Data are the basis for digital transformation. Yet all too often, data are treated as private goods and not shared, especially across national borders. This is caused by market failure and, in overall economic terms, results in a suboptimal outcome. Analogous to the idea of an international climate club, an international data club could overcome this market failure, at least in part. Europe would benefit from such a club. It should therefore make use of its strengths in the international arena and take the initiative here.

Data-sharing as a prerequisite for digital transformation

The digital transformation of business and society depends on having contextually relevant data available. Whether simple algorithms or complex AI systems: there can be no added- value without suitable data as an input. This applies just as much to screw-sorting industrial robots as it does to apps for tracking the spread of Covid or software for diagnosing tumors.

By making applications possible that support us day in and day out, data have become part of everyday life. These applications come mostly from the United States and China, which – even beyond GAMMA and BATX, the acronyms used to denote their most famous tech giants – have also long made up the second tier of digital enterprises.

Europe, on the other hand, is lagging behind. A key reason for this is the limited availability of data, which too often remain sequestered within individual EU member states. The Data Act can help improve this situation. Yet even with a less fragmented data landscape, in terms of data availability, the EU cannot gain equal footing with the US and its huge corporate data collectors or China and India as the world’s most populous nations. After all, even though not every application requires a large dataset, the most important apps, especially in the area of artificial intelligence, can only prove their effectiveness if a sufficient amount of data is available to train them. Thus, when it comes to data: More is definitely better.

Europe must share data as a result. Too little data, however, are making its way across national borders. The potential here is immense – and the cost of foregoing otherwise accessible data is equally high: The EU alone might well sacrifice €2 trillion in growth by 2030 if international data flows remain restricted to a significant degree. Conversely, there is little to lose by taking action. Datasets do not shrink when shared, and the marginal costs of transporting and storing them are low. This makes data – as an economic good – not only unique but predestined for sharing.

International data club versus market failure

That data are not shared internationally to a socially optimal degree can be seen as a market failure. In keeping with the prisoner’s dilemma as known from game theory, economic disincentives exist which prevent actors from sharing data among themselves. If only one actor shares data, all others benefit – and the first does not. When anticipating how the others will act, all actors thus assume that their peers will hesitate to share data. Overall, the best strategy for everyone involved is, therefore, not to share their data with anyone else.

Individually, this is understandable, although it does not lead to the best outcome for the group as a whole. If some actors decide to share data anyway, the danger that there would be free riders is great – and the benefits of more freely available data would accrue to those who have contributed nothing in return.

One approach to solving this dilemma would be to establish an international data club. This would create opportunities to cooperate and thereby overcome the disincentives that are present – by establishing clear barriers to entry, for example, or credible agreements to make data available. In lieu of automatic cooperation among all actors, one reason this second-best solution would work is that it offers repeated chances to play – and, thus, a long-term incentive to collaborate.

Learning from the climate club

Against the background of man-made climate change, the concept of the club is increasingly making its way into the discourse and policy practice. This was the case most recently at the end of 2022 when the G7 took the initiative and established a climate club. Here, too, an international club has been chosen to solve a problem similar to the one of data-sharing: To transition to a climate-neutral economy, individual countries must include the costs of the required adjustments in the prices charged for the goods and services they produce.

At the same time, the climate and environment must be viewed as a global public good: If only one country forges ahead, it loses its international competitiveness – and provides everyone else with the “benefit” of less climate change. As with data-sharing, the prisoner’s dilemma exists here as well.

Nobel laureate William D. Nordhaus developed the idea of the climate club to counter the free-riding that would otherwise occur. The climate club is basically a multilateral trade agreement with multiple tools that provide incentives to cooperate on climate protection. The participating countries safeguard their competitiveness and create barriers to entry for non-members. Cooperating members are rewarded accordingly, and non-members have all the more reason to join the club. An international data club could also benefit from the experience of implementing the climate club.

Designing an international data club

As with the climate club, an international data club would have to use various levers. Duties could be imposed on data sent to non-member countries, similar to punitive tariffs on CO2. Alternatively, fees could be imposed on providers of data-based services located in non-member countries, or they could be denied access altogether to data available from the data club if they do not share their data within the club.

In any event, the differentiation between members and non-members must be clearly defined- something that could compensate for any competitive disadvantages caused by one-sided data sharing. At the same time, a clear incentive to join the data club should be created. A well-functioning differentiation is crucial if a data club is to prove successful.

In addition to the right economic incentives, another crucial element for a data club is having technical capabilities in place that allow data usage to be reliably monitored. It must be possible to ensure that data do not end up outside the clubroom. One solution here is centralized data storage. Technically speaking, this could be a gigantic data lake in which data are held “in escrow,” and only members are granted access.

This would ensure data sovereignty and minimize the risk that data fall into the hands of non-members. In addition to improving data availability, a data club can also serve as a forum and a dedicated platform on the international level for discussing which data should be shared. This applies in particular to the harmonization of certain topics, such as data protection, standards for increasing interoperability, and data governance in general.  Moreover, it would be possible to test different data-sharing models in greater detail before specifying how they would be implemented.

As the world’s leading organization in the field of digital regulation, the EU is an obvious candidate for initiating an international data club. It would be a logical next step for the EU to go beyond developing internal regulations for the single market and raise its profile externally by becoming the global standard-setter. This would be a worthwhile step for the EU since it would benefit most from such an initiative.

The EU is also a prime candidate, given that multilateralism has seen better days. Multilateral organizations such as the WTO are not currently the best place for realizing such an undertaking: A major effort was required within the WTO to maintain the practice for one more year of not imposing customs duties on electronic transmissions.

A data club as a driver of digital transformation – in Europe and worldwide

An international data club – if appropriately designed – could help overcome the current market failure in data-sharing. The EU would benefit here in particular and could use its role as a pioneer in the field of digital regulation to take the initiative and establish such a club. A project of this sort would be the next logical step in its current regulatory activities and should be undertaken in the medium to long term.

This would generate added value for all countries, not just the EU. In addition to having more data available to develop data-driven applications, it would help level the playing field. The competition would thus shift from withholding data to using data. This, in turn, would promote the development of the algorithmic systems that are best suited for addressing today’s economic and social problems. Ultimately, that is why we collect data in the first place.

About the authors

Markus Overdiek works for the “Europe’s Future” program at the Bertelsmann Stiftung. Previously, he worked for the Bertelsmann Stiftung on the projects “Ethics of Algorithms” and “Global Economic Dynamics”. He has a focus in economics, data science, digitization, and European affairs.

Thomas Schwab is Project Manager for the Europe’s Future Program at the Bertelsmann Stiftung. He applies a data-driven approach to economic analysis by employing data science and econometric methods.

Read more on the EU’s role in global data governance

Reshuffling the Data Economy: The Major Role Interoperability Plays in the Data Act

Cross-border Data Flows: Global Data Governance is Required to Tackle Injustices

New Transatlantic Foresights – What Do Experts Say on the TTC, the IRA, China and Other Issues?

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