from Digital and Cyberspace Policy Program

What the Trump Administration’s NAFTA Priorities Get Right (and Wrong) About Digital Trade

The logo of the web service Amazon is pictured in this June 8, 2017 illustration photo. Carlos Jasso/Reuters

A renegotiated North American Free Trade Agreement could set the gold standard for digital free trade, an opportunity the Trump administration should not miss.

September 15, 2017

The logo of the web service Amazon is pictured in this June 8, 2017 illustration photo. Carlos Jasso/Reuters
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Digital commerce and trade are increasingly important to the global economy. Seven of the ten most valuable firms today are technology companies (Apple, Alphabet, Microsoft, Amazon, Facebook, Alibaba, and Tencent). Data, according to some analysts, is the new oil. A major study concluded that the internet has powered some one-fifth of recent economic growth within the leading economies. Jobs are increasingly dependent on digitization; digital skills are needed for all but two job categories [PDF] in the United States: dishwashing and food cooking.

Just as national economies are becoming more digitized, barriers to digital trade are being erected. These barriers limit opportunities for consumers to access global providers and for small- and medium-sized enterprises to reach new customers. It is not only technology firms that suffer; all enterprises with international operations need cross-border data flows to process, analyze, and transfer data about employees, customers, and operations. Global supply chains depend on the flow of goods, data, and services across borders. Moreover, commitment to the free flow of information across borders is essential to freedom of expression. Digital trade is about more than access to markets; it is about access to information.

The renegotiation of the North American Free Trade Agreement (NAFTA) is an excellent opportunity to set the gold standard for digital free trade. Despite public pronouncements about the harm free trade causes to the steel and automobile industries, the Donald J. Trump administration, to its credit, recognizes the importance of removing digital trade barriers in its stated objectives for the NAFTA renegotiation [PDF]. In its negotiations with Canada and Mexico, the Trump administration should seek rules limiting data localization, promote a balanced approach to intellectual property protections, support cross-border privacy rules, and remove barriers that hinder the trade of services.

Liberalizing the Digital Economy

Many of the efforts to liberalize the digital economy predate the first NAFTA negotiations, which concluded in 1992. In 1995, the World Trade Organization’s General Agreement on Trade in Services committed many states to liberalize trade in services, including many database and computer services. In 2001, the United States began including digital issues in its bilateral trade agreements with a nonbinding commitment in its agreement with Jordan, and then included binding e-commerce chapters in every subsequent agreement.

Notwithstanding these early liberalization efforts, a growing number of governments claim that the free flow of data inordinately benefits U.S. tech companies and that digital trade barriers could help foster domestic innovation and the growth of national companies. For example, Australia, China, some Canadian provinces, the European Union, Nigeria, and Russia all have variations of what have become known as data localization laws, which either require the use of local computing facilities or keep data from being transferred abroad in certain instances. In the wake of Edward Snowden’s revelation of the United States’ widespread digital surveillance programs, these countries often also justify data localization laws based on concerns over privacy and national security.

Governments claim that the free flow of data inordinately benefits U.S. tech companies.

Most research [PDF] suggests that data localization raises costs for local businesses and reduces access to global services for both businesses and consumers. Moreover, keeping information local can undermine privacy and security because local suppliers sometimes lack the strong protections offered by global providers. Whatever its rationale, data localization effectively disfavors foreign suppliers, which are less likely to use local data infrastructure, and therefore acts as a trade barrier.

While negotiating the Trans-Pacific Partnership (TPP), the Barack Obama administration successfully pushed to remove digital trade barriers among the dozen TPP states. The TPP included innovative provisions that permitted data localization only in the absence of alternatives to achieving legitimate regulatory goals. However, the TPP’s data localization limitations did not extend to financial services, which were covered by the special rules of the financial services chapter, after U.S. financial regulators [PDF] expressed privacy and security concerns.

The Trump administration withdrew from the TPP in January 2017. The other countries in the pact may attempt to move forward without the United States, but the future of the agreement is unclear. Absent a stronger standard such as a renegotiated NAFTA, the TPP’s e-commerce provisions will likely set the benchmark for discussions of digital trade in other trade deals, such as the EU-Japan free trade agreement.

The Trump Administration’s Trade Agenda

In his public pronouncements, President Trump has emphasized the need to focus on traditional industries, such as the automotive and steel sectors, to bolster U.S. manufacturing. He has also expressed a desire to prioritize bilateral trade agreements over multilateral ones on the grounds that the former are more beneficial to U.S. interests. He had repeatedly criticized the TPP as being unfair to U.S. workers.

Consistent with its skepticism of trade deals, the Trump administration formally notified Canada and Mexico of its intent to renegotiate NAFTA in May 2017. In July, the Office of the U.S. Trade Representative publicized its objectives for a renegotiated North American trade deal, including five e-commerce priorities. The White House would seek to prohibit customs duties on digital products, discrimination against digital products from a NAFTA party, data localization either in the form of restrictions on cross-border data flows or requirements to use local computing facilities, government mandates to disclose source code, and higher thresholds for duty-free sales of goods across borders. Essentially, the NAFTA negotiating objectives for digital trade promote some of the same trade liberalization gains that had been achieved by the TPP.

The NAFTA objectives also seek the liberalization of the services sector by using a negative list approach, whereby countries agree to allow trade in all kinds of services except those specifically excluded from importation. The United States has long championed freer trade in services, and it has good reason to do so: it is the world’s leading exporter of commercial services [PDF], with a total of $750 billion dollars in services exports in 2016 and surpluses in services since 1971. Providing a cross-border service can require foreign investment, cross-border travel of individuals (either the consumer or the supplier), or electronic delivery. Liberalization of trade in services makes it possible, for example, for a U.S. business to supply a service online to Canada or Mexico, or for a representative from a U.S. cloud computing firm to travel to Canada or Mexico to provide on-site setup and support.

However, there are important areas in which the NAFTA negotiating objectives could be strengthened. The NAFTA negotiating objectives do not include a requirement for privacy or consumer protection. The Trump administration has also neglected to include internet copyright safe harbors and other limitations and exceptions on copyright, which would protect internet service providers from being held strictly liable for the actions of their users. Thus, in its current form, the Trump administration’s digital trade agenda seems to reflect only the interests of the domestic content industry, including Hollywood studios and traditional media companies, rather than those of internet service providers or users. Even as Silicon Valley companies such as Facebook and YouTube increasingly become content providers, they continue to depend on legal protections from being held liable for the actions of their users. Focusing on Hollywood’s interests alone neglects the technology industry powering much of recent economic growth. Not including privacy or consumer protections in international trade means neglecting the rights of everyday citizens.

Not including privacy or consumer protections in international trade means neglecting the rights of everyday citizens.

Recommendations

The Trump administration should expand its digital trade agenda for the NAFTA renegotiation beyond the objectives released by the U.S. trade representative. An expanded agenda will promote U.S. businesses, which will gain broader markets, and benefit U.S. consumers, who will have access to more competitive markets. The United States should use the negotiations to remain the world’s leading promoter of free and fair trade, as well a strong promoter of privacy and consumer rights. The Trump administration should also require stronger privacy and consumer protections and guarantee basic creative rights, which would signal that NAFTA will be more consumer oriented than the TPP was perceived as being. The Trump administration should expand its negotiating agenda to include the following four specific provisions: enforceable privacy protections on cross-border flows of personal data, protections for consumers across borders, protections for responsible internet intermediaries, and fair-use exceptions to copyright. The Trump administration should include financial services within any provisions limiting data localization measures, even though they were excluded in the TPP; the legitimate concerns of financial regulators with respect to access to data held abroad can generally be met by alternative measures, such as agreements ensuring access to cross-border data.

Americans should feel comfortable that, as information traverses the globe, the companies handling that information will keep it private and secure. The TPP was criticized for having weak privacy protections that allowed each country to set its own legal protections for personally identifiable information, rather than setting explicit minimum data protection standards. The NAFTA negotiation offers an opportunity for the Trump administration to seek a minimum data protection standard for cross-border flows of data. This standard could readily take the form of the Asia-Pacific Economic Cooperation’s Cross Border Privacy Rules (CBPRs), a standard to which Canada, Mexico, and the United States have already committed. The CBPRs require countries to establish accountability agents that review and certify enterprises for compliance with the data protection rules. Under the CBPRs, privacy commitments made by enterprises must also be legally enforceable.

The Trump administration should also promote consumer protection in NAFTA by committing to work with Canada and Mexico to ensure easier cross-border enforcement of consumer rights. As consumers interact with sellers across borders, they should be confident that their rights will be protected, regardless of where the seller is located in North America. This will help U.S. businesses by making their goods and services more appealing to customers in Canada and Mexico.

In addition, the Trump administration should seek balanced intellectual property rights provisions, modeled on U.S. law, that protect both the internet platforms and their users. In recent years, the United States has sought a more balanced approach to copyright protection in its trade agreements, recognizing that too strong intellectual property rights can limit innovation and consumer rights. Since the U.S.-Singapore free trade agreement of 2003, the United States has included copyright safe harbors for internet service providers in its trade agreements. Such provisions make possible the internet that we have today: users can freely share information without online platforms being sued into oblivion by copyright infringement claims, as long as the platforms take responsible steps when they receive claims of copyright infringement. The Trump administration should recognize the importance of these protections in U.S. law for the development of Silicon Valley enterprises and push for their expansion to international trade agreements. Furthermore, the administration should protect exceptions to copyright that allow use of copyrighted works for purposes such as criticism, news reporting, and education—along the lines of fair use in U.S. copyright law.

The United States has an opportunity to promote a twenty-first century economy that drives innovation and empowerment across North America. This should benefit consumers across the region while also enlarging markets for American products and services. Entrepreneurs can set up shop in Guadalajara, Kansas City, or Vancouver and reach a market of nearly half a billion people, and individuals across the region can gain tools to both increase their knowledge and access diverse suppliers. The NAFTA renegotiation objectives demonstrate that President Trump is hewing to the e-commerce provisions of TPP despite pulling out of that agreement. That is good for digital trade liberalization, but the administration should go further to focus the digital trade agenda on enhancing individual rights by promoting privacy, consumer protection, and balanced intellectual property rights. The rules set out in NAFTA will ultimately lay the foundation for freer trade and prosperity in the future.

Anupam Chander is visiting professor at Georgetown University Law Center and Martin Luther King Jr. professor of law and codirector of the California International Law Center at University of California, Davis. He has received a Google Research Award for related research and serves as a consultant to the UN Conference on Trade and Development.

This Cyber Brief is part of the Digital and Cyberspace Policy program. The Council on Foreign Relations takes no institutional positions on policy issues and has no affiliation with the U.S. government. All views expressed in its publications and on its website are the sole responsibility of the author or authors.

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