Digital trade, data protection and EU adequacy decisions

Abstract

Using a structural gravity model, we assess whether EU adequacy decisions on data protection are associated with bilateral digital trade. Controlling for digital-relevant bilateral covariates, including preferential trade agreements and other binding data flow arrangements, we find that countries that received EU adequacy exhibit an increase in digital trade between 6-14 percent, representing a trade cost reduction up to 9 percent. This is mostly driven by the EU granting adequacy to the U.S., reflecting the dominance of the EU and U.S. in global digital trade. We also find that countries that have an EU adequacy determination exhibit greater digital trade among each other, suggestive of a network or club effect. Complementary country-specific analysis of post-adequacy digital trade performance using synthetic control methods confirms the positive effects of adequacy.