A digital bright spot in US trade policy

The digital trade chapter of the new North American trade deal is a bright spot in our otherwise-problematic current trade policy. The United States-Mexico-Canada Agreement (USMCA) replaces NAFTA, and it sets the stage for U.S. leadership in trade rules for the digital economy. Without it, the United States would lose the opportunity to establish a strong template for the future.

The digital trade chapter reflects some of the best practices in international trade: preventing favorable treatment to domestic firms at the expense of foreign firms, barring trade-restricting measures, protecting trade secrets, and a commitment to unfettered trade flows. The chapter also leaves room for countries to tackle hard-but-legitimate questions of data and personal privacy, as long they do so in the least trade-restricting way and treat domestic and foreign firms consistently.

“Digital trade” includes not only online shopping and software, but also internet-powered professional services emerging in areas such as cyber security and medical and health care. For U.S. companies involved in supply chains, digital trade is an invisible but essential component of the management of everyday business operations and communications.

USMCA’s digital trade chapter prohibits countries from applying discriminatory measures to digital products that are distributed electronically. The chapter also protects trade secrets and bars countries from requiring the disclosure of source code (the secret sauce for how a business operates on the internet and in the ethernet), and even protects algorithms expressed in that source code (the key ingredients to the secret sauce).{mosads}

USMCA also bars our trading partners from requiring foreign firms to physically store or localize data in their host country, even for financial services companies. This is important because data localization requirements would mean that any U.S. company working abroad would have to build out or lease separate data infrastructures in each country where they do business. It makes exporting an artificially costly endeavor, especially for small and medium-sized firms. Data localization requirements would also put data at risk to the extent the host country’s cyber infrastructure is not up to par.

In USMCA, parties are free to adopt measures consistent with their own public policy objectives, including privacy protections. Privacy has been a cornerstone of American life and has long been recognized to be in the public interest. In fact, 270 years ago, when Benjamin Franklin was in charge of the colonial mails, he required his employees to swear an oath not to open the mail. A few years later, in 1782, Congress passed a law that mail should not be opened.

Fast forward to today, when we are all sending information to each other digitally, and it is no wonder these rules may need updating for the internet age. Congress appears intent on turning to internet privacy legislation this year. USMCA establishes the framework for countries to achieve their public interest goals with an important footnote: They must do so in the least trade-restrictive way. In the digital trade area, that means if they target cross-border transfers, then they must not alter the conditions of competition between domestic and foreign suppliers.

Indeed, these are the bedrock principles of long-established international trade conventions within the General Agreement on Tariffs and Trade and the World Trade Organization.

Digital trade is one of those areas where the United States is a global leader. We are not afraid of competition in this area, and it shows. This is in stark contrast to the auto provisions in USMCA, which force Mexico and Canada to use more U.S. and North American content, and for Mexico to increase its wages.

U.S. Trade Representative Robert Lighthizer said, “there is no trade program in the United States if we don’t pass the USMCA.” He’s not joking. Without USMCA, and if President Trump withdraws the United States from NAFTA, there is little left on the table except for a list of bilateral deals. And these bilaterals mean less and less because our trading partners are signing bigger and better deals with others.

Lighthizer reportedly expects to host negotiating rounds with the United Kingdom, European Union, and Japan. The digital trade chapter of USMCA enables us to establish a strong digital trade framework in the region and global marketplace moving forward.

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.