United States International Trade Commission fact finding investigation

The following written statement addresses the specific issue of the impact of the United States-Mexico-Canada Agreement (USMCA) on digital trade opportunities for the United States economy and industry. The USMCA makes important progress developing new rules on digital trade that should be of benefit for the United States.

key points

1. The U.S. has captured significant economic value from the internet and data. In addition, the global internet and use of data is a global opportunity.
2. The impact of data and the global internet is not limited to the IT sector but is driving commercial and international trade opportunities economy-wide.
3. The internet and global data flows are transforming international trade in four key ways:

• Businesses can use the internet (particularly digital platforms) to export.
• Services can be increasingly traded online, particularly IT, professional, financial and education services. New digital service such as cloud computing are becoming crucial business inputs.
• Data collection and analysis is adding value to goods exports.
• Global data flows underpin global value chains.

4. Further economic integration among the U.S., Canada, and Mexico should include development of a digital North America. The USMCA makes an important contribution to this goal. Successful digital integration should increase productivity and create new opportunities for trade.
5. Data localization barriers are increasing globally. Data localization restricts cross-border data flows, reducing opportunities for digital trade. Some data localization measures are to achieve legitimate goals, such as privacy, while others are aimed at protecting domestic industry, a form of digital protectionism.
6. The WTO lacks comprehensive rules on digital trade. However, some WTO rules are relevant, particularly the General Agreement on Trade in Services.
7. The USMCA includes important new digital trade commitments. In particular, the USMCA digital trade chapter significantly expands upon e-commerce chapters in previous FTAs to which the U.S. is a party.  Digital trade opportunities will also be expanded by USMCA commitments in a number of other areas, particularly in the services, telecommunications, trade facilitation, and intellectual property chapters.
8. USMCA digital trade commitments will expand digital trade opportunities for all business in the U.S., Canada, and Mexico.

The Trillion Dollar Economic and Trade Opportunity

There are various estimates of the economic and trade importance of digital trade and/or global data flows—best ones for the U.S. from ITC:

Note the U.S. Department assessment of scope for U.S. export of digitally deliverable services—services that could be provided online—to Canada represent 52 percent of U.S. services exports and 27 percent of services export to Mexico.

Digital trade Opportunities

As noted, the globalization of the internet and the ability to move data across borders is also transforming the nature of international trade in four key areas.

However, as the opportunities presented by digital technologies grow, governments and regulators have to determine how to benefit from going digital while maintaining the integrity of their domestic regulations. Against this backdrop, there has been significant growth in data localization measures globally¹. Such requirements create costs for key U.S. digital services exports such as cloud computing, which rely on global dispersed data centers to reduce costs and enhance security.

There are various forms of data localization. Outlined in my written submission and suspect that you will hear more about these in my colleagues subsequent statements.

The USMCA Digital Trade Chapter

The following outlines the key USMCA digital trade commitments for the U.S.:

• USMCA includes a commitment to the cross-border transfer of information. As outlined, the flow and use of data is of increasing economic value. There is a similar commitment in CPTPP, but the USMCA wording is an improvement. In USMCA, the commitment is for each party not to prohibit cross-border transfers of information which implies (correctly) that cross-border data flows are the norm and that governments should refrain from interfering, whereas the CPTPP formulation suggests instead that data flow restrictions are the status quo, and that governments allow cross-border data flows as an exception.
• An obligation to not require the domestic location of computing facilities as a condition for conducting business in either party to the USMCA. These commitments respond to global trend towards data localization laws.
• USMCA includes an obligation not to “require the transfer of, or access to, source code of software owned by a Person of another party” as a condition for import or sale². Source code is the fundamental component of a computer program. Most commercial software source code is closely protected and proprietary.  Yet, access to source code is a requirement in some countries for doing business, and requiring such access was identified by USTR as part of the broader issue of forced technology transfer in China.³
• Online Consumer Protection:⁴ USMCA requires the parties to have in place consumer protection laws to address fraudulent and deceptive commercial activities to consumer engaged in online commercial activities. This commitment begins to address a tension between domestic regulation focused on protecting citizens from harm and the cross-border nature of digital trade where harm can arise from commercial activities in another country and where domestic regulators have no jurisdiction. Expanding regulatory cooperation on consumer protection issues is therefore needed.
• Personal Information protection:⁵ maintaining strong protection of personal privacy while maximizing the opportunities of digital trade. The ability to move data seamlessly across borders can undermine domestic privacy standards when personal data is moved to jurisdictions with lower privacy standards. The USMCA gets at this issue first by requiring the extension of domestic privacy standards to “users of digital trade”, which includes people located domestically as well as in the territory of the other parties. Second, USMCA requires all parties to have in place a legal framework for the protection of privacy.  Such privacy frameworks are to take into account, “principles and guidelines of relevant international bodies”, and here USMCA refers to the APEC Privacy Framework and the OECD Guidelines.  There is also a commitment to developing interoperability amongst different privacy systems.  This is important given the diverging approaches, particularly between the broadly bottom-up U.S. system for protecting privacy and the omnibus top-down approach the EU has taken in the General Data Protection Regulation.⁶ In this context, the APEC cross-border privacy rules are singled out in USMCA as a suitable mechanism for protecting privacy and ensuring the free flow of data across borders.⁷
• Cybersecurity: this provision is expanded on from CPTPP⁸. USMCA includes a stronger commitment to building cybersecurity capacity in each country and to strengthening collaboration, also supporting “risk-based approaches that rely on consensus-based standards and risk management best practices to identify and protect against cybersecurity risks”.  This is a useful development. For one, the reference to consensus-based standards and best practices could help channel cyber development and avoid unnecessary expansion of restrictions on digital trade under the cover of cybersecurity, as is occurring in China and Vietnam for instance. The focus on risk-based solutions is also commended. Indeed, the focus on risk mitigation is also brought into other digital trade commitments such as on privacy, where restrictions on cross-border data flows to achieve privacy goals must be “necessary and proportionate to the risks presented.”⁹ Such commitments can help shape a risk-based approach to regulation in the digital age, avoiding otherwise prescriptive regulation that can lose relevance in a rapidly changing environment, and also counter government’s using legitimate goals such as cybersecurity and privacy protection to unnecessarily restrict digital trade opportunities.

In addition to these provision highlighted above, the USMCA digital trade chapter includes a range of other commitments more commonly found in previous United States e-commerce chapters. These include the following provisions:

• No customs duties:¹⁰ the commitment by the parties to not impose customs duties or fees on trade in digital products transmitted electronically makes permanent amongst the U.S., Canada and Mexico what otherwise relies on a rolling two year WTO moratorium on imposing such customs duties, which is moratorium is renewed (so far) at each WTO ministerial meetings.
• No-discriminatory treatment of digital products:¹¹ extends key non-discrimination norms of national treatment and most-favored-nation treatment to digital products. This will ensure that U.S. producers of digital products are not discriminated again in Mexico and Canada. It will also ensure that if Mexico and Canada grant more favorable treatment to digital products from third countries, that this more favorable treatment is extended to U.S. digital products.
• A requirement to have in a place an electronic framework consistent with principles of the UNCITRAL Model Law on Electronic Commerce
• Agreement to recognize electronic signatures with some exceptions.
• Development of principles on access to and use of the Internet for digital trade which emphasize consumer choice in terms of connection to the network, use of devices and access to information.¹²
• A requirements to limit unsolicited commercial electronic commerce.

Other USMCA chapters relevant for digital trade

There are other USMCA commitments relevant for supporting digital trade. This testimony does not go into these other commitments in detail, and the following merely highlights the other relevant areas of USMCA for digital trade to underscore the scope and importance of the agreement for digital trade.

• Services (including financial services): as noted, U.S. increasingly exports digitally—deliverable services which in turn makes market access commitments on services important for securing such opportunities.
• Trade facilitation: as noted, the ability to sells goods online using digital platforms is a significant opportunity for SMEs. To realize this requires eliminating barriers to the movement of low-value packages across borders. This includes improving customs processes and raising de minimus duties—the amount of an import below which customs duties or taxes are not applied. USMCA makes progress here.  Under the agreement de minimus is $US800 for the U.S., for Mexico it is USD$117 for customs duties and USD$50 for taxes, and Canada it is C$150 for customs duties and C$40 for taxes.¹³
• The USMCA Technical Barriers to Trade (TBT) chapter is important for supporting digital trade.¹⁴ This chapter builds upon the commitments in the WTO Technical Barriers to Trade (TBT) agreement. New commitments on technical standards are potentially important for digital trade in a number of ways. For one, the development of smart manufacturing will be premised on interoperability within factories and between facilities located with North America (and globally).¹⁵ Consistent standards for information flows, integration of units and cyber physical integration will be needed to realize these opportunities.¹⁶ The development of mutual recognition of domestic standards is also likely to be an important means for enabling interoperability between domestic standards in areas such as privacy, health, education, while also supporting global data flows and digital trade opportunities.  Finally, commitments on transparency in the standards making process, always important, is particularly so now given the importance of standards for digital trade and the corresponding incentive for countries to use standards as non-tariff barriers.  USMCA makes progress on all these fronts. For instance, commitments to ensure that domestic standards are based on international standards and for regular review of domestic standards builds on the TBT agreement. USMCA strengthens commitments to mutual recognition amongst the parties. On transparency, USMCA includes specific requirements for notification and publication, opportunities for comment and input, as well as requirements to explain the objectives of the technical regulation, what alternative approaches were considered and the merits of the selected approach.
• As discussed, IP commitments are an important underpinning for digital trade. Key IP commitments in the USMCA chapter that support digital trade are: Technological Protection Measures¹⁷; Rights Management Information¹⁸; and Legal Remedies and Safe Harbors.¹⁹The USMCA does not include a provision similar to CPTPP, that recognized the need for the Parties to achieve “an appropriate balance in its copyright and related rights systems.”²⁰ This development in the CPTPP opened the gate for application of fair use exceptions to copyright that is found in U.S. law and which have been part of the legal underpinning in the U.S. for development of a digital economy.²⁰ Extending even a hortatory commitment to Canada and Mexico would have made sense given that Mexico and Canada are party to the CPTPP.  Doing so would have allowed the U.S. to continue to signal support for such a doctrine while monitoring and assisting in its development.