The Canada-U.S.-Mexico Agreement that replaced NAFTA includes a first-of-its-kind digital trade chapter that builds on the e-commerce chapter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Key language in both agreements favours large, established, mainly U.S.-based tech firms by giving primacy to the unimpeded flow of data across borders while restricting governments’ ability to regulate the digital economy for public interest reasons.
However, a change of heart on digital trade policy in Washington opens a window for Canada, Mexico and the United States to rethink and potentially remove some of CUSMA’s harmful regulatory restraints. With CUSMA coming up to a scheduled review period in 2026—for which governments are already beginning to prepare—now is the time to start working toward those goals.
What is digital trade? The OECD claims there is no singular definition but proposes that digital trade encompasses “digitally-enabled transactions of trade in goods and services that can either be digitally or physically delivered, and that involve consumers, firms, and governments.”1 According to this definition, buying a book or vacuum cleaner from Amazon is digital trade, but so is booking a hotel through Expedia or Airbnb, hailing a ride from Uber, or streaming a film on Netflix. Global trade in digitally delivered products reached $3.83 trillion USD in 2022, representing half of all global services trade.2 A significant proportion of digital trade is carried out by U.S.-based firms offering digitally-supplied digital or physical goods or services in other countries.
At a different level, digital trade is a rhetorically useful label chosen by U.S. tech firms in the early 2010s to promote supra-national regulatory constraints on governments as a means of preserving the status quo that led to their oversized power.3 Key elements of this agenda are limiting governments’ capacity to regulate international data transfers and banning their capacity to demand transparency over the code and algorithms that undergird software.
“Underpinning digital trade is the movement of data,” notes the OECD. “Data is not only a means of production, it is also an asset that can itself be traded, and a means through which [global value chains] are organized and services delivered…. Data is also at the core of new and rapidly growing service supply models such as cloud computing, the Internet of Things (IoT), and additive manufacturing.”4
As the value of data has increased, so have corporate efforts to hoard and keep data secret. It is not surprising that countries with the highest share of digital products in their overall services trade, such as Luxembourg and Ireland, are also known tax havens, “where companies can exercise control without state interference.”5
CUSMA’s digital trade chapter, like the CPTPP, broadly covers any measures adopted by governments that “affect trade by electronic means” (CUSMA Article 19.2, CPTPP Article 14.2). Both agreements say there can be no discrimination between the digital products and services of national and foreign firms, similar to national treatment rules in the agreements’ investment, services, and market access chapters.
On their own, these provisions limit countries’ ability to foster domestic competition to established U.S. (or Chinese or Korean, for that matter) firms that currently dominate the digital economy. They may also interfere with efforts to regulate predatory behaviour by app-based firms such as Uber and Postmates, which compete with and in some cases completely destroy existing markets (and better paid jobs) in restaurant-based food delivery, regulated taxi services, and public services such as urban transit.
Indeed, industry groups representing U.S. big tech interests claim that digital governance policies adopted by Canada violate the digital non-discrimination obligations included in CUSMA’s digital trade chapter. For instance, the Computer and Communications Industry Association has claimed that the Online News Act is a discriminatory policy in breach of CUSMA’s non-discrimination obligations.6 The American and Canadian Chambers of Commerce have jointly declared Canada’s digital services tax, which has been repeatedly challenged by U.S. officials, would “directly contravene Canada’s obligations under [CUSMA].”7
CUSMA and CPTPP further prohibit countries from applying customs duties to electronic transmissions, including the content of those transmissions. These rules have tax implications, as alluded to above with respect to companies claiming value generation from the use of data in countries with low or zero taxes.
Many lower income countries without developed income tax systems also depend on customs tariffs on imported goods for government revenues and rightly resist the idea of prohibiting import tariffs on digital products. It is not obvious why digitally supplied goods should be treated differently from any other dutiable product.8 While it is unlikely Canada would start taxing imports of digital goods and services, countries needn’t rule the policy out in perpetuity.
CUSMA also prohibits any restriction on the cross-border transfer of data, including personal information, if it is for business conduct. And the agreement forbids governments from requiring that businesses use or locate computing facilities (e.g., servers or cloud services) domestically, which is sometimes referred to as “data localization.” There are clear privacy-based reasons why a country might reasonably expect domestically collected data to be stored locally. There are tax implications as well, as mentioned.
CUSMA further blocks governments from accessing a company’s source code and algorithms, except “for a specific investigation, inspection, examination, enforcement action, or judicial proceeding” (Article 19.16). This provision could impede efforts by the United States, Canada or Mexico—individually or collectively—to regulate today’s chaotic rollout of novel artificial intelligence technologies and address the mental health impacts on children of social media algorithms.9 CUSMA may also undermine “right to repair” policies whose effectiveness will in some cases depend on access to corporate data such as source code and diagnostic tools.10
This article of the digital trade chapter further impedes governments from addressing company algorithms that may be discriminatory, harmful, or involve intrusive surveillance practices—an important issue for workers in many different industries and especially so-called gig workers. “Technology companies and other employers are increasingly supervising, surveilling and even disciplining workers with automated artificial intelligence (AI) and algorithmic management systems that can shortchange workers’ earnings, expose workers to unsafe workplace conditions, infringe on the right to form unions and exacerbate employment discrimination,” wrote the U.S.’s largest labour union federation in February 2023.11
Until recently, the U.S. was using every available venue to lock in these invasive digital trade rules, including through regional trade deals like CUSMA and in plurilateral e-commerce negotiations at the World Trade Organization. However, in October 2023, the U.S. withdrew its backing for provisions in the planned WTO agreement relating to data flows, localization of computing facilities, and access to source code. The change of position “was made to preserve the ability of the government to regulate the technology sector, particularly in the emerging field of artificial intelligence.”12
More recently, United States Trade Representative Katherine Tai suggested the policy shift is related to efforts by the Biden administration to tackle monopolization in the tech sphere. “Some of my antitrust enforcement colleagues in the administration will talk about a domestic market that is dominated by certain firms taking choice and freedom away from people, as consumers and also workers,” Tai told an event hosted by the American Society of International Law in April. “We get dictated to by these dominant companies.”13 The influence and close relationship that companies like Google and Amazon have with staff at the United States Trade Representative was also recently exposed.14
These and other powerful Silicon Valley–based firms and others, backed by the U.S. Chamber of Commerce, decry this turn away from strict limits on regulating the digital economy. They have waged a public relations war against the Biden administration, enlisting key Republican congresspersons and senators to their cause. The prospects of using the CUSMA review period to gut the agreement of harmful digital trade rules may therefore depend on the results of the November election.
Regardless of who wins November’s U.S. elections, Canada may come under pressure in the CUSMA review for its digital governance policies, including the three per cent digital services tax on revenues generated by large U.S. and Canadian digital service companies like Netflix and Amazon from Canadian users. Effectively implementing the digital services tax may require tax officials to verify company data via source code or algorithms—another reason for Canada to support reforming language in CUSMA restricting access to this information.
Recommendations
Canada and Mexico should press for reforms to the digital trade chapter for the same precautionary reasons as the U.S. has proposed: to not hamstring the regulation of emerging AI-based technologies and services; to protect workers against invasive surveillance and unaccountable algorithm-based discipline by firms; to give primacy to privacy over profits in the handling of personal data; to begin to rein in data and tax hoarding in zero-tax jurisdictions; and to retain policy space to support domestic competition to monopoly firms in the global digital economy.
