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Here’s what you need to know about CUSMA and digital trade

Photo: REUTERS/Carlos Jasso

Global News | 14 April 2019

Here’s what you need to know about CUSMA and digital trade

By Jessica Vomiero

Google is praising the internet trade provisions in the new North American trade pact as a “framework for the digital age.”

The tech giant published a statement earlier this week lauding the deal’s digital trade chapter following a series of discussions between U.S. President Donald Trump and Google CEO Sundar Pichai.

“We need trade agreements that reflect the reality of today’s economy. NAFTA references ‘telegrams’ multiple times, but doesn’t even mention the internet. In contrast, the new [Canada-U.S.-Mexico-Agreement (CUSMA)] includes a comprehensive set of digital trade provisions that keep the internet open, and protect the businesses and consumers that rely on it,” the statement read, bringing digital trade back into the spotlight.

While it’s true that the CUSMA’s predecessor, the North American Free Trade Agreement (NAFTA), did not discuss e-commerce, there have been mixed reactions about the effectiveness of the CUSMA’s (known as the USMCA in the U.S.) digital trade provisions, outlined in Chapter 19 of the document.

While many experts have come out as advocates for Chapter 19, some argue that it threatens the security of Canadian data.

What are digital trade provisions?

Anupam Chander, a Georgetown University professor specializing in communications and technology law, explained that “digital trade” refers to the wide range of e-commerce activities involving tangible and non-tangible products, which may include anything from basic e-commerce to streaming a Netflix series.

“It could be traditional e-commerce, which would be something like eBay or Alibaba selling you a hard good that’s shipped across borders. Or it could be live streaming of a show, so that you can now watch a TV show from the United States being broadcast directly,” said Chander.

While e-commerce provisions have begun to make their way into recent trade agreements, including the Trans Pacific Partnership (TPP), Chander said digital commerce wasn’t nearly developed enough to have been included when NAFTA was drawn up in 1994.

Four key components of digital trade are regulated in the CUSMA: (1) customs on digital products; (2) data localization laws; (3) civil liability for content creators and (4) cooperation on matters of cybersecurity, spam prevention and consumer protection.

The most direct impact to consumers likely comes from the restrictions on taxation. The agreement prohibits customs and other charges on digital products, though parties may continue to impose internal taxes (such as HST). Chapter 19 essentially ensures tax-free transfers of movies, e-books, videos, etc., across North American borders.

“The rules protect against discriminatory or extra special internet taxation, but essentially if you’re doing a tax that’s generally applicable and it covers the internet version of the same service then it should be acceptable under the international trade rules,” Chander explained.

In addition, the agreement establishes that platforms cannot be held liable for the actions of content producers, prohibits businesses from requiring that data be stored domestically and establishes a groundwork for cooperation when protecting personal information and consumer well-being online.

How do they impact Canada?

While many areas of Canadians’ digital lives are impacted by the CUSMA, the most direct changes will result from the restrictions on taxation of digital products and prohibition of local data housing.

Chander used the example of the Netflix tax debate of 2017 as a scenario that would have benefited from the USMCA’s digital taxation guidelines.

Deliberations began in 2017 between streaming giant Netflix and the Canadian government over whether Canadians should pay a GST sales tax on their monthly subscription fees. At the time, Netflix’s lack of a local office created a tax loophole where the company could offer its service to Canadians for the same price (in Canadian dollars) at which it offered it to Americans.

While the scenario was largely unprecedented and warranted a discussion at the time, Chander explained that under the CUSMA, Netflix would have been obligated to pay any sales tax required of domestic service providers.

“I don’t see any reason why Netflix shouldn’t just be taxed as if it were a Canadian vendor of the same service. That doesn’t seem discriminatory against Netflix. As long as they’re treated equally, there’s nothing wrong.”

In a more recent debate however, the data localization provisions apply directly to some Canadian provinces, including British Columbia and Nova Scotia, which currently require citizen data to be stored in Canada.

“You have provinces within Canada – British Columbia and Nova Scotia – that require, when the government has data about citizens, that that information needs to be held within Canada…that provision is the exact kind of provision that would be contrary to international trade,” Chander said.

Michael Geist, law professor at the University of Ottawa and expert in internet policy, criticized the data localization clause shortly after the deal was finalized.

“The digital trade chapter also bans restrictions on data transfers across borders. That means that countries cannot follow the European model of data protection that uses data transfer restrictions as a way to ensure that the information enjoys adequate legal protections,” Geist wrote in a post on his website.

He adds that these provisions may conflict with increasingly protectionist privacy restrictions being adopted in Europe. He warned of a scenario where European countries demand limits on data transfers and the CUSMA prohibits them. In addition, Geist adds that the data localization and transfer rules weaken the other provisions in the agreement.

“The data localization and data transfer rules may erode efforts to safeguard privacy and many other provisions represent a lost opportunity to establish higher standards. Indeed, as the U.S. touts high standard intellectual property protections in its trade agreements, it seemingly opts for low standard digital trade protections,” he continued.

When will these changes happen?

While the CUSMA was signed this past November, the agreement has yet to be ratified by all three governments. Reports indicate that the deal will have to overcome a vote in the House, which holds a Democratic majority, while Democrats have issues with portions of the deal.

Beyond this, trade tensions between Canada and the United States continue to drag on.

Experts have warned that should ratification be delayed much longer, upcoming elections in both Canada and the United States could put the agreement in jeopardy.

–With files from Reuters.

 source: Global News