1

Woiking Papei:

Bata, Tiaue, anu uiowth

Bi. Nichael Nanuel
Piogiessive Policy Institute
Nmanuelpiogiessivepolicy.oig



Reviseu August 1S, 2u1S
Reviseu Nay 1S, 2u1S
0iiginal veision Febiuaiy 18, 2u1S



Ny thanks to the Sloan Founuation foi funuing this ieseaich. I thank Biana Caiew of
PPI, Alan Nauluin of Teleueogiaphy, Steve Bauei anu Bill Lehi of NIT, anu Nichael
Kenue of Analsys Nason foi veiy useful assistance. All mistakes anu eiiois aie my
own.
2
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As 0.S. tiaue negotiatois embaik on uiscussions ovei the Tiansatlantic Tiaue anu
Investment Paitneiship (TTIP) anu the Tians-Pacific Paitneiship (TPP), it is self-
eviuent that goou policy iests on a founuation of accuiate anu compiehensive
knowleuge about cuiient anu emeiging tiaue flows.

To pioviue this knowleuge, goveinment economists in Washington woik uiligently,
unuei tight buugets, to piouuce the monthly iepoit on "0.S. Inteinational Tiaue In
uoous Anu Seivices." This iepoit, which in the }une 2u1S ielease iuns to Su pages
anu moie than 2u tables, incluuing the supplement, pioviue a uetaileu pictuie of
what goous anu seivices the 0niteu States is expoiting anu impoiting, anu fiom
whom. The goous anu seivices tiaue ueficit, $S4.2 billion in }une, is a heauline
numbei foi the financial meuia, while the inuiviuual numbeis foim the basis of
tiaue negotiations.

But uespite all the haiu woik anu effoit, the tiaue iepoit is incomplete as a
uesciiption of the links between the 0.S. anu the iest of the woilu, anu becoming
moie incomplete by the uay. The statistical pioblem, so to speak, is the Inteinet. As
we will show latei in this papei, because of the way the Inteinet is set up, most uata
flows uo not leave a monetaiy footpiint when they cioss boiueis. That makes them
veiy haiu foi tiaue agencies to tiack.

You can live in Chicago, anu listen to a Lonuon iauio station via the Inteinet; you can
woik foi a laige multinational baseu in Paiis anu be in constant online
communication, email anu otheiwise, with Ameiican supplieis anu customeis; you
can woik foi a financial company which is continuously exchanging laige amounts
of uata between offices in New Yoik anu Lonuon; you can be a stuuent in Spain
watching viueos of Stanfoiu computei science couises.

All of these activities will geneiate cioss-boiuei flows of uata, much of which will
not appeai in the monthly tiaue iepoit. The iepoit uoes contain some infoimation
S
about inteinational telecommunications seivices, ioyalty payments, anu cioss-
boiuei uata puichases, but as we will see below, these figuies likely miss much of
the inciease in cioss-boiuei uata tiaffic because of funuamental changes in the
stiuctuie of global netwoiks. Similaily, inteinational agencies such as the IT0 only
collect fiagmentaiy statistics on cioss-boiuei uata flows, though they aie putting
moie effoit into estimating such figuies.
1


Cioss-boiuei uata flows have become the unknown fiontiei of both tiaue policy anu
inteinational tiaue economics.
Tiaue statistics, set up to measuie tiaue in goous anu seivices, eithei
unueiestimate oi completely ignoie cioss boiuei uata flows.
Economists unueiestimate oi ignoie the contiibution of cioss-boiuei uata
flows to giowth, because those flows aie invisible in the statistics.
Anu with little attention fiom economists, policymakeis unueiestimate oi
ignoie how uata piotectionism coulu lowei piouuction anu living stanuaius
in theii countiies

Consiuei: Cioss-boiuei uata flows aie giowing fai fastei than conventionally
measuieu tiaue in goous anu seivices. Accoiuing to Teleueogiaphy, a consulting
fiim that keeps tiack of inteinational uata flows, uemanu foi inteinational
banuwiuth incieaseu at a compounu annual iate of 49 peicent between 2uu8 anu
2u12.
2
By compaiison, the volume of global tiaue in goous anu seivices iose at an
aveiage iate of 2.4% ovei the same peiiou.

0i let's consiuei the 0niteu States anu Euiope. Telecom pioviueis have boosteu
tiansatlantic cable capacity at an aveiage annual iate of 19% between 2uu8 anu

1
See foi example "#$%&'()* +,# -)./'0$+(/) 1/2(#+3 4564, Inteinational
Telecommunications 0nion, 2u12, http:www.itu.intIT0-
Bictpublicationsiuimateiial2u12NIS2u12_without_Annex_4.puf
2
"ulobal Banuwiuth Reseaich Seivice," Teleueogiaphy,
http:www.telegeogiaphy.comieseaich-seivicesglobal-banuwiuth-ieseaich-
seiviceinuex.html.
4
2u12, accoiuing to figuies fiom Teleueogiaphy. Neanwhile impoits anu expoits of
goous anu seivices between the 0.S. anu Euiope aie baiely above pie-iecession
peaks.

The impoitance of these uata flows is being incieasingly acknowleugeu. "The cioss-
boiuei fiee flow of infoimation enables inteinational tiaue which can leau to
incieaseu innovation, piouuctivity anu economic giowth," wiites a iecent papei
fiom the Biookings Institution.
S
"Foi instance, the ability to uownloau puichases
ovei the Inteinet anu the uevelopment of new technologies such as auuitive piinteis
that cieate thiee uimensional objects will enable businesses to oveicome the
tiansaction costs of selling goous anu seivices oveiseas."

Noieovei, tiaue in uata cieates positive exteinalities anu an extia boost to global
giowth. 0nlike expoits of goous, uata can be shippeu fiom one countiy to anothei
without uepiiving the fiist countiy of the benefits. In othei woius, iathei than
expoits anu impoits, we neeu to talk about the economic benefits of bilateial uata
flows. The veiy aiithmetic of tiaue changes. All othei things being equal, giowth in
cioss-boiuei uata flows can be a fai moie poweiful impetus to consumei welfaie
anu economic giowth than giowth in tiaue in goous anu seivices.

Neveitheless, theie's piessuie acioss the globe to set up baiiieis to cioss-boiuei
uata flows. Pait of the piessuie steams fiom the tiauitional feais of foieign
competition, just like countiies have often tiieu to keep out impoits of goous. In
auuition, theie aie also piivacy woiiies, accentuateu by the iecent ievelations of
monitoiing of cioss-boiuei uata flows by the NSA anu othei intelligence agencies.

Foi example, the Euiopean 0nion is consiueiing new uata piivacy iegulations that
coulu potentially act as an impeuiment to flows of uata in anu out of the E0. The

S
}oshua Neltzei, "The Inteinet, Cioss-Boiuei Bata Flows anu Inteinational Tiaue",
Biookings Institution, Febiuaiy 2u1S.
S
oiiginal veision of the iegulations, announceu in }anuaiy 2u12, specifically noteu
that E0 iules woulu apply even if peisonal uata was sent oveiseas.
4


But in pait because cioss-boiuei uata flows uon't show up in the statistics,
policymakeis uon't iealize just how impoitant they aie to theii economies. Tiying to
wall off the Inteinet coulu have a fai biggei effect on consumei welfaie anu
economic giowth than it seems. Noieovei, moving to uata piotectionism coulu
tiiggei a soit of tiaue wai that woulu be seveiely uetiimental to global giowth.

Plan of this papei
This papei is intenueu as a pieliminaiy exploiation of the empiiical, conceptual, anu
policy aspects of cioss-boiuei uata flows. Theie aie six sections:
An examination of how cioss-boiuei uata flows aie being iepoiteuanu not
being iepoiteuin the cuiient tiaue statistics.
A typology of cioss-boiuei uata flows.
An analysis of the magnituue of cioss-boiuei uata flows, baseu on a
compaiison all inteinetIP tiaffic. We finu that foi the 0niteu States, cioss-
boiuei flows aie ioughly 16-2S% of all 0.S. uata tiaffic, which is veiy
significant. Cioss-boiuei uata flows between Euiope anu the iest of the
woilu equal ioughly 1S-16% of all Euiopean uata tiaffic. These estimates,
which shoulu be tieateu as highly impiecise anu tentative, suggest that the
0niteu States is moie inteiconnecteu with the iest of the woilu than Euiope.
An initial analysis of the economic benefits of cioss-boiuei uata flows. In
paiticulai, we uevelop a fiamewoik foi measuiing the impact of uata flows
which cioss boiueis without leaving a monetaiy footpiint.
We exploie the implications of latency as the equivalent of the "cost of
shipping" foi uata.
Finally, we biiefly examine the effects of policy on uata, tiaue, anu giowth.

4
"Bata piotection iefoim: Fiequently askeu questions," }anuaiy 24 2u12
http:euiopa.euiapiupiess-ielease_NEN0-12-41_en.htm.locale=en
6
-" ./01*'/2/%& $11*/1 3,&4 5'(1167(')/' 80&0 9:(31

The 0.S. Buieau of Economic Analysis (BEA)the statistical agency in chaige of
tiacking seivice tiaue--measuies uata-ielateu expoits anu impoits by tiacking the
money ieceiveu fiom 'foieign peisons' anu the money paiu to 'foieign peisons.' This
appioach of "follow the money" is veiy infoimative unuei most ciicumstances.
Bowevei, in this section we will show that given the stiuctuie of the Inteinet, much
of cioss-boiuei uata flows uo not leave a monetaiy footpiint that can be pickeu up
by the BEA.

The BEA collects much of its uata on seivice sectoi expoits anu impoits thiough
suiveys: specifically "BEA benchmaik (BE-12u) anu quaiteily (BE-12S) Suivey of
Tiansactions in Selecteu Seivices anu Intangible Assets with Foieign Peisons. "
S

Figuie 1 shows the list of seivices queiieu in these suiveys is faiily long. Nany of
these incluue cioss-boiuei uata flows, incluuing telecommunication seivices,
ioyalties anu license fees, uatabase anu othei infoimation seivices, anu financial
seivices.

S
"Chaptei 8: net expoits of goous anu seivices," Buieau of Economic Analysis,
upuateu Novembei 2u11.
http:www.bea.govnationalpufch8NetExpoit%2ufoi%2uposting.puf
7
Figuie 1. Seivice Tiansactions Tiackeu by BEA Suivey


Bowevei, the pioblem is that it's incieasingly easy to finu impoitant cases wheie
uata ciosses boiueis but no money changes hanus. To illustiate oui point, we'ie
going to consiuei two such cases.

An Ameiican economist uownloaus Russian money supply uata fiom the
Bank of Russia, the Russian cential bank (www.cbi.iu)
8
A Euiopean teenagei views a viueo of a Stanfoiu 0niveisity class on machine
leaining on YouTube. (http:www.youtube.comwatch.v=0zxYlbK2c7E)

The fiist example is emblematic of the bioauei aiiay of cases wheie a 0.S peison
uownloaus uata fiom a non-0.S. souice. The seconu example is the ieveise: A non-
0.S. peison uownloaus valuable uata fiom a 0.S. souice. Bata ciosses boiueis in
both cases.

Fiist, note in both cases theie is no chaige foi content. The Russian cential bank is
not chaiging 0.S. economists foi uownloauing uata, anu YouTube (anu its coipoiate
paient uoogle) uoes not chaige the Euiopean teenagei foi uownloauing an
euucational viueo.

So if these two cioss-boiuei uata tiansfeis aie going to cieate a monetaiy footpiint
anu show up in the BEA statistics, it will happen because the telecommunications
tianspoit acioss national boiueis involves an exchange of money.

In the fiist case, the economist points his oi hei biowsei to the Russian cential
bank's website anu uownloaus the uata. 0bviously the economist oi his oi hei
institution pays a uomestic Inteinet seivice pioviuei such as Comcast oi veiizon foi
an Inteinet connection. But unlike an inteinational phone call, no extia money is
paiu foi the foieign website.

The uata iequest is passeu fiom netwoik to netwoik until it ieaches the Russian
cential bank, which then senus the money supply figuies back again. At some point,
that uata iequest passes fiom a 0.S.-owneu netwoik to a foieign-owneu netwoik.
Foi the sake of claiity of the example, let's assume that the 0.S.-owneu netwoik also
owns the submaiine cable between New Yoik anu the 0niteu Kinguom, so that the
9
inteichange between the 0.S.-owneu netwoik anu foieign netwoik physically occuis
in the 0K.
6


Is theie an exchange of money between the 0.S.-owneu anu the foieign-owneu
netwoik. Not necessaiily. Laige netwoiks aie often connecteu by 7##'()*, which is
an agieement to exchange tiaffic without exchanging money. Peeiing agieements
aie so ubiquitous that they aie basically conuucteu on a hanushake, as one
authoiitative 0ECB stuuy shows:
7

A suivey of 142,uuu peeiing agieements conuucteu foi this iepoit shows that
the teims anu conuitions of the Inteinet inteiconnection mouel aie so geneially
agieeu upon that 99.S% of inteiconnection agieements aie concluueu without a
wiitten contiact.

In fact, the laigest global netwoiksthe so-calleu 'Tiei 1' netwoiksalmost by
uefinition peei with eveiy othei Tiei 1 netwoik.

It might seem like peeiing is a baitei-type agieement that shoulu geneiate ievenue
iecognition on the financial books, even if no money exchanges hanus. Bowevei,
peeiing takes place mostly in situations of balanceu tiaffic, so the ievenues anu
costs woulu net out. The accounting fiim KPNu notes that:
8

In oui expeiience, peeiing aiiangements between Tiei 1 telecoms uo not iesult
in the iecognition of ievenue even though a seivice is pioviueu anu value is
tiansfeiieu between telecoms in much the same way as unuei tiauitional
inteiconnect aiiangements.

It's woith noting that peeiing is one of the key ieasons that you can access websites
fiom all ovei the woik without having auuitional chaiges auueu to youi Inteinet bill.


6
Nany laige pioviueis own theii own unueisea cables, have a shaie of a cable, oi
have long-teim iights to use pait of the banuwiuth.
7
Bennis Wellei anu Bill Wooucock, Inteinet 8'$..(2 9:2,$)*#; "$'<#+ =#>#?/70#)+%
$)@ A/?(23 B,$??#)*#%C 0ECB Bigital Economy Papeis 2u7, }anuaiy 2u1S.
8
"Accounting unuei IFRS:Telecoms", KPNu, }anuaiy 2u1u.
1u
Now let's tuin to the seconu example, the Euiopean teenagei accessing a viueo of a
Stanfoiu 0niveisity computei science class fiom YouTube. We choose this example
because YouTube is owneu by uoogle, which has thiee full-fleugeu uata centeis in
Euiope. It is quite possible that the Euiopean teenagei will be uownloauing a copy
of the viueo fiom one of uoogle's Euiopean uata centeis, especially if it has been
iepeateuly accesseu by othei Euiopeans.

In that case, at some point the viueo will have been ieplicateu in a uoogle Euiopean
uata centei, via a cioss-boiuei uata tiansfei fiom one of uoogle's 0.S. uata centeis.
Will this cioss-boiuei uata tiansfei between uoogle anu one of its affiliates be
bookeu as a money exchange. Bighly unlikely, given that an aims-length
inteiconnection between two laige telecoms woulu typically be a peeiing
aiiangement with no exchange of money.
9
As a iesult, this cioss-boiuei uownloau
of an euucational viueo, which is cleaily valuable to the Euiopean stuuent, uoes not
show up in the goveinment statistics.

;" <=>(:(?= (@ +'(116A(')/' )0&0 @:(31

Now let's extenu the examples of the pievious section to a bioauei set of cioss-
boiuei uata flows. If we consiuei the economic context of cioss-boiuei uata flows,
we can see the following typology:

1. Biiect tiaue. 0seis uownloau uata uiiectly fiom a website in anothei
countiy. Foi example, a usei in Floiiua can link to a Lonuon-baseu Inteinet
iauio station. ueneially these tiansactions will not piouuce a cioss-boiuei
monetaiy footpiint.
2. Inteinal tiaue. Nultinationals maintain a constant flow of uata among theii
locations, supplieis anu customeis in uiffeient countiies. Financial
companies, foi example, aie continuously exchanging uata between New

9
See also Ryan Singel, "YouTube's Banuwiuth Bill Is Zeio. Welcome to the New Net,"
1u162uu9, http:www.wiieu.combusiness2uu91uyoutube-banuwiuth
11
Yoik, Lonuon, anu othei financial centeis. Bepenuing on the setup, these
connections may eithei use the public Inteinet oi a contiact with a majoi
pioviuei. Even in the lattei case, it may oi may not get iepoiteu as a cioss-
boiuei tiansaction.
S. Tiansit tiaue. Bata that flows thiough a countiy on the way to somewheie
else. In paiticulai, less uevelopeu countiies sometimes have bettei
connections with the 0S anu Euiope than with each othei. These uata flows
may piouuce a cioss-boiuei tiansaction
4. Content Beliveiy Netwoiks (CBN) As one stuuy notes:
1u

A CBN ieplicates content fiom the oiigin seivei to cache seiveis,
scatteieu ovei the globe, in oiuei to uelivei content to enu-useis in a
ieliable anu timely mannei fiom neaiby optimal suiiogates.

In othei woius, content ueliveiy netwoiks take one cioss-boiuei uata flow
the 0lympics, sayanu potentially ieplicate it multiple times in the
uestination countiy. Content ueliveiy netwoiks incluue Akamai, Limelight,
EugeCast, Level S, anu Bituiavity. CBNs typically have 'noues' aiounu the
woilu. Foi example, EugeCast has locations on five continents, incluuing
Austialia.
11
ChinaCache, a China-baseu CBN, opeiates uata centeis in
Califoinia anu New Yoik City "to suppoit global customeis in ueliveiing
content into Asia".
12
By theii natuie, CBNs uelivei content that has been
licenseu foi a fee, anu theiefoie shows up in tiaue iepoits.
S. Bata centei upuate anu backup tiaffic. Laige uata centeis, such as the ones
opeiateu by uoogle, Amazon, anu Facebook, aie embeuueu in an intiicate
netwoik of upuating anu backups. This geneiates a cioss-boiuei uata flow
that likely uoes not show up in tiaue iepoits.
At this point we uo not know the ielative piopoition of these types. Bowevei, we
note that foi the most pait they will not be iepoiteu on the tiaue statistics.

1u
Pathan, A. N. K., & Buyya, R. A , "Taxonomy anu Suivey of Content Beliveiy
Netwoiks," 2uu7, http:www.clouubus.oigiepoitsCBN-Taxonomy.puf
11
http:www.eugecast.comnetwoikmap
12
http:en.chinacache.cominuex.phpabout-
ccih.htmlinuex.php.option=com_content&view=aiticle&iu=124&Itemiu=1S1
12






<4/ $%&/'%0&,(%0: B4(%/ 50:: 0%) 9('/,?% <'0)/
Bistoiically the majoi cioss-boiuei uata flow was the conventional inteinational
phone call. In the 0niteu States, the oiiginatoi of an inteinational phone call pickeu
up a telephone, uialeu u11, the countiy coue anu phone numbei, anu paiu an
inteinational chaige to his oi hei phone company. The pioviuei then paiu the caiiiei
in the ieceiving countiy accoiuing to a goveinment-manuateu settlement scheuule.
Conveisely, the iecipient of an oveiseas call uiu not pay an inteinational chaige
insteau the oveiseas callei paiu his oi hei local pioviuei in theii own countiy, who
settleu up with the 0.S. phone company.
0nuei this scheme, calls fiom the 0.S to oveiseas points weie classeu as impoits,
because the foieign caiiiei ieceiveu the payments. Calls fiom othei countiies weie
classeu as expoits, since the payments came to the 0.S. caiiieis. So if 0.S. customeis
maue moie oveiseas calls than they ieceiveu, the telecom tiaue balance woulu be
negative. Inueeu, that was tiue foi many yeais. Accoiuing to an FCC iepoit fiom
1998:
0.S. caiiieis owe settlement payments foi the seivices that they bill, anu aie
oweu payments foi the seivices that the foieign caiiieis bill. In auuition, 0.S.
caiiieis aie oweu payments foi switcheu tiaffic that tiansits 0.S. points.
Because 0.S. customeis place fai moie calls than they ieceive anu because 0.S.
caiiieis teiminate moie collect calls which geneiate suichaiges foi the
oiiginating caiiiei, 0.S. caiiieis make net settlement payments to most
foieign caiiieis. The total net payment foi all 0.S. caiiieis giew fiom $u.4
billion in 198u to $S.6 billion in 1996. (Tienus In The 0.S. Inteinational
Telecommunications Inuustiy" FCC, August 1998
http:tiansition.fcc.govBuieausCommon_CaiiieiRepoitsFCC-
State_LinkIntlitltiu98.puf)
Reauing this explanation, howevei, shoulu make it cleai that this uefinition of
telecom impoits anu expoits is an aitifact of a iegulatoiy convention that "calling
paity pays" foi wiieline calls. Suppose insteau that we hau a iule that "ieceiving
paity pays" as in a collect call oi an 8uu-numbei. 0nuei that iegulatoiy iegime, an
outgoing inteinational call woulu be tieateu as an expoit iathei than an impoit,
since the money woulu be collecteu by the foieign caiiiei, which woulu then settle
up with the uomestic caiiiei. Similaily, an incoming call woulu be tieateu as an
impoit. Such a shift in iegulatoiy conventions woulu immeuiately tuin a telecom
tiaue ueficit into a tiaue suiplus, without alteiing the final allocation of ievenues to
the iespective telecom caiiieis. In auuition, outgoing anu incoming inteinational
calls weie physically inuistinguishable, in teims of the equipment useu.
1S
C" D%(&4/' E0= (@ ./01*',%? 5'(1167(')/' 80&0 9:(31

We can see fiom the pievious section that many types of cioss-boiuei uata flows uo
not leave a monetaiy footpiint. In an eailiei papei, we uiscusseu the iuea that the
piouuction anu use of uata shoulu be tieateu as a funuamental component of
economic activity, paiallel to the piouuction anu use of goous anu seivices.
1S
This
appioach leaus natuially to an incieaseu focus on uiiectly measuiing uata
geneiation, uata flows, anu uata stoiage as a way of unueistanuing economic
activity.

0ne pioneei in such effoits has been Naitin Bilbeit, who has been ueveloping a
systematic methouology foi compaiing the communications capacity of vaiious
meuia, ianging fiom mobile to television.
14
Baseu on this woik, the Inteinational
Telecommunications 0nion (IT0) has been giauually moving towaius uiiect
measuies of uata flows, as opposeu to inuiiect measuies such as numbeis of cellulai
subsciiptions oi bioaubanu connections. A iecent publication fiom the IT0 notes:
0sing the unifying metiic of bits pei seconu, employeu foi measuiing global
technological capacity to communicate, it is possible to compaie uiffeient
communication technologies. It is also possible to analyze bits pei seconu pei
capita, pei technology, pei countiy oi pei any othei ielevant socio-economic oi
uemogiaphic paiametei.
1S


This papei follows in the same spiiit of uiiect measuiement of uata flows. Bowevei,
we aie paiticulaily inteiesteu in cioss-boiuei uata flows, which have become
incieasingly impoitant in iecent yeais. This is a uifficult anu tiicky aiea, so the
iesults piesenteu heie shoulu be vieweu as exploiatoiy.

1S
Nichael Nanuel, "Beyonu uoous anu Seivices: The (0nmeasuieu) Rise of the Bata-
Biiven Economy," Piogiessive Policy Institute, 0ctobei 2u12
14
See, foi example, Naitin Bilbeit anu Piiscila Lopez, "The Woilu's Technological
Capacity to Stoie, Communicate, anu Compute Infoimation", 12(#)2#, Apiil 2u11.
1S
"#$%&'()* +,# -)./'0$+(/) 1/2(#+3 4564, Inteinational Telecommunications 0nion,
2u12, http:www.itu.intIT0-
Bictpublicationsiuimateiial2u12NIS2u12_without_Annex_4.puf

14

Foi the puiposes of this papei, uata flow is measuieu in teiabits pei seconu (Tbps).
Submaiine cable is useu to caiiy cioss-boiuei uata flow acioss oceans but also often
between countiies on the same continent, because it's often easiei anu safei to
maintain cables that iun along the coast unueiwatei than acioss uifficult teiiain.

Cables aie typically laiu with multiple stianus of optic fibei, some of which aie 'lit'
anu have the necessaiy equipment to be useu, anu some of which aie 'uaik' anu not
yet ieauy foi use. Capacity can be incieaseu by laying new cables, lighting uaik fibei,
oi by impioving the capacity of alieauy lit fibei.

The telecommunications maiket ieseaich anu consulting fiim Teleueogiaphy
estimates that the 0.S. hau 2S Tbps of inteinational Inteinet capacity in 2u12, with
an aveiage utilization of 29% anu a peak utilization of 49%.
16
This suggests that on
aveiage, the 0.S. cioss-boiuei uata flow is ioughly 6.7 Tbps.
17


Is this volume of cioss-boiuei uata a laige numbei oi a small numbei. We compaie
the cioss-boiuei uata flow with a iecent Cisco-sponsoieu piojection of uata tiaffic,
by countiy anu type.
18
Foi 2u12, the Cisco stuuy estimates that Inteinet anu IP
tiaffic in the 0niteu States at 8 exabytes pei month anu 1S exabytes pei month,
iespectively.
19
That tianslates into ioughly 26.S Tbps anu 42.2 Tbps.
2u


Table 1 below compaies the 0.S. cioss-boiuei uata flows with the oveiall 0.S.
Inteinet anu IP tiaffic. We finu that cioss-boiuei uata flows aie ioughly 2S% anu

16
We thank Alan Nauluin of Teleueogiaphy foi pioviuing these estimates.
17
These figuie aie baseu on the biuiiectional aveiages of the monthly aveiage anu
peak uuiing Apiil of each yeai.
18
See "The Zettabyte Eia, " Cisco, Nay 2u12.
http:www.cisco.comen0SsolutionscollateialnsS41nsS2SnsSS7ns7uSns
827vNI_Bypeiconnectivity_WP.puf. See also
http:ciscovni.comvni_foiecastauvanceu.html
19
Non-inteinet IP tiaffic in the 0.S. is mainly consumei viueo.
2u
1 exabyte=1u24 petabytes; 1 petabyte=1u24 teiabytes; 1 teiabyte = 8 teiabits.
1S
16% of 0.S. Inteinet anu IP tiaffic, iespectively. To put this in peispective, 0.S.
expoits of goous anu seivices aie 14% of 0.S. gioss uomestic piouuct (uBP) in 2u12,
while 0.S. impoits of goous anu seivices aie 18% of 0.S. gioss uomestic piouuct
(uBP) in 2u12.



16
Table 1: Cioss-Boiuei Bata Flows






17


Now, these numbeis aie accompanieu by substantial anu woiiisome caveats, anu
the possibilities of laige eiiois in both uiiections. In paiticulai:

5(F/'0?/ 0%) 2/&4()(:(?= 20= ),@@/'" Cisco's piojections incluue all IP
usage. Teleueogiaphy's estimates of inteinational capacity by countiy uo not
incluue piivate netwoiks such as intia-coipoiate netwoiks, uoogle anu othei
content pioviueis netwoiks, anu ieseaich netwoiks. This factoi woulu tenu
to unueiestimate the shaie of cioss-boiuei tiaffic.
8(*A:/ +(*%&,%? ,1 ,%/F,&0A:/. Inteinational Inteinet tiaffic is often iouteu
thiough thiiu-paity countiies befoie getting to its uestination. Tiaffic
between Noscow anu New Yoik might be iouteu thiough Lonuon anu
theiefoie show up as pait of Euiopean cioss-boiuei uata flows. Tiaffic
between the Canauian cities of vancouvei anu Toionto might be iouteu
thiough the 0niteu States, anu theiefoie show up as pait of 0.S. cioss-boiuei
uata flows. Anu since less-uevelopeu countiies may have bettei Inteinet
connections with the 0.S. anu Euiope than with each othei, it's possible foi
intia-Afiican tiaffic, say, to be iouteu thiough New Yoik oi Lonuon. This
factoi woulu tenu to oveiestimate the shaie of cioss-boiuei tiaffic
E4/% +(2>0',%? /1&,20&/1G@('/+01&1 @'(2 ),@@/'/%& 1(*'+/1H &,2,%?
20&&/'1" Inteinational Inteinet capacity, as estimateu by Teleueogiaphy,
has been giowing at almost Su% pei yeai. Bomestic 0.S. Inteinet tiaffic as
piojecteu by Cisco, has been giowing ioughly as fast. As a iesult, calculating
cioss-boiuei uata flows as a shaie of Inteinet tiaffic can be heavily
influenceu if one souice is using yeaily aveiages while the othei souice
(Teleueogiaphy) is using a paiticulai point in time (Apiil of each yeai). The
uiiection of bias is unceitain.
5(2>'/11,(% 20= ),1&('& &4/ 1&0&,1&,+1: Wiuespieau anu giowing use of
compiession means that "we communicate aiounu thiee times moie
18
infoimation thiough the same installeu infiastiuctuie as we uiu in 1986."
21

The uiiection of bias is unceitain.

We can calculate inteiiegional cioss-boiuei uata flows as a shaie of Inteinet tiaffic
foi Euiope. Teleueogiaphy estimateu that inteinational banuwiuth in Euiope was
S6.S Tbps in 2u12, but that 78 peicent of that banuwiuth was between cities in the
same iegion. As a iesult, "inteiiegional inteinet capacity connecteu to Euiope"
equaleu 12.6 Tbps in 2u12. Baseu on this figuie, we calculate that cioss-boiuei uata
flows between Euiope anu the iest of the woilu equaleu 16% of the iegion's
Inteinet tiaffic anu 1S% of the iegion's IP tiaffic.

These iesults, which shoulu be vieweu as highly impiecise anu tentative, suggest
that the 0niteu States is moie inteiconnecteu with the iest of the woilu than Euiope.
The souices of eiioi enumeiateu in the caveats above aie potentially veiy
significant.

I" ./01*',%? &4/ J+(%(2,+ 7/%/@,&1 (@ 5'(11K7(')/' 80&0 9:(31

The classic justification foi the benefits of tiaue is two oi moie countiies woiking
togethei can piouuce moie than the same countiies opeiating sepaiately. What's
moie, each countiy benefits compaieu to the no-tiaue case.

This usual analysis assumes that all piouucts have a location, which can be changeu
thiough tiaue. An automobile manufactuieu in ueimany anu expoiteu to the 0niteu
States is locateu in ueimany, in tiansit, oi in the 0niteu States. It can't be in moie
than one place simultaneously.


21
"Napping the uimensions anu chaiacteiistics of the woilu's technological
communication capacity uuiing the peiiou of uigitization (1986 - 2uu72u1u)", IT0,
Becembei 2u11, piepaieu by Naitin Bilbeit.
19
But cioss-boiuei uata flows uon't woik the same way. Bata can be uuplicateu
ielatively costlessly, so the fact that uata is cieateu in one countiy anu useu in
anothei countiy uoes not uepiive the fiist countiy of the use. To use a specific
example, one type of intangible capital stock is 'enteitainment, liteiaiy, anu aitistic
oiiginals', incluuing films. Licensing the iight to show a film in a foieign countiy
cuiiently shows up as an expoit in the national income accounts. Bowevei, such a
license geneially uoes not ieuuce the ability of Ameiican consumeis to view the film,
anu uoes not ieuuce the intangible capital stock of 'enteitainment, liteiaiy, anu
aitistic oiiginals' (two ways of saying the same thing).

0n the one hanu, this means that uata tiaue geneiates a positive exteinality foi the
global economy. If a 0.S. univeisity piouuces euucational viueos about computei
science anu makes them available on the Inteinet (as noteu in section 2), then
stuuents aiounu the woilu can benefit fiom those viueos.

0i to use a somewhat silliei example, consiuei the myiiau of YouTube viueos of cats
involveu in uiffeient activities. Quite a few of these viueos aie piouuceu in }apan,
anu get millions of views.
22
They pioviue pleasuie foi vieweis in Ameiica anu
aiounu the woilu, analogous to going skiing oi ieauing a book. In some sense, they
iaise consumei welfaie in the 0.S.

But how shoulu the gain to the 0.S economy fiom these "fiee" uata flows be
measuieu. The key is to iealize that theie aie two ielevant piices heie. .
2S
0ne is
the piice to Ameiicans of consuming the }apanese-maue cat viueo, which is zeio.

22
uiueon Lewis-Kiaus, "In Seaich of the Living, Puiiing, Singing Beait of the 0nline
Cat-Inuustiial Complex" wiieu.com, August S1, 2u12,
http:www.wiieu.comunueiwiie2u12u8ff_catsall
2S
Theie is a giowing liteiatuie about how to assess giowth when impoit piices aie
less than uomestic piices. See, foi example, W. Eiwin Bieweit anu Alice 0.
Nakamuia, "Bias Bue to Souicing Substitutions: Can It Be Neasuieu." (Naich 19,
2u1u). See also R. Feenstia et al, "Estimating Real Piouuction anu Expenuituies
acioss Nations: A Pioposal foi Impioving the Penn Woilu Tables," 8,# D#>(#E /.
92/)/0(2% $)@ 1+$+(%+(2%, 2uu9, vol. 91, issue 1, pages 2u1-212
2u
The seconu is the maximum piice P
cat
that an Ameiican woulu pay foi viewing the
cat viueos, measuieu eithei in uollais oi value of time.


So befoie YouTube, it was as if the piice of }apanese cat viueos to Ameiicans was
equal to P
cat
, anu the volume of viueos vieweu was zeio. Aftei the Inteinet anu
YouTube, the piice of }apanese cat viueos goes to zeio, anu the volume of viueos
vieweu goes to v.

Bow much uoes this change contiibute to 0.S. uBP giowth. If X is the size of the 0.S.
economy, then the stiaightfoiwaiu way of calculating giowth woulu be as (X+Pv)X,
21
wheie P is the piice of cat viueos, anu v is viueo vieweiship. But P is zeio, so it
looks like theie is no gain.

In fact, a bettei appioach is ioughly analogous to the pioceuuie useu to calculate
chain-weighteu uBP giowth. We take the geometiic aveiage of two giowth iates
the fiist assuming that the piice of the viueo is always zeio, anu the seconu
assuming that the piice of the viueo is always P
cat
.

! !
!! !! ! !!
!
!
! !!
!"#
! !
!
! ! !
!
!"#
! !
!
! ! !
!
!"#
! !
!!


In othei woius, the gains to the 0.S. economy fiom cioss-boiuei uata flows of cat
viueos aie ioughly equal to the ievenue that woulu geneiateu by piicing the viueos
at the aveiage of the actual piice (zeio) anu the piice that Ameiicans woulu be
willing to pay, P
cat
.

We aie cuiiently woiking on using a similai appioach to the contiibution of cioss-
boiuei uata flows to the Euiopean anu 0.S. economies. This will iequiie assessing
the 2uu8 value of tiansatlantic uata flows, anu then applying the uata giowth iate.
That will also give us a basis foi piojecting how much giowth woulu be lost by uata
piotectionism.

6. Investment in ulobal-Facing IT Facilities anu the "Cost of Shipping"

0ne final impoitant issue is the "cost of shipping." 0p to this point we have tieateu
cioss-boiuei uata flows as if they weie costless, anu that eveiy point in the global
netwoik was equally connecteu to eveiy othei.

22
In ieality, all things being equal, the same uata has a highei ielative utility if it is
accesseu fiom 'neaiby' in both geogiaphic anu netwoik teims iathei than fiom
acioss the woilu. This tianslates into:

A shoitei length of time to get a iesponse (latency)
A lowei piobability foi packets to aiiive out of oiuei oi late (jittei)
A lowei piobability foi packets to be lost along the way anu have to be
ietiansmitteu.

Some of these issues aie ielateu to uistance, in the geogiaphic sense. uoing thiough
moie links ovei longei uistances means that it will simply take longei to get a
iesponse. Some of these issues aie ielateu to uistance in the netwoik sensefoi
some souice-useis paiis, the best paths uon't take the stiaightest ioutes. Foi
example, the best inteinet path between many Afiican countiies often leu thiough
New Yoik oi Lonuon, because of a lack of goou uiiect oveilanu links in Afiica.

Bow much of a uiffeience coulu uistance make in teims of iesponse time. It's simple
to uo latency tests fiom youi own computei, oi to use some sites that aie
specifically uesigneu to measuie iesponse times fiom uiffeient paits of the globe.
Table 2 shows the iesponse time of queiies to vaiious cential banks aiounu the
woilu, measuieu fiom a Euiopean site.



2S

So the iesponse time, fiom ueimany to the Feueial Reseive in Washington BC, is
moie than ten times gieatei than the iesponse time fiom ueimany to the Euiopean
Cential Bank, locateu in Fiankfuit.

A systematic measuie of latency comes fiom veiizon Enteipiise, which publishes
eveiy month a table summaiizing latency acioss its global business-oiienteu
netwoik. In Becembei 2u12, latency aveiageu 14 ms within Euiope anu 42 ms
within Noith Ameiica, compaieu to 8u ms on tiansatlantic links anu 112 ms on
tianspacific links.
24


Bow impoitant is a 1uu ms oi even 2uu ms uiffeience in iesponse times. Foi one, it
uepenus how often the iequest is iepeateu. Foi a single iequest foi uata fiom a
iemote website, a 1uu ms lag may not mattei. But if a iauiologist in Inuia is ieauing
x-iays peifoimeu in the 0niteu States, it's fai bettei to have the uata ieplicateu in
Inuia to shoiten the iesponse time as the iauiologist goes thiough the sliues.

Some applications of the Inteinet aie moie oi less immune to lags anu uistance. Foi
example, emailone of the eailiest Inteinet applications--is asynchionous. That
means you can senu it, anu you uon't expect an immeuiate ieply. 0n a netwoik

24
http:www.veiizonbusiness.comaboutnetwoiklatency#oveiview

Table 2: Examples of Latency

Response time fiom ueimany
Euiopean Cential Bank (www.ecb.int) 7 ms
Swiss Cential Bank (www.snb.ch) 1S ms
Bank of Russia (www.cbi.iu) S7 ms
Feueial Reseive (www.feueialieseive.gov) 98 ms
Bank of Taiwan (www.cbc.gov.tw) 29S ms
Bata: Baseu on uata fiom ping.eu
24
level, the uata packets that make up the email can aiiive out of oiuei anu then be
ieassembleu at the uestination without uoing any uamage at all to the usability of
the email.

But moie anu moie, we'ie moving to uses of the Inteinet wheie low latency anu
high ieliability aie uesiiable chaiacteiistics. Foi example, stieaming viueo iequiies
that the uata packets aiiive in oiuei anu without much vaiiance. Applications that
aie sensitive to the location of the usei ielative to the souice incluue:
Financial tiauinghigh-speeu tiauing iequiies veiy iapiu iesponse times to
changes in the uata.
SeaichCompanies such as uoogle anu Niciosoft have iepoiteu that fastei
iesponse to seaiches means the useis uo fewei seaiches anu spenu less
money.
2S

Stieaming viueo
voice ovei IPuistance uegiaues the quality of the connection
uame playa gieatei uistance between the playei anu the game seivei
makes the game less enjoyable to play
Social meuiaas social meuia incluues moie pictuies anu viueos, uistance to
the seivei matteis.
EcommeiceAmazon has founu that consumeis aie moie likely to buy if the
website iesponus quickly
Real-time gioup collaboiationas ieal-time viueo confeiencing becomes
moie sluggish, it becomes haiuei to use.
BealthcaieAll soits of health-ielateu opeiations, fiom ieauing x-iays to
monitoiing patients, aie sensitive to lags.
Euucationany lags in euucational applications aie uiscouiaging to stuuents.
Any application that iequiies inteiaction with a laige amount of uata


2S
http:iauai.oieilly.com2uu9u7velocity-making-youi-site-fast.html
2S
Latency can be ieuuceu if companies invest money in "global-facing IT facilities"
aiounu the globecontent ueliveiy netwoiks, caches, anu uata centeis.
26
The
appiopiiate concept heie is the iuea that shoitei lags anu highei quality
connections inciease the ielative utility of uata. Those viueos will have a highei
ielative utility fiom a neaiby seivei iathei than fiom one halfway acioss the woilu.

The goal is to piouuce a global netwoik that most efficiently ueliveis uata to useis.
Wellei anu Wooucock, in theii iecent 0ECB papei, note that:
27

.optimisation of piicepeifoimance of Inteinet seivices consists laigely of
ieuucing the uistance between the souice anu uestination of any packet of
uata, in oiuei to allow it to tiavel moie quickly, at a lowei cost. .If the souice
anu uestination aie both inuiviuuals oi oiganizations, it is likely impiactical
to move them about, but if one enu of the tiansaction is a seivei, paiticulaily
a seivei of non-unique infoimation, as is the case of most common web
seiveis, the uata on the seivei may be ieplicateu to many locations, so as to
be pioximal to as many useis as possible."

Theie aie two key points to note heie. Fiist, investment in "global-facing IT facilities"
such as content ueliveiy netwoiks anu uata centeis is the equivalent of the "cost of
shipping." Without these investments, cioss-boiuei uata flows aie much less
economically valuable. The constiuction of a uata centei oi a content ueliveiy
netwoik in a iegion biings the iest of the woilu's uata closei, in an impoitant sense.

In that sense, the investment in such facilities in a iegion has a uiiect impact on the
output anu piouuctivity of the iegion because useis have to wait a shoitei time foi
access to uata, which makes the uata moie useful anu boosts output anu
piouuctivity. As uata becomes moie impoitant to economic giowth, the value of
such investments incieases as well.



26
In pievious veisions of the papei, I useu the teim 'ieplication facilities,' which was
less accuiate.
27
Wellei anu Wooucock, 2u1S
26
Seconu, it's not necessaiy to constiuct these IT facilities in eveiy countiy. In fact, it
may be inefficient both economically anu in teims of the netwoik, since such a
stiategy woulu both iequiie moie investment anu put auueu stiess on the limiteu
connections between countiies. Wellei anu Wooucock note:
It is also the case that iegulations that aie not explicitly intenueu to apply to
Inteinet tiaffic exchange may have that effect. Foi example, iestiictions on the
ability to expoit ceitain uata, such as customei piofiles, intenueu to piotect
secuiity anu piivacy, may also limit the uevelopment of Inteinet topology anu
the giowth of Inteinet assets in some iegions. Similaily, tax policies in each
countiy towaiu bioaubanu anu Inteinet businesses aie likely to affect the choice
of the locations foi investment in Inteinet assets.

To put it a uiffeient way: Touay huge ships caiiying impoiteu goous uock at the
biggest anu most efficient poits, anu the goous aie caiiieu oveilanu to theii final
uestinations. If goveinment iegulations foiceu ships to only unloau impoiteu goous
at theii countiy of ultimate uestination, the shippeis woulu have to use smallei
ships, less efficient poits, anu the whole piocess of tiaue woulu become much moie
expensive.

L" B(:,+= $2>:,+0&,(%1

Tiaue in uata is funuamentally a new phenomenon. While many people woulu like
to fit it into the fiamewoik of pievious tiaue uealsin paiticulai, the ueneial
Agieement on Tiaue in Seivicessuch effoits will not woik. We neeu new
analytical tools to ueal with both measuiing cioss-boiuei uata flows anu assessing
the benefits.

This papei takes a step in this uiiection. 0ne goal is to highlight the iapiu giowth of
cioss-boiuei uata flows not being pickeu up in the tiaue statistics. The seconu goal
is to show the possibility foi laige gains in welfaie fiom cioss-boiuei uata flows.

Finally, we neeu to look at the implications foi policy. In ieaction to the iepoits
about NSA monitoiing, it is natuial foi Euiopean countiies to consiuei paitially
27
walling off theii netwoiks fiom the iest of the woilu. Noieovei, theie have been
seveial iecent pioposals foi incieasing the tax iate paiu by inteinational Inteinet
companies, oi imposing auuitional iegulations on them. Foi example, a iecent
papei fiom the Fiench goveinment suggesteu a soit of tax on uata.
28
.

But any action in this iegaiu may be a ieal case of cutting off youi noise to spite
youi face. Access to uata flows fiom the iest of the woilu is a tiemenuous acceleiant
to giowth. It boosts both consumei welfaie anu investment in intangible capital.
Inueeu, the gains fiom tiaue in uata aie the puiest foim of a bioaubanu bonus, since
countiies that exchange uata can win without anyone losing.

Fiom that peispective, the fiist best alteinative foi Euiopean policymakeis is to
focus on encouiaging new innovations in uata anu content to contiibute to global
giowth, iathei than setting up uata walls anu tiying to uuplicate existing seivices.
Inueeu, the iight goal foi the ongoing tiaue negotiations is to maximize cioss-boiuei
uata flows as much as possible.








28
"Nission u'expeitise sui la fiscaliti ue l'conomie numiique," Pieiie Collin anu
Nicolas Colin, }anuaiy 2u1S. http:www.ieuiessement-
piouuctif.gouv.fifilesiappoit-fiscalite-uu-numeiique_2u1S.puf