Digital trade has proliferated in recent years, but so, too, has digital protectionism. The digital chapter of the United States-Mexico-Canada Agreement (USMCA), which entered into force on July 1, represents the first time this issue has been explicitly addressed in a trade deal, potentially setting the stage for other future trade pacts. Eleanor Wragg reports.


When the North American Free Trade Agreement (Nafta) first came into force in 1994, the digital age was barely entering its infancy. The internet was no more than a handful of text-based pages, while online marketplaces, 3D printing, machine learning and smart manufacturing were beyond the realms of even the most imaginative works of science fiction.

Just over a quarter of a century later, and the rise of the digital economy has transformed cross-border trade, extending the capacities of firms of all sizes to export around the world in ways that continue to evolve. Because of its intangible nature, digital trade – defined broadly as the supply of products and services via the internet as well as the data flows that enable global value chains and smart manufacturing – is notoriously difficult to measure. However, the McKinsey Global Institute estimates that around 50% of the world’s traded services are in digital form, while e-commerce accounts for around one-sixth of all goods traded across borders.

Drawn up before the first web browser was even released to the public, Nafta was never designed to govern this kind of trade. Indeed, in its 1,700 pages, there is not a single mention of the word “internet”, while “data” is used only in the statistical sense of the word, to refer to measurements and numbers.


The rise and rise of digital protectionism

But Nafta isn’t alone in its antiquation. International trade rules, by and large, have not kept pace with the transformation of global commerce from the physical to the virtual. As a result, recent years have seen a growing trend of countries enacting barriers to digital trade go largely unchecked.

For the US, which is home to 11 of the world’s 15 largest internet businesses, this represents a serious challenge. According to data from the US Congressional Research Service, US exports of information and communications technology-enabled services totalled US$439bn in 2018 – dwarfing the combined weight of its top two goods exports sectors, machinery and mineral fuels, by a considerable margin.

In recent years, the US Trade Representative (USTR) has been monitoring impediments faced by US suppliers of digital goods and services. First on its hit list are practices mainly carried out by China, from the filtering of cross-border internet traffic, which poses a significant burden to foreign suppliers, to restrictions on foreign-invested cloud computing services within China, the prohibition of the use of virtual private network (VPN) connections to reach overseas data centres, and forced source code disclosure as a condition of market access.

Data localisation requirements are another thorn in the side of online trade. In Russia, Turkey and Indonesia, for example, certain data on citizens collected electronically must be processed and stored within the country. Because ensuring local storage and processing is either technically or economically infeasible, many US companies face a choice between withdrawing from those markets or operating under significant legal uncertainty, the USTR says.

That isn’t to say that legitimate reasons for keeping certain data within sovereign borders do not exist, but policymakers around the world have long warned of restricting data movement under the guise of consumer protection. “Let’s not kid ourselves: some data restrictions out there are purely protectionist,” said then-EU Trade Commissioner Cecilia Malmström in a 2016 speech to the European Parliament. “Rules that require data to be localised in a place, or that impose limits on transferring data, often have no justification, other than to inhibit market access by overseas companies. That is not data protection, it is protectionism; that is our trade partners not playing fair.”

As every business becomes a data business, and the future of globalisation rests increasingly on cross-border flows of data rather than goods, breaking down these barriers to trade has become of vital importance.


A model for other trade deals

The United States-Mexico-Canada Agreement (USMCA), which officially replaced Nafta on July 1, is the first trade agreement to explicitly address this issue. Hailed by the USTR as “the strongest disciplines on digital trade of any international agreement”, its digital chapter contains prohibitions on customs duties and tariffs on digital products, facilitates digital transactions by permitting the use of electronic authentication and electronic signatures, ensures the free transfer of data across borders, and cracks down on data localisation measures.

“The digital provisions of USMCA promote innovation and economic growth and are a model for all trade agreements,” says Martin Schroeter, senior vice-president of global markets at tech giant IBM. “The USMCA begins a new era in world trade, one in which digital trade gets the same kind of attention as traditional trade. It recognises that cross-border data flows already make a bigger contribution to global GDP than trade in manufactured goods, a trend that is likely to accelerate in the future.”

Karan Bhatia, vice-president for global public affairs and government relations at Google, is equally effusive. “USMCA promotes an open and secure global technical infrastructure that supports a new kind of trade,” he said in an official blog post. “For example, the agreement prohibits the US, Mexico and Canada from requiring that data be stored and replicated locally, reducing the cost of doing business in other countries and ensuring that data isn’t vulnerable to attack.”

However, the potential impact the USMCA will have upon digital trade within the North American trading area is not immediately apparent. Indeed, an – albeit cursory – glance through all three countries’ national legislation does not reveal any of the barriers to digital trade that so irk the USTR.

In fact, digital trade among the three signatories to USMCA is in rude health. According to research by the Internet Association, which represents 45 global internet companies, including Google, Amazon and Facebook, the US’ digital trade with Mexico and Canada adds US$19.2bn per year to its economy.

“There really are not a lot of digital trade barriers between the US, Canada, and Mexico, so this chapter wasn’t really to solve any immediate problem,” Logan Finucan, senior manager of data policy and trust at public policy firm Access Partnership, tells GTR. “The real goal was to enshrine these standards as a high-water mark example for other countries and other trade negotiations where there are problems such as this.”


Unilateral solutions to multilateral problems

Work is already being done elsewhere to tackle digital protectionism in trade, but progress has been slow. The World Trade Organization’s (WTO) joint initiative on e-commerce, for example, which was launched in 2017 to tackle barriers that prevent cross-border sales, has yet to get off the ground, and its members are struggling to conceal their frustration.

“Since 1998 the WTO has agreed no new rules on e-commerce,” said Julian Braithwaite, UK ambassador to the WTO, during a February plenary. “It is beyond time for the world to put in place digital rules; not rules that close down the future before it arrives, but rules that unlock the extraordinary economic potential that a truly global digital economy promises… This initiative is about more than e-commerce. It goes to the credibility of the WTO itself, and its ability to deliver relevant global trade rules fit for the 21st century.”

Absent an ambitious and inclusive new global deal on digital trade, then, all that is left to the world’s economies is to try to stem the tide of digital protectionism unilaterally. The USMCA is the first trade deal to do so, but it won’t be the last: the Digital Economy Partnership Agreement (DEPA), signed in June this year between Chile, New Zealand and Singapore, covers some of the same ground, albeit tentatively, while recent trade talks between the EU and Japan, Mexico and Singapore have all included mentions of the topic.

Although the USMCA may not live up to US President Donald Trump’s bombastic claims of being “the best and most important trade deal ever”, it does at least go some way towards bringing international trade rules into the internet age, paving the way for the benefits of digital trade to be felt across the world.