October 9, 2018

NAFTA 2.0 Will Benefit the Digital Economy

The United States, Canada, and Mexico are set to be free of digital trade barriers, and that deserves a thumbs-up emoji. On September 30th, after more than a year of intense negotiations, a last-minute trade deal was reached to replace the longstanding North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA). The new agreement – informally dubbed “NAFTA 2.0” – includes major changes to trade in the automotive and dairy industries, while leaving wheat and grain industries largely unchanged. While we have all been closely watching the fate of cars, cows, and corn, what has evaded the headlines is something significant: the digital fingerprints left on our computers and other devices. Whenever we make an online purchase, post on Facebook, or type a query into Google’s search engine, we are creating new digital information which then travels across computers around the globe in what is known as cross-border data flows.

Data is the New Dairy

Brand new in NAFTA 2.0 is a chapter on digital trade which emphasizes free trade principles for the digital world. The addition of this chapter was uncontroversial among the three players, but not inconsequential. The original NAFTA took effect in 1994, preceding the modern Internet. Today, more than half of the world’s population is online, and in 2015 the global electronic commerce market amounted to $22.1 trillion according to the United Nations Conference on Trade and Development, making the Internet economy the globe’s fifth largest economy. Cross-border data flow is integral to how the Internet works — without it, the Internet as we know it would cease to exist. Data is the currency of the Internet economy. For example, Facebook provides services to its users for “free” in exchange for personal information which is then packaged in meaningful ways for advertisers – creating value for all parties. Since these data exchanges either directly or indirectly become linked to commercial activity, they are “traded.” While trade in goods has flattened since 2010, cross-border data flow has been skyrocketing, contributing more to global GDP than trade in manufactured goods.

NAFTA 2.0 Commits to Free Trade in the Internet Economy

The digital trade chapter puts a hard stop to protectionist data measures — trade barriers that attempt to restrict cross-border data flow — in favor of a market liberalism approach to digital trade. The parties agreed not to place customs duties on digital products, not to restrict cross-border data flows, and not to require companies operating in their respective territories to use or build local data servers. The chapter also prohibits governments from requiring companies to disclose proprietary information such as computer source code. All of these provisions favor digital innovation.

Proponents of data protectionism point to concerns over personal information privacy and cybersecurity. It is unlikely that far-reaching data protectionist measures can mitigate those concerns. Requiring data to be stored on servers within a country increases costs and stifles competition while undermining security and privacy since local providers typically lack the expertise of global providers. On the other hand, restricting cross-border data flow reduces public access to information. An extreme example is China’s Great Firewall, which blocks certain websites, including Facebook and Google.

The digital trade chapter also includes safeguards intended to protect public interests. The agreement calls on each country to adopt domestic legal protections for personal information and allows for exceptions to free digital trade to meet public policy objectives such as blocking data flow for national security reasons. The language in the agreement is vague, however, and it is not clear what level of privacy and consumer protection it requires of each country. Currently, the United States has no baseline federal data protection law, while Canada and Mexico have more comprehensive legal protections. Despite some loose threads, the digital trade chapter could set a global standard for future trade agreements.

A Win For Whom?

Some argue that the free flow of data will disproportionately benefit the U.S. economy as it is home to 11 of the 15 leading Internet companies. That may be true, but digital free trade is still a net benefit for all three countries. Mexico has been gaining steam in the app development economy, while Canada is establishing itself as a leader in artificial intelligence. Unimpeded data flows are invaluable for innovation in the tech sector. A 2016 study by the McKinsey Global Institute found that 86% of tech-based startups rely on cross-border data flow. Free trade in the digital space is a win-win-win for North America, and NAFTA 2.0 delivers those wins.