The Coming North American Digital Trade Zone

Anupam Chander is a professor of law at Georgetown University. He has received a Google Research Award for related research.

In 1992, when NAFTA was signed, the World Wide Web had yet to become truly world-wide and the iPhone was still fifteen years away. Thus, it is not surprising that an update was needed to bring the free trade agreement between Canada, Mexico, and the United States into the twenty-first century.

While much of the public attention has been focused on the new agreement’s implications for cars and milk, the revised NAFTA—or what’s formally being called the “United States Mexico Canada Agreement” (USMCA)—contains digital economy provisions that have significant implications for emerging tech.  

Despite the Trump administration withdrawing from the Trans-Pacific Partnership (TPP), USMCA negotiators used the TPP’s electronic commerce chapter as the basis for negotiations (or—the TPP is dead, long live the TPP). The USMCA’s digital trade chapter continues the TPP’s ban on customs duties on digital products (though regular taxes remain unaffected). It also requires anti-spam laws in each country. Like the TPP, it bars countries from requiring the disclosure of source code, but it goes further to bar governments from requiring the disclosure of “algorithms expressed in that source code” unless that disclosure was required by a regulatory body for a “specific investigation, inspection, examination enforcement action or proceeding.”

The USMCA also reprises the TPP’s safe harbors for internet service providers modeled on the Digital Millennium Copyright Act’s Section 512, protecting them for copyright liability for the actions of their users. (For a discussion of the critical role of these safe harbors, see my paper here.) Unfortunately, the USMCA drops the language adopted by the TPP requiring a “balanced” approach to copyright, which might have further empowered user rights.

The most important provisions borrowed from the TPP, and the ones most likely to find themselves in the center of a future trade dispute, are those that bar data localization. Indeed, the USMCA version is stronger than the one in the TPP (it even bars data localization with respect to financial services, though it does so under a different set of rules set forth in the financial services chapter). Data localization is the nemesis of digital trade—permitting foreign companies to work in a country only if they build out or lease costly separate data infrastructures in that country. Data localization thus limits access to global services and serves as the principal instrument for protectionism in the information age. While some argue that this provision limits the ability of countries to protect their citizens, that depends on whether Canadian citizens’ data can be better safeguarded in Canada, Mexican citizens’ data in Mexico, and U.S. citizens’ data in the United States. Uyên Lê and I have argued that that is unlikely to be the case.

The USMCA follows the TPP in requiring each country to establish personal information protection laws, though it leaves the content of such laws and the means of enforcement to be decided by each country. (In an earlier brief for the Council for Foreign Relations, I had argued that the NAFTA negotiators should seek to establish mandatory privacy protections in the various states, including the APEC Privacy Framework, which each of the three countries had established.) Although detractors may object that the USMCA information protection rules do not establish a mandatory minimum of protections, it does present an advance over earlier trade agreements, which neglect this area entirely. The USMCA does not preclude a nation from adopting strict privacy protections.

The USMCA’s digital trade chapter offers a number of other innovations.

First, this is the very first “digital trade” chapter in a trade agreement of which I am aware. This is a semantic change—U.S. free trade agreements have included an “electronic commerce” chapter since the 2003 Singapore agreement. But where “electronic commerce” might lead some to think only of goods and digital products sold online, “digital trade” seems to invoke a broader set of economic activities—from the services offered by Baidu and Google to internet-powered medical or other professional services. The World Trade Organization, which has long had a work program in electronic ecommerce, might take note.

Second, and more importantly, the United States convinced Canada and Mexico to accept an “Interactive Computer Services” provision whereby internet platforms are not held civilly liable for the actions of their users. Eric Goldman has noted how closely the relevant USMCA text hews to the Communications Decency Act’s Section 230. That doesn’t stop the platforms from being held criminally liable, as shown by the criminal prosecution of Backpage.com for promoting prostitution. If the U.S. Congress were to undo Section 230 in the future, Congress might find itself in conflict with the USMCA. In this way, trade agreements restrict not only our trading partners, but ourselves as well. Of course, at the present time, neither Canada nor Mexico would seek to enforce this provision against us.

Third, the chapter has unenforceable provisions favoring open government data provided in machine readable format (someday our robot overlords will hail the USMCA negotiators), as well as risk-based cybersecurity approaches. USMCA also requires consumer protection laws that would apply online, but it does not go further to help consumers enforce their rights across borders.

Early commentators have described changes from the old NAFTA as “mostly cosmetic” (as a Brookings’ commentator suggests) or suggested that it might be a “step backwards” for free trade (as the Economist argues). Whatever one’s view of the entire agreement, there are in fact some provisions that significantly advance internet-powered trade should the three countries ratify it. Indeed, the USMCA’s digital trade chapter represents the strongest set of digital trade provisions yet negotiated, at least outside the single market created in the European Union.