The USMCA and digital trade in North America
Data and the digital economy are ever more present in business and public policy discussions, domestically as well as internationally.1 The USMCA contains one of the most ambitious digital trade chapters of any free trade agreement (FTA), which provides an important building block towards a more digitally-integrated North America. The November 2021 North American Leaders Summit underscored the digital economy’s importance, calling on the three governments—U.S., Mexico, and Canada—to cooperate to ensure a safe, secure, and reliable cyber ecosystem in North America.2
Digital trade between the three North American economies is difficult to assess because of a lack of adequate statistics; however, the available data indicate that it is significant and that it represents a growth opportunity. According to UNCTAD (2021b, 11), the U.S. imported $318 billion worth of digitally delivered services in 2020.3 For U.S. exports of digitally delivered services, we can estimate Canada’s market share to be less than 2 percent.4 It seems reasonable to assume that the percentages are smaller for digitally delivered services between Mexico and the U.S.
There is more to digital trade than digitally-delivered services; there are also digitally ordered goods and services.5 Unfortunately, North American cross-border trade data is not available for such transactions, although it is safe to assume that the majority of online sales are domestic in nature. For instance, in 2016, the McKinsey Global Institute estimated that 12 percent of all goods traded across borders were the result of digital trade (Manyika et al. 2016). For its part, UNCTAD estimates that 91 percent of online sales worldwide between businesses and consumers (B2C) in 2019 were domestic in nature (UNCTAD 2021a, 5).6
Trade in digitally ordered goods and services between the three North American economies could be worth as much as $250 billion. After all, the U.S. is the largest, by far, digital market in the world, with $9.5 trillion in total—B2C and business to business (B2B)—online sales (of goods and services) in 2019 (UNCTAD 2021a, 4). As for Canada, total online sales amounted to C$336 billion in 2019 (Statistics Canada 2021), placing it just short of the top 10 in the world. With $31 billion in B2C online sales in 2019, Mexico came in 14th place in the world, only a few spots behind Canada (UNCTAD 2021a, 5). Assuming that B2B online sales represent at least 80 percent of total online sales for Mexico, we can estimate the latter’s B2B digital market to be over $200 billion. So, in total, we are talking about ten trillion dollars in online sales for North America. If we assume that about ten percent of digitally ordered goods and services are internationally traded, then this means that about $1 trillion of such goods and services would be traded internationally. Given that about 25 percent of the three North American economies’ total trade in goods and services takes place in North America, then we can reasonably estimate that about one quarter of total digitally ordered goods and services in North America would be traded between Canada, Mexico, and the U.S.
Digital trade is about digitally ordered goods and services as well as digitally delivered services, but it is also about the application of digital technologies in supply chains. Big data analytics, artificial intelligence, blockchain, robotic process automation, and the Internet of things (IoT) are increasingly being used (or considered) by businesses to improve different aspects of their supply chains: Demand planning, sourcing, warehouse and inventory management, transportation, and distribution operations (Hartley and Sawaya 2019; Seyedghorban et al. 2020). The more businesses in North America make good use of these technologies for making their operations more efficient and resilient, the more we are likely to see digital trade taking place across the three North American economies. So, how should Canada, Mexico, and the U.S. realize the full potential of digital technologies and ensure that the North American economy remains integrated as it digitalizes?
The USMCA Chapter 19 on digital trade should form the basis for the three North American partners to cooperate in developing and integrating their digital markets because it addresses the key elements necessary for digital trade to flourish in North America. The chapter is the most advanced among existing free trade agreements (FTAs) in terms of liberalizing digital trade between its members (Haji and Leblond forthcoming; Meltzer 2019a). To that end, it prohibits the imposition of custom duties on digital transactions, although it allows domestic taxes on digital trade as long as they do not discriminate against firms from other USMCA parties. It also does not allow restrictions of cross-border data transfers, including for personal data.7 Similarly, it prohibits any requirement to locate computing facilities in a member state as a condition of doing business in that jurisdiction, except for contracts with governments.8 Finally, it forbids requiring the transfer or access to the source code of software (including algorithms that are part of a source code) as a condition for selling or using that software in a member state’s territory.
In addition to prohibiting potential barriers to digital trade (with some exceptions), the USMCA’s Chapter 19 encourages or requires several endeavors that facilitate or encourage digital trade. For instance, it recognizes electronic signatures and encourages the parties to work together to convert the paper-based administration of cross-border commerce into an electronic one. It also requires that the parties have consumer protection legislation and regulations in place for online commercial activities and work together to protect consumers in digital trade transactions. This includes adopting or maintaining measures to limit unsolicited electronic commercial communications, which means that consent must be obtained beforehand. Similarly, it mandates the adoption of legislation and regulations to protect individuals’ right to privacy with respect to their personal data; however, it cannot be done in a manner that discriminates against firms offering digitally enabled goods and services from the other parties. In support of digital competition, the chapter explicitly recognizes that consumers must have not only access to the internet and its information, but also have choice with respect to service providers and online applications. It also recognizes that “facilitating public access to and use of government information fosters economic and social development, competitiveness, and innovation” and, therefore, it commits the parties to making such information available digitally and easily accessible. Finally, in recognition of the fact that cybersecurity can “undermine confidence in digital trade,” the chapter enjoins the USMCA’s three members to have capabilities to prevent and respond to cybersecurity incidents and adopt a risk-based approach in addressing cybersecurity threats, especially in working with businesses.
To achieve the above, the USMCA’s Chapter 19 calls upon Canada, Mexico, and the U.S. to cooperate to “exchange information and share experiences on regulations, policies, enforcement and compliance relating to digital trade.” It also specifically commits them to cooperate closely (by strengthening existing collaboration mechanisms) in cybersecurity matters so as “to identify and mitigate malicious intrusions or dissemination of malicious code that affect electronic networks, and use those mechanisms to swiftly address cybersecurity incidents, as well as for the sharing of information for awareness and best practices.” Another area where Chapter 19 enjoins the parties to cooperate is on expanding and facilitating access to government information and data “with a view to enhancing and generating business opportunities, especially for SMEs.” The USMCA’s three members are to cooperate not only among each other within North America but also internationally. They are expected to “actively participate in regional and multilateral fora to promote the development of digital trade,” including with respect to the interoperability of privacy regimes and “the development of mechanisms to assist users in submitting cross-border complaints regarding personal information protection.”
The USMCA digital trade chapter enjoins the North American partners to establish “a forum” to formalize their cooperation on the above-mentioned matters and, therefore, more effectively implement the USMCA’s digital trade provisions and objectives. Such a forum (we could call it the North American Digital Trade Council) would allow the three USMCA member states to exchange information, coordinate (domestic and international) policy actions, and negotiate the removal of obstacles to digital trade across their borders. The creation of such a permanent forum should be a priority for Canada, Mexico, and the U.S. as a building block for more intensive cooperation on digital trade opportunities.9 To produce effective cooperation, a North American Digital Trade Council would need to be under the responsibility of specific federal minister/secretaries from the three USMCA countries with dedicated human and financial resources from three federal departments: Department of Commerce (U.S.), Innovation, Science and Economic Development (Canada), and Secretariá de Economía (Mexico). There should be regular meetings of the dedicated government officials and the latter should engage closely with relevant stakeholders from all three countries, including subnational governments (provinces and states).10 Once the USMCA’s digital trade cooperation forum is set up, it should address a number of priority issues to ensure digital trade’s development in North America.
To begin with, Canada, Mexico, and the U.S. should cooperate closely to build an integrated fast, reliable, secure, and inclusive digital infrastructure throughout North America. Currently, Internet access outside urban areas (and in urban areas too, because of digital “redlining”) is expensive and inadequate in all three countries, which makes it difficult, if not impossible, for people and enterprises to take part in digital trade (Cave et al. 2018; Koch 2020; Rachfal 2021). 5G may be arriving in large urban centers in Canada and the U.S., but rural communities are often living in a 3G, if not slower, world. Closing this “digital divide” is key to ensure everyone can take equal part in the digital economy and conduct digital trade (Chakravorti 2021; Weeden and Kelly 2021). The Canadian and U.S. governments, for instance, have both committed billions of dollars to support the development of such digital infrastructure. For example, as part of the recently signed $1.2 trillion U.S. Infrastructure Investment and Jobs Act, $65 billion is allocated to fixing the digital divide (Reardon 2021). It is, however, important that such infrastructure spending not be associated with protectionist “buy local” measures, which lead to higher costs.11 It is also important that the North American digital infrastructure is accessible by any business across the three economies and that it interconnects easily across borders, which is what the USMCA’s Chapter 18 on telecommunications is meant to ensure.12
Payments are another important piece of the digital trade infrastructure puzzle (World Economic Forum 2020b). Paying for goods and services that are digitally ordered—B2B as well as B2C—across North American borders is generally expensive. Whether payment is done through credit cards, wire transfers, or payment platforms such as PayPal, there is a significant cost per transaction, often for both sides of the transaction (McKinsey & Company 2018).13 Reducing payment-related transaction costs would help stimulate digital trade across North America’s borders, especially for small and medium-sized enterprises (SMEs) and consumers. This requires cooperation by Canada, Mexico, and the U.S. to ensure greater interoperability between national clearing and settlement systems as well as interoperability between payment service providers, including adequate oversight by financial system supervisors. The USMCA’s chapter (17) on financial services should serve as a basis for such cooperation on easier and cheaper cross-border payments.14
The third priority for a North American Digital Trade Council should be to ensure that data (personal, business, and, where relevant, government) can flow freely across North America’s borders in support of digital trade; however, this requires a high degree of trust (for individuals, businesses, and governments) surrounding the collection, processing, and use of data in all three USMCA countries. The agreement’s provisions on consumer protection, privacy, cybersecurity, and unsolicited electronic commercial communications are meant to achieve a trusting environment for cross-border data flows in particular and digital trade in general. To create such an environment throughout North America so that data (and trade) can flow freely across borders, policymakers must cooperate closely to develop and enforce common, high-quality privacy protection standards and regulations for personal as well as non-personal data, as Leblond and Aaronson (2019) and Meltzer (2019b) argue. Otherwise, federal and/or subnational governments in the three North American partners risk adopting laws and regulations to protect individuals, businesses, and governments that pose obstacles to cross-border data flows and digital trade. And it is not clear that the USMCA’s provisions are sufficient to prevent such national or subnational obstacles to cross-border digital trade from being implemented (Leblond 2021a). In years to come, such cooperation within a North American Digital Trade Council will be crucial as Canada and Mexico revise, and the U.S. establishes, federal privacy/data protection laws. Coordination with provincial and state governments will also be important since they (in Canada and the U.S.) have been active in promulgating such laws in recent years. Canada, Mexico, and the U.S. should also make use of their close cooperation at the North American level to push for “free data flow with trust” at the international level (Leblond 2021b; Leblond and Aaronson 2019; Meltzer 2019).15
The same kind of close cooperation within a North American Digital Trade Council should also take place when it comes to digital platform regulation, to prevent national laws being at odds with the USMCA’s provisions. For example, even if the U.S. federal government were to get rid of Section 230 of the Communications Decency Act, the USMCA’s Article 19.17 (Interactive Computer Services) would allow service providers based in Canada and Mexico to avoid any liability for third-party information on their platforms with respect to American consumers. In such a case, and with Canada and Mexico also adopting laws making platforms legally liable for third-party content (e.g., misinformation), we want to avoid a situation where Meta’s main platforms (Facebook, Instagram, WhatsApp) would serve U.S. customers from Canada or Mexico while they would serve Canadian and Mexican customers from the U.S. The three North American partners would then have to cooperate to remove Article 19.17 from the USMCA in a future mandated review of the agreement.
In addition to data protection, platform governance, and cybersecurity, the USMCA member states should also coordinate their efforts in the development and regulation of new digital technologies like artificial intelligence, blockchain, and quantum computing. Such cooperation would prevent duplication of efforts and protectionist actions (e.g., subsidies) in the pursuit of national industrial policies, which are gaining in popularity across North America. A North American Digital Trade Council could lead on cooperative efforts focused on science, technology, and innovation, thereby allowing joint statements for cooperation in these domains, such as the recent one between Canada and the U.S., to become a reality.16
The USMCA’s chapter on digital trade offers a strong basis for Canada, Mexico, and the U.S. to cooperate closely to facilitate and promote the development of digital trade in North America and beyond through an integrated digital infrastructure, common or interoperable standards and regulations, the development of new digital technologies, and their application throughout firms’ and sectors’ entire supply chains. Such cooperation, thanks to a North American Digital Trade Council, would allow for North America to become a global leader in the digital economy.
- 1. https://www.commerce.gov/news/press-releases/2021/09/us-eu-trade-and-technology-council-inaugural-joint-statement.
- 2. https://pm.gc.ca/en/news/backgrounders/2021/11/18/joint-statement-north-american-leaders.
- 3. Digitally delivered services are defined as services that are delivered remotely to foreigners over information and communications technology (ICT) networks. Statistics Canada and the United Nations Conference on Trade and Development (UNCTAD) follow this definition, which is based on a framework developed by the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the International Monetary Fund (IMF) (2020). According to the OECD-WTO-IMF framework for measuring digital trade, goods cannot be delivered in digital form, only services can: “by this definition, digital equivalents of goods—such as e-books or digital software—would be considered as the delivery of a licence to use the product and not physical ownership of the product” (Nair 2021, 14).] Canada’s share of those imports is estimated to be around 7.5 percent.[In a survey of Canadian enterprises conducted in 2018, Statistics Canada (2020b) found that a maximum share of 82 percent of “in-scope” (i.e., within the scope of the survey) exports to the United States were digitally delivered. According to the U.S. Bureau of Economic Analysis (https://www.bea.gov/sites/default/files/2021-09/trad-geo-time-series-0721.xlsx), U.S. imports of services from Canada amounted to $29.3 billion in 2020. Therefore, we can estimate that a maximum of $24 billion (i.e., 82 percent) of those imports would have been digitally delivered. This amount represents 7.5 percent of all digitally delivered services imported into the U.S. in 2020.
- 4. Total Canadian imports of digitally delivered services are estimated to be C$13.2 billion for 2019 (Statistics Canada 2021) while total U.S. exports of such services are reported to be $533 billion for 2020 (UNCTAD 2021b, 11). If we assume a 20 percent growth rate for digitally delivered services imported into Canada for 2020 with 70 percent of those imports coming from the U.S. and an average exchange rate of $0.75 for C$1, then Canada would account for only 1.6 percent of U.S. exports of digitally delivered services in 2020. To compare, Canada’s share of total U.S. exports of services was 7.6 percent in 2020, based on data from the U.S. Bureau of Economic Analysis.
- 5. The OECD et al. (2020) define digital trade as “all trade that is digitally ordered and/or digitally delivered”, whereby digitally ordered trade corresponds to “[t]he international sale or purchase of a good or service, conducted over computer networks by methods specifically designed for the purpose of receiving or placing orders.”
- 6. No data are available for business-to-business (B2B) online sales.
- 7. Exceptions are allowed for a “legitimate public policy objective” as long as they are applied in a manner that is not protectionist in nature.
- 8. Chapter 19 does not apply to government procurement.
- 9. The existence of such a forum does not guarantee success, as demonstrated by the North American Competitiveness Council’s failure and the US-Canada Regulatory Cooperation Council’s limited effectiveness.
- 10. The responsible ministers should meet at least once a year to review the Council’s activities and provide guidance for future work, to ensure that it maintains its momentum and effectiveness over time.
- 11. In principle, the USMCA’s chapter 13 on government procurement should prevent the implementation of such discriminatory measures when federal funds are used to finance digital infrastructure contracts above a certain threshold value, but only between Mexico and the U.S. since chapter 13 does not apply between Canada and the U.S., which instead rely on the WTO Agreement on Government Procurement. In practice, it remains uncertain how effective government procurement provisions are in preventing the use of “buy local” (Onur Tas et al. 2019; Rickard and Kono 2014).
- 12. USMCA articles 18.3 ensures that any enterprise of another party has “access to and use of any public telecommunications network or service, including leased circuits, offered in its territory or across its borders, on reasonable and non-discriminatory terms and conditions.” Article 18.4 ensures that the supplier of public telecommunications services of a party can interconnect with the suppliers of another party at reasonable rates, negotiate roaming agreements with such suppliers, and provide “number portability without impairment to quality and reliability, on a timely basis, and on reasonable and non-discriminatory terms and conditions.”
- 13. Cross-border payment transactions usually charge both the payer and payee administrative fees for sending and receiving funds, respectively. The payer or payee is also charged a commission or premium for converting one currency into another.
- 14. USMCA article 17.15 states: “Under terms and conditions that accord national treatment, each Party shall grant financial institutions of another Party established in its territory access to payment and clearing systems operated by public entities, and to official funding and refinancing facilities available in the normal course of ordinary business.”
- 15. At the 2019 annual meeting of the World Economic Forum in Davos, Switzerland, former Japanese Prime Minister, Shinzo Abe, gave a speech in which he invited leaders to build an international order for “data free flow with trust” (World Economic Forum 2020a). In June 2019, at the G20 leaders’ summit in Osaka, Japan, 24 countries signed the Osaka Declaration on the Digital Economy (http://www.g20.utoronto.ca/2019/osaka_declaration_on_digital_economy_e.pdf), which launched the “Osaka Track” for negotiating an agreement on “trade-related aspects of electronic commerce” at the WTO.
- 16. https://www.canada.ca/en/innovation-science-economic-development/news/2021/11/joint-statement-to-leaders-from-canadas-minister-of-innovation-science-and-industry-and-the-united-states-director-of-the-white-house-office-of-sci.html.
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Carla A. Hills underscores the importance of strengthened relations between the U.S., Mexico, and Canada, as well as of domestic political support for open trade.