What long-term effect will the revelations about US mass surveillance disclosed by Edward Snowden two years ago have on the US tech sector?

Through inaction, the US government risks sacrificing the “robust competitiveness of the U.S. tech sector for vague and unconvincing promises of improved national security,” argues the Information Technology & Innovation Foundation (ITIF) in a June 2015 report entitled “Beyond the USA Freedom Act: How U.S. Surveillance Still Subverts U.S. Competitiveness.”

The report’s authors, Daniel Castro and Alan McQuinn, raise an issue that ought to make US policymakers and US leaders stop and think:

“When historians write about this period in U.S. history it could very well be that one of the themes will be how the United States lost its global technology leadership to other nations. And clearly one of the factors they would point to is the long-standing privileging of U.S. national security interests over U.S. industrial and commercial interests when it comes to U.S. foreign policy.”

Inaction on reforming mass surveillance and promoting transparency and data security worldwide puts US trade and its technology businesses at risk. In its report, ITIF describes the effect on US companies and the rise of protectionism resulting from the covert mass surveillance scandal.

The fallout for US companies

In August 2013, just as the ink was drying from the press covering the initial Snowden revelations, ITIF estimated that the economic fallout for US cloud computing providers could run from $22 to $35 billion. In the two years since, ITIF noted that US technology continues to underperform due to mistrust of US government surveillance. They concluded that the long-term repercussions “will likely far exceed” the $35 billion figure from 2013.

The increasing lack of trust has even affected trade with closely aligned nations including the UK and Canada. A January 2014 survey showed that 25% of respondents in those two nations intended to pull their organizational data out of the US as a result of the National Security Agency (NSA) surveillance controversy.

Further repercussions affecting major US companies include the following.

  • Salesforce saw a leading German insurance firm cancel an agreement to manage a consumer database. In the fiscal quarter after the Snowden revelations, Salesforce saw short-term sales losses and a deficit of $124 million.
  • Cisco suffered sales losses in China, Brazil, and Russia due to a report that the NSA covertly placed surveillance tools into its hardware. In a quarterly earnings call, CEO John Chambers stated that the NSA was a factor in revenue declines in China.
  • Qualcomm has admitted that, despite growth projections in China, NSA revelations are hurting its business there.
  • Also in China, Apple, Cisco, Citrix Systems, and McAfee (Intel) were dropped from the approved purchase list for state enterprises; this was part of the wave of foreign protectionism ITIF cited that results from the NSA surveillance uproar.
  • Boeing in Brazil and Verizon Wireless in Germany were dropped from government contracts because of spying concerns.

Protectionism by foreign governments

In its report, ITIF described how in 2012 a Rackspace competitor in Australia, after Rackspace had built data centers there, argued that the US would use the Patriot Act as a way to track Australian citizens. That same Australian company also lobbied lawmakers, using a report it had funded, to convince them to place limits on foreign cloud providers. After the US spying revelations in 2013, protectionist efforts stemming from surveillance concerns have grown larger in Australia.

In Europe, the NSA backlash has led to calls for data localization laws, and procurement regulations that support European providers. Germany and France have started to build their own national networks: Schlandnet and Sovereign Cloud, respectively. In addition, France has invested $200 million in two startups to create an independent, domestic infrastructure.

Australia, China, India, and Russia have passed laws requiring that their citizens’ personal information does not leave their borders, effectively mandating that international cloud providers build data centers in those countries. Apple and Salesforce have already done so to support their worldwide business and to respond to critics.

Due to the scale of its economy, and its own aspirations to be a global technology leader, the effects of protectionism in China could have the greatest impact on the US tech sector. In January 2015, the Chinese government adopted harsh new measures, compelling companies that sold to Chinese banks to submit their source code, agree to aggressive audits, and provide encryption keys in their products. Western companies saw these steps as a way to force them out of the Chinese market. Before that, China had already pushed for banks to stop buying from American firms IBM, EMC, and Oracle, a policy that the government pulled back from under US pressure.

Despite the inherent conflicts between an established superpower and a growing superpower, both the US and China have much to gain from increasing trade and stronger government relations. The trust needed to achieve and sustain that level of political and economic cooperation will not exist if the US government does not come clean on its surveillance practices and firmly close this murky, distasteful chapter in its history. Nor can the US argue in trade negotiations that others should “play by the rules” if the specter of mass surveillance casts a shadow over its global standing.

ITIF recommendations for US policy

To reverse the growing backlash against NSA surveillance and the fallout to the US tech sector, ITIF argues that US policymakers should:

  • Enhance transparency about domestic and international US surveillance.
  • Oppose efforts to place covert backdoors in software and weaken encryption.
  • Create mutual legal assistance treaties (MLATs) with other governments, which would permit law enforcement agencies to collaborate across borders. ITIF argues that if the US bypasses MLAT efforts and seeks to gain data on its own, the reaction will hurt US business.
  • Help to create an international legal standard on government access to data, what has been termed a “Geneva Convention on the Status of Data.”
  • Pursue trade agreements like the Trans-Pacific Partnership, which was just passed by the US Senate, that ban IT protectionism.

Exceptional? Maybe. Invincible? No.

As naïve as those reforms might sound in the current political environment, it is wholly unrealistic to believe that the US government can continue its program of mass surveillance and not adversely affect the international reputation of US tech companies.

We can debate what US exceptionalism really means, but when it comes to economic matters and international business, the US is not invincible and never has been.

The US government can and does throw its weight around in political and military affairs, but trade and economics don’t work that way. The US has to be fully aware of what adverse global public opinion can do to its tech sector, which predictably does not care for the hubris of the NSA’s digital mass surveillance.

Nor can the US blithely assume that its technology leadership is safe and sound. The US has a growing challenge on the other side of the Pacific — China, a nation with a long, proud history that has the capacity, and the burning desire, to become not only the world’s major economy but the next global tech leader.

Our trading partners and their consumers will not have much patience for the US government intransigence on reforming surveillance practices. The clock is ticking.

Download the full ITIF report “Beyond the USA Freedom Act: How U.S. Surveillance Still Subverts U.S. Competitiveness.”

Note: TechRepublic and ZDNet are CBS Interactive properties.