Digital Trade under the USMCA: A Modern Opportunity for North American Economic Growth

As the United States, Mexico, and Canada implement the US-Mexico-Canada trade agreement (USMCA), its new Digital Trade chapter, can provide a modern example for addressing 21st century challenges within and across the multiple trade sectors.  

As the first digital trade agreement of its kind, USMCA’s digital provisions can help promote economic prosperity, fairer trade, and North America’s global competitiveness. As commerce across North America becomes increasingly digitalized in all sectors, the potential for positive impact from this part of USMCA will also grow. This article looks at the opportunities and challenges as the three countries work to implement this key part of North America’s “new NAFTA.” 

Background 

The Woodrow Wilson Center for International Scholars leads ongoing efforts to understand the importance of the USMCA and other partnerships across North America. As such, we organize private and public conversations to examine challenges, implications, and successes on North America’s agenda and publish studies to further appreciation of the importance of these issues for the region’s prosperity and the well-being of its citizens. With over two years of implementation, the USMCA is beginning to promote fairer and more balanced trade, recovery from the pandemic recession, and aid in North America’s competitiveness internationally. 

This article presents insights and conclusions from conversations about USMCA’s Chapter 19 on digital trade, a chapter that stands out as one of the cutting-edge chapters of USMCA – addressing challenges and opportunities regarding Taxes on Digital Trade Products; Data Localization & Internet Sovereignty; and the Disclosure of Trade Secrets, Source Codes, and Internet Intermediary Liability. In the Wilson Center’s discussions of Digital Trade, private sector experts and business leaders underscored the importance of increasing public awareness of the Digital Trade Chapter to help facilitate and evaluate its implementation and effectiveness.  

Key Challenges for Chapter 19 under USMCA  

To understand the most beneficial potential outcomes from Chapter 19, pre-existing challenges involving enforcement, implementation, and national regulations must be considered.  

Mexico has a full agenda action needed to come into compliance with its USMCA digital obligations. Article 19.3, Customs Duties, specifically prohibits taxes and duties on digital products between persons of either Party (United States, Canada, or Mexico). However, if the World Trade Organization moratorium on e-commerce duties ends, Mexico has a law that would tax digital services/products. Digital experts argue this violates Article 19.3 commitments and thus needs to be modified to be in compliance with USMCA.  

Other challenges for Mexico fall under articles 19.11 and 19.12, Cross-Border Transfer of Information by Electronic Means and Location of Computing Facilities. While Chapter 19 does not cover government procurement, experts worry that based on experience in Mexico and the focus of the current Mexican government on “sovereignty”, individual Mexican regulators could apply their own definition of data sovereignty – undermining the USMCA’s goal of building an open digital economy between the North American countries. For example, Mexico’s central bank (Banxico) and the National Banking and Securities Commission (CNBV) issued draft fintech regulations that would require Mexican firms to store financial data with cloud providers based in Mexico, prohibiting certain financial data from being transferred out of Mexico. Not only would this regulation violate the intentions of the digital trade chapter, on the basis of broad national security concerns for the regulation, but it could also potentially violate the financial services chapter of the USMCA as well. This requirement could dangerously cause sensitive data to be held in Chinese owned data storage facilities in Mexico, rather than higher standard U.S. owned cloud storage options, one of our experts signaled.  

Furthermore, Mexico has a “kill switch” sanction, which is an amendment to a tax enforcement law whereby Mexico can block Mexican consumers from having online access to international companies that provide digital services in cases where the Mexican authorities determine that the companies are not compliant with Mexican law. Experts say this provision also appears to be in violation of USMCA commitments.  

There are also implementation and enforcement concerns regarding USMCA Article 19.17, Interactive Computer Services. Through the Inter-American Development Bank, Mexico has tried to jumpstart the enforcement where no Party can hold an internet platform (i.e., a supplier or user of an interactive computer service) liable for content found on the platform, as stated in the Interactive Computer Services chapter. However, there is still broad concern that Mexico does not have the capabilities to implement specific actions called for under Article 19.17, prompting US, Canadian and Mexican interlocutors to push for further dialogue to identify solutions for Mexico’s proper implementation of the digital trade chapter.  

Concerning Mexico’s implementation of chapter 19, the experts in our conversations recommended that a new law containing the principles for the digital trade regulations needs to be adopted by Mexico’s Congress before the Secretariat of Communications and Transportation can draft specific regulations. In conjunction, Mexico still needs to create an institution to oversee new digital trade policies, not just regulate them. Alongside passing laws establishing principles for digital trade regulations, Mexico should pass laws that provide investment into digital infrastructure. For example, the U.S. is working to provide increased broadband infrastructure to bring internet to more households, which Mexico can follow to further their plan to provide internet for the whole population.  

Mexico also faces the issue of their continued attempts to expand the access of digital resources to their populace. In terms of business access to digital services, those industries that are greater connected to the United States and Canada have become greatly digitized in recent years, whereas those industries that are more independent from the North American supply chains are less digitized. Specifically, small and medium enterprises (SMEs) in all sectors also face barriers to fully digitize. In addition, many companies are not valuing internet protections high enough, even though more and more Mexicans are gaining internet access. Finally, the lack of digitization in public sector industries also hurt the populace, specifically in analyzing the lack of educational opportunities for many children from a virtual learning environment with no internet access. 

Regarding the United States, the very concerning decision during the Trump Administration to take on Tik Tok as part of its disagreements with China was argued to be based on the application’s country of origin, rather than its behavior, violating Chapter 19. This example highlights the need for the Biden Administration to define a more sophisticated and targeted set of solutions that allow for the United States’ digital legislation to align with the principles of the digital trade chapter. Future legislation should consider the concerns that arose from the Tik Tok battle and digital trade abuses under the USMCA, and thus, should modernize its digital policies, legislations, and regulations to be more reflective of the digital trade chapter. 

Furthermore, the United States lacks federal legislation concerning privacy, leaving individual states to implement differing regulations, opening opportunities for potential challenges under USMCA’s digital trade commitments. This legal and regulatory gap should be remedied. 

Finally, under Chapter 23 of the USMCA (Labor), while the Rapid Response Labor mechanism is designed to protect workers that are denied the right of free association and collective bargaining allows for cooperation to remedy problems, there is still a need for further cooperative measures to find constructive alternatives to problems that arise in data localization and regulatory cooperation regarding digital trade.  

In Canada, there is still the need for the digital trade regulations issued to comply with USMCA commitments. Specifically there is uncertainty regarding the regulations aiming to satisfy Article 19.17, regarding interactive computer services – Prime Minister Trudeau has stated that Canada will create regulations that require all social media platforms to remove illegal content from the platforms within 24 hours (otherwise, they could face significant penalties) in the mandate letter of the Minister of Canadian Heritage. IPR experts, however, expressed concern that this regulation could violate the intermediary liability articleof the USMCA, and in turn reduce the response to a violation by treating the removal of illegal material as an injunction. Article 19.17, the intermediary liability article, protects companies like Facebook and Google from being held liable for content published by their users. 

Potential Successes  

Beyond the implementation challenges, there are major economic gains that can flow from full implementation of the digital chapter. As the International Trade Commission found in its review of the USMCA, “The Commission estimates that USMCA is likely to have a significant, positive impact on the many U.S. industries that rely on cross-border data flows and digitally enabled trade, including e-commerce” (P.177). 

While some countries are looking into further restricting data trade regulations, North America is setting the stage to become an exemplary model showcasing the benefits of free flows of data to boost economic growth and competitiveness – particularly, across tech, manufacturing, and agricultural sectors; as well as large tech firms, small and medium businesses, and firms that participate in e-commerce.  

While Chapter 19 does not regulate government procurement, the Canadian and the United States federal governments are entering agreements with cloud services for government services that require local storage of highly sensitive government data – regulations that do not stand in the way of the Digital Trade Chapter as most of the commercial digital activity covered in this chapter does not fall under highly sensitive government data. This approach could mark a nuanced and realistic interpretation of internet sovereignty and localization requirements. 

Also, Mexico’s Secretary of Economy has commenced work to implement article 19.17 on Interactive Computer Services by establishing a working group, and the Instituto Federal de Telecomunicaciones (IFT) is working on the implementation of USMCA commitments. According to a press release by the IFT, the IFT oversees and promotes competition in the telecommunication and broadcasting sectors by:  

• Establishing procedures to impose economic sanctions for anti-competitive practices. 

• Conducting investigations on monopolistic practices related to telecommunications and broadcasted TV. 

• Identifying a substantial market power in four telecommunications markets concerning dedicated links. 

• Authorizing requests for the concentration and assignment of rights among companies. 

Moving Forward 

If well implemented, USMCA’s Digital Trade chapter can provide a big boost to economic growth across North America and help to keep the region as one of the most competitive in the world. The November 2021 North America’s Leaders Summit further underscored the importance of Chapter 19, with calls to push forward positive advances within the cyber ecosystem of North America. To support good outcomes, however, stakeholders need to give very close attention to implementation of the chapter’s provisions. If implementation is done well, USMCA will be an even more attractive model for other international agreements.  

Looking forward, several suggestions emerged from our conversations: 

• Compiling and sharing evidence of cases where data moves freely across enterprises is seen to  promote economic growth; 

• Inviting companies and stakeholders to regularly review implementation progress and provide feedback to governments. Stakeholders and governments need to keep in mind the six-year reviews of the USMCA which will assess the achievements under the agreement and make decisions about whether USMCA should be extended or whether additional effort needs to be made to assure progress. Stakeholder input on the functioning of the Digital Trade chapter should start before the six-year review. 

• Compiling and sharing success stories regarding data moving freely across enterprises to showcase for others in the private sector how to take advantage of USMCAs provisions.  

• Using lessons learned and best practices from USCMA’s digital chapter in inform other agreements being negotiated. 

Also, as part of our “what next” discussions, participants highlighted that the Australia-Singapore Digital Economy Agreement showcases the value of having a review board that regularly meets to go over progress and produce reports to further ongoing work.  They argued that such a regular review could be of great value to the progress of USMCA’s Digital Trade. 

A consistent theme in our discussion was the importance of policy certainty needed to build and expand digital trade; thus, arguing for the assurance of good implementation well ahead of the agreed reviews of USMCA. 

Conclusion 

While important challenges remain in implementing USMCA’s digital chapter, there is wide-spread agreement that getting the rules for digital trade in North America can unlock great opportunities for enhanced productivity and prosperity across the continent.  As companies in all sectors continue to digitalize their operations, the importance of this chapter should continue to grow.  Good implementation can also serve as a model for the many digital trade agreements now being considered around the world. Success requires hard work, careful attention, and good dialogue among officials and by the many stakeholders in the digital economy, but the payoffs can be great for workers, businesses, civil society, and governments.