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Cross-Border Data Continues to Flow under the USMCA

After months of uncertainty and negotiations, NAFTA 2.0 has officially arrived, and it has now been re-branded as the U.S.-Mexico-Canada Agreement (USMCA). While the deal still faces a potentially long road ahead in Congress, if approved, the USMCA will be expected to take effect around January 1st, 2020. The trilateral deal comes after President Trump’s withdrawal from the Trans-Pacific Partnership (“TPP”) in 2017, an agreement that was set to become the world’s largest free trade agreement. After the departure of the U.S., the TPP itself was re-branded and replaced by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”), with most of the provisions on digital trade from the TPP still intact. With the U.S. on the sidelines on one of the most important free trade agreements, the USMCA is even more central in U.S. trade policy, including its provisions on digital trade.

In attempts to protect privacy and security and to promote economic growth, some countries (including India, China and Russia) have enacted data localization laws. Data localization laws require that data be stored, processed, or handled within their own country’s borders. Since the Internet has become an indispensable platform for commerce, localizing data this way severely restricts international digital trade. DisCo previously highlighted key reasons why cross-border data flows are so essential to the economy:

In the U.S., the productivity gains and efficiencies enabled by data flows have boosted the economy by hundreds of billions of dollars. Cross-border data flows allow Internet platforms and providers to connect small and medium-sized U.S. businesses to a global marketplace.

Small businesses and craftspeople located across the U.S. can use platforms like eBay and Amazon to sell their goods worldwide without the need for brick-and-mortar presences abroad. An array of online payment processors and emerging digital currencies allow the same small firms to handle transactions globally, and global Internet advertising networks enable them to target potential customers in markets they would not be able to otherwise access. Larger companies can similarly take advantage of cloud platforms and globally distributed computing resources to analyze vast quantities of data and improve provision of remote services to customers worldwide, with benefits visible across industries, from manufacturing and retail to finance and healthcare.

Despite protectionist measures by certain countries, there is a recent trend in recognizing the importance of cross-border data flows in trade agreements. The EU has drafted provisions to be inserted in future trade agreements aimed to facilitate the free flow of data by prohibiting protectionist measures such as data localization and the requirement that businesses use specific computing facilities in a country’s territory. However, as DisCo has noted, the proposed trade provisions may risk justifying more data localization due to the text’s inclusion of “safeguards” that allow countries to introduce data protectionism under the guise of “data protection.” In contrast, the USMCA and CPTPP are two examples of trade agreements with stronger provisions on cross-border data flows as discussed below. Additionally, ongoing trade negotiations like the proposed Trade in Services Agreement (“TiSA”), which includes countries representing 70 percent of the world’s services trade, allows for a platform for these major trading nations to agree on an international framework which would promote free data flow. The World Trade Organization also recently began initial discussions on e-commerce.

The USMCA retained general principles from TPP regarding digital trade, and in some instances, goes further to promote cross-border data flows. Article 14.11(2) under the TPP reads:

Each Party shall allow the cross-border transfer of information by electronic means, including personal information, when this activity is for the conduct of the business of a covered person.

The USMCA shares a similar stance, but goes even further than the TPP to discourage localization and data flow restrictions with stronger language. Article 19.11(1) under the USMCA reads:

No Party shall prohibit or restrict the cross-border transfer of information, including personal information, by electronic means if this activity is for the conduct of the business of a covered person.

Additionally, the USMCA’s position on computing facilities for cross-border data flows is simple and definitive under Article 19.12, which reads:

No Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that territory.

TPP’s Article 14.13(2) on computing facilities is identical to the USMCA’s Article 19.12. However, additional provisions on computing facilities under the TPP differ from the USMCA’s shortened language in two respects. One, the TPP allowed for an exception to Article 14.13(2) by allowing measures inconsistent with that paragraph if needed to achieve a legitimate public policy objective. Two, the TPP allowed for individual countries to set their own requirements for their own countries. Article 14.13(1) reads:

The Parties recognise that each Party may have its own regulatory requirements regarding the use of computing facilities, including requirements that seek to ensure the security and confidentiality of communications.

In this respect, the USMCA’s position on computing facilities is more restrictive, and its simplified language allows less room for exceptions.

Data flows are essential to today’s modern economy, and trade policies should reflect the importance of economic activity in the borderless Internet era. As was the case with the TPP, the inclusion of a digital trade chapter in U.S. free trade agreements that promotes cross-border data flows and restricts data localization policies will positively impact the global economy. The USMCA is a step in the right direction.

Jacqueline Yin is a recent graduate of George Washington University Law School and a Legal Fellow at CCIA.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.