Britain's digital advantage

As they consider the art of the deal, negotiators on both sides of the Brexit discussions must ask a central question: what are the consequences of the uncoupling for Britain and for the European Union without the UK?
If the perception is that the EU is losing a star from its line-up, British negotiators can expect to wield more leverage in setting the terms. Unfortunately, if the state of the British economy is used as a measure of star power, the picture looks bleak at the moment: growth in the UK has dropped to the bottom of the G7, with forecasts slashed even further by the IMF; inflation has spiked while overall economic performance measured by economic growth per capita, literacy, growth in wages and infrastructure investments compare unfavourably with that of key EU nations, such as France, Germany, Italy and Spain.
While the Brexit decision has precipitated some of this decline, the prospects for the UK going solo look even worse than previously imagined.
No wonder then that there is much anxiety among Brexit-watchers about the UK making a clean break and rejecting the ‘four freedoms’ that EU members enjoy the − free movement of people, goods, capital and services. I would argue that there is a fifth freedom that negotiators ought to keep in their sights, one that may hold the key to re-balancing the terms of Brexit. This freedom has to do with the free movement of data.
Data matters because it is the fuel − and exhaust − of a critical part of the overall economy: the digital economy.
When one considers the digital economies of the UK and that of the EU, the latter would be losing a genuine star if barriers to UK-EU data flows were to be erected.
This is an essential consideration because the digital sector has grown into one of the most dynamic and innovative drivers of economies anywhere. Looking ahead, the digital economy can be expected to play an ever-larger role in the economies of the UK and the EU. In Britain alone, it accounts for 16 percent of domestic output, 10 percent of employment, and 24 percent of exports. The movement of data across borders is growing exponentially and digital flows are now responsible for more GDP growth globally than trade in traditional goods.
It is important, therefore, to make sure that policy-makers and negotiators recognize the significance of the digital economies of the UK and major EU countries. Ignoring the digital relationships between these nations would be a missed opportunity for Brexit negotiators.
To facilitate such comparisons, my team, at Tufts University’s Fletcher School, has created the Digital Evolution Index − a data-driven evaluation of the digital economies of 60 countries, combining more than 170 different indicators across four key drivers: supply conditions, demand conditions, the institutional environment and factors contributing to innovation.
The index shows the UK performing better than its most significant peers in Europe, Germany, France, Spain and Italy. If the Nordic countries − Denmark, Finland, Norway and Sweden − are included, then they are slightly ahead of the UK.

When examining how the UK’s digital economy performs over time, however, its strengths become even more apparent. The graphic shows the rate of change in the Digital Evolution Index over 2008-15 across 60 countries, including the UK and a number of other EU nations. The UK performs very well in comparison with its EU counterparts. This is an indicator of the momentum of the digital economy overall and leaves little doubt that Britain is a digital powerhouse. Indeed, in digital terms, the EU would be losing a genuine star from its line-up. This should help the UK in negotiating the terms of Brexit.
Of course, while the UK’s digital strengths can help its negotiators demand favourable terms, its digital sector also relies heavily on cross-border relationships with EU countries. This means that a ‘hard’ Brexit is not a good walk-away position and this leverage ought to be used with due care.
There are three ways in which the UK’s digital advantage depends on cross-border flows. The UK’s digital sector depends on a cross-border value chain. According to a techUK-commissioned study, conducted by Frontier Economics, 50 percent of the inputs for digital goods and services in the UK are imported, while 20 percent of final demand of goods and services for the entire digital sector is exported, many of these linkages being European. Almost 20 percent of the digital workers in the UK is foreign, with 6 percent of the sector’s talent from EU countries. Half of all trade in services is digitally enabled and reliant on data flows. The UK accounts for 11.5 percent of global cross-border data flows of which three-quarters are between the UK and EU countries.
The UK is a top online cross-border shopping location. According to a Nielsen study, the UK was the second-most popular online cross-border shopping destination behind the US, according to shoppers across six key markets, including Germany.
The UK’s digital innovation advantages benefit from cross-border access. A key area of the UK’s digital strength is innovation. This capacity to innovate would be adversely affected by a host of post-Brexit factors: talent shortages, loss of seamless access to markets beyond the UK, fragmentation of innovation ecosystems as key resources scatter across multiple innovation clusters in the region, and regulatory hostilities that impede access to markets and customers.
The digital gap between Britain and the EU ought to have a profound influence on the Brexit negotiations. The UK’s departure would drag down the digital economies of  EU countries. At the same time, the UK needs freedom of movement of assets critical to the digital economy between its borders and that of the EU.
Indeed, the UK-EU digital gap could provide the UK with some bargaining chips at a time when its stack has dwindled. At the same time, it is essential that negotiators handle these assets with care; free movement of data is essential for Britain to sustain its hard-won digital advantage.

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