USMCA – Impact on digital trade

On September 30, 2018, Canada, Mexico, and the United States agreed to a trilateral trade agreement called the United States-Mexico-Canada Agreement (USMCA), which will replace the North American Free Trade Agreement (NAFTA) on January 1, 2020.

Signed in 1994, NAFTA did not include a chapter on the digital economy.

Below is a high-level summary of how the new digital economy chapter in USMCA will affect digital trade.

Customs on Digital Products

The USMCA will prohibit customs and other charges on digital products such as music, games, videos, and e-books. However, parties may continue to impose internal taxes or charges, such as HST, on digital products. While businesses will want to monitor amendments to domestic tax laws to determine the true cost of digital products they wish to import/export, they can now be assured of tax-free transfers across North American borders.

Data Localization

The USMCA prohibits parties from requiring the use or location of computing facilities in their jurisdictions as a condition of business. This provision should be of particular interest to international businesses or businesses considering outsourcing data infrastructures in North America. In designing computing facilities, these businesses will need to consider the potential effect of foreign legislation such as the USA PATRIOT Act.

Changes to data localization principles are also found in the USMCA, and will have an impact on financial institutions subject to the Canadian record-keeping requirements of the Bank Act. Under Article 17.20, foreign financial institutions will no longer be required to maintain computing facilities in Canada, but must ensure that Canadian regulatory authorities have ongoing access to the information stored in any non-Canadian facility. Foreign-based financial institutions should continually monitor how the Canadian government implements this change to ensure compliance with the mandated level of access.

Interactive Computer Services

The USMCA requires parties to distinguish between internet platforms and content creators for determining civil liability. Unlike the United States, Canada does not currently have online legal protections for third-party content. Under the USMCA, internet platforms that simply host or process third-party content may now be protected from liability for harms related to the information they make available.

Internet platforms interested in establishing services in Canada in light of this safe harbour rule should seek advice on other elements of Canada’s regulation of internet services. These businesses will also want to note that these provisions do not apply to liability under intellectual property enforcement or criminal laws, nor will they be applicable to Mexico until 2023.

Cooperation Between the Parties

The USMCA recognizes the importance of matters such as cybersecurity, spam prevention, consumer protection, and personal information, and commits the parties to collaborate and establish appropriate safeguards in these areas. These areas are generally already covered by various legislation in Canada, including PIPEDA and CASL, so it will be interesting to see if any legislation is introduced or amended.

With special thanks to Jason Worobetz, articling student, for his contribution to this article.