Global Markets

Congress and the Administration Are Right: A Modernized NAFTA Must Address Digital Trade

Yesterday, BSA | The Software Alliance testified at a hearing convened by the Office of the US Trade Representative (USTR) to shape the US negotiating objectives for a modernized North American Free Trade Agreement (NAFTA).

The hearing comes amid concrete signs that the Administration – as well as Canada and Mexico – recognize that there is a compelling need to update NAFTA for the digital economy that has emerged in the 25 years since the agreement was concluded.

Last week, Ambassador Lighthizer told the House Ways and Means Committee that “we expect to have a high-level agreement with a digital chapter” and the Senate Finance Committee that NAFTA could be a “model agreement” for the digital economy. He added that he expected Canada and Mexico would be broadly supportive of this approach.

At the hearing, I laid out for USTR and other US government agencies responsible for trade policy the key elements of needed protections for digital trade in North America and beyond. A central feature must be twin prohibitions on governments interfering with cross-border transfer of data or requiring service providers to build data centers inside its borders as a condition for doing business.

The 21st century data economy relies on software services ranging from cloud computing to data analytics, and will increasingly use artificial intelligence services and blockchain technologies. These technologies and services are most effective when data can flow seamlessly across borders.

NAFTA also must provide space for innovative new digital services to emerge. Governments should open their markets to not only existing software services but also to new services that may emerge in the future. This will ensure that new digital services cannot be discriminated against and NAFTA itself stays up to date.

Good examples of emerging transformational digital services are “smart” contracts and other autonomous machine-to-machine means for conducting transactions, such as blockchain. NAFTA should allow electronic authentications and signatures to be utilized in digital contracts. NAFTA should also continue the practice of more recent US trade agreements of prohibiting customs duties on electronic transmissions, including on the value of data being transmitted.

Additionally, BSA calls for NAFTA governments to ensure that Internet intermediaries are protected against liability for unlawful content posted or shared by third parties. NAFTA governments further should ensure that their copyright rules permit commercial text and data mining, an important tool used in software-enabled data analytics and the development of artificial intelligence.

Finally, NAFTA must protect digital service companies from foreign government requirements to transfer their technology, such as demands for access to source code or proprietary algorithms as a condition for importing, distributing, or selling software services in a foreign country.

The upcoming NAFTA negotiation is a unique opportunity to enable the growing and dynamic software services sector to expand in an integrated fashion across North America. Moreover, writing systematic digital trade rules into NAFTA would set a precedent that the United States can draw upon in future trade negotiations in other regions of the world.

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