers premises in order to comply with data sovereignty laws. These laws promote an influx of capital investment, the creation of local jobs and greater demand for local suppliers of goods and services.

Indeed, data sovereignty laws have the effect of increasing the demand for data centers in national markets. While a London-based organization previously could have stored data in low-cost locations like Amsterdam, it now has to procure compute and storage space at a local data center.

Although this requirement for local data storage means a greater demand for materials, parts and workers to build and install data centers, and permanent jobs for the people responsible for operating these data centers, the operation running a data center in London is arguably more expensive than running a data center in Amsterdam. Additional costs can dampen profits and must ultimately be passed on to consumers.

Nevertheless, at first glance, data sovereignty may seem like a very positive story – countries are creating more jobs and expanding their tax base while priming their own tech ecosystems and encouraging growth and innovation.

Cons: higher costs for customers

Unit economics favors greater scale: that is, it is less expensive to operate one large data center than to operate a dozen small ones. And the cost of operating a data center in one country can be very different from the cost of operating a data center in a neighboring country. The migration of data storage to the cloud has lowered the cost of storage and computing precisely because companies have been able to centralize storage and processing power in efficient, low-cost locations and benefit from cost savings. scale in terms of maintenance, personnel and supply.

For example, the cost of electricity in Germany is around 24 euros per kWh, while in the neighboring Netherlands the cost is only half. By forcing German organizations to store their data in Germany, customers may end up paying more and not realizing any significant security or performance benefits, given that data protection laws in the Netherlands are equivalent to those in force in Germany.

Instead of a few large data centers around the world, operators are now forced to build many smaller data centers. Thus, data storage consumers end up paying more, offsetting at least some of the economic benefits of capital inflow and job creation.

There is also a notable environmental angle to data sovereignty laws. The best place to set up a data center is somewhere cold and with access to cheap energy, like Iceland or Scandinavia. If you can cool a data center just by bringing in cool, cold air from outside rather than having to run huge air conditioning systems in a hot climate, data centers can have a big impact. lower on the environment. And given the large amounts of energy used by data centers, the environmental impact of data sovereignty laws will likely be seen as a more serious issue in the years to come.

Assess data sovereignty

It is a fundamental duty for organizations, and those who provide cloud services to them, to ensure that end-user data is handled properly and securely. If a jurisdiction’s data sovereignty laws are the standard expected by customers for proper and secure handling, then customers should be able to expect it without hesitation. It’s not just about good ethics, it’s also about good business sense – ultimately organizations must comply with these laws as they represent the law and requirements for doing business in their areas.

But when it comes to assessing the consequences of many different national data sovereignty laws with varying degrees of rigor, we must remember that these laws have ripple effects. While much of the data sovereignty debate is framed in terms of principle and theory, we must bear in mind that these laws can and do have a substantial impact on people’s livelihoods, and there It is crucial that responsible policy makers keep this in mind when debating and deciding on these laws.

As the CEO of a cloud storage provider, I would like to provide our customers with cloud storage in the most economical way possible. Data sovereignty laws complicate our mission by requiring us to build many small data centers instead of a few large data centers. But I can also understand why someone who wants to create jobs and grow their country’s tech ecosystem might see data sovereignty as a boon.

Ultimately, it is the job of policy makers to weigh these competing interests and decide which course of action is best in principle and in the common interest.

David Friend is the co-founder and CEO of Wasabi.


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