State aid, data adequacy and Britain’s tech ambitions

IN SEPTEMBER Dominic Cummings, chief adviser to Boris Johnson, wrote to government employees laying out the government’s ambition for post-Brexit Britain to become a hothouse in which to grow technology companies with trillion-dollar valuations. Freedom from the EU’s rules about what financial support states may and may not provide to the private sector would help, he said, as the government would be able to pump public money into technology companies, stimulating a new generation of British giants.

There’s a problem with this vision. In order to get a trade deal with the EU, the government may have to give up the freedom to pump money into companies. And if it does not get a deal, another impediment may prevent its unborn tech giants from seeing the light. If the EU does not judge its data protection rules to be adequate after January 1st, and British entities may process Europeans’ data only after jumping through regulatory hoops, any potential technology giant will be hamstrung.

That is because Britain’s 66m people cannot alone sustain a trillion-dollar tech firm. Alibaba, Google and the like serve user-bases ten times that large. The pool of users of similar size most immediately available to Britain’s future tech giants, in which they would not be competing with Chinese or American ones, is the 446m folk of the EU. But the hard Brexit that would hand the levers of state aid over to Mr Cummings would almost certainly cut British companies off from Europeans’ data.

That is because European courts do not approve of British intelligence practices to which Europeans’ data is subjected upon being processed in the UK. Most recently, on October 6th, the European Court of Justice (ECJ) ruled that telecoms providers cannot be required to gather data on their users on behalf of security services on an ongoing basis, as Britain’s Investigatory Powers Act insists. Britain has used the country’s membership of the EU to argue that it has the right, as all member states do, to carry out national-security functions without interference. This has left a stalemate, and EU-UK data flows untouched.

But once Britain is no longer a member of the EU, this defence falls apart. Britain will suddenly be in the same boat as America. The ECJ has been examining the transfer of EU citizens’ data to America for years, again citing concerns about overreach by its security services. In July the ECJ ruled that the blanket agreement which had facilitated EU-US data transfers, known as Privacy Shield, was not sufficient to protect Europeans from American spying.

The American technology giants are continuing to serve their European users through what are known as Standard Contractual Clauses (SCC), agreements negotiated directly with the EU over the terms of data transfer. Already onerous, the July ECJ ruling made them even more so, requiring companies seeking an SCC to prove that the transferred data will be treated according to EU law. Mature tech giants, with teams of expensive lawyers and data-protection experts, can easily bear those costs. Embryonic ones cannot.

These issues may be averted with a last-minute deal on data adequacy, even a temporary one. But any deal with the EU seems unlikely to come with the free-and-easy state aid rules that Mr Cummings seems to see as the key to building big tech companies. The EU wants tech giants too, to combat America’s and China’s digital influence. Quite why Mr Cummings imagines the EU would be keen on competition in the European market from state-backed British companies is unclear. ■