Someone Needs a Digital Makeover: Rethinking NAFTA in the Digital Economy

by Patrick Law Group, LLC
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When the North American Free Trade Agreement went into effect on January 1, 1994, there were an estimated 10,000 websites, most people used dial-up online services, Google had not yet become a verb, and the first online transaction (purchase of a Sting CD) would not occur until later that year.  As a result, NAFTA did not contemplate digital trade flows and many in the tech sector agree that the time has come to update NAFTA for the digital age.

The Trans-Pacific Partnership, often billed as a trade agreement for the 21st century, attempted to provide comprehensive rules for digital trade and data flows.  Because the TPP included Mexico, the United States and Canada, the TPP would have effectively updated NAFTA to address digital industries that were in their infancy (or were not yet even established) at the time of NAFTA’s inception.  The withdrawal of the United States from the TPP, however, has left NAFTA signatories with a trade agreement that predates the digital age.

Although it is not clear whether the Trump administration will follow through with its plan to re-negotiate NAFTA, a handful of issues routinely appear on the digital trade wish lists of those in the tech sector:

  • Ban Data Localization.   Many agree that market access should not be conditioned on a requirement to process or store data locally (e.g., by requiring companies to build local data centers).  Data localization requirements should be balanced against a country’s privacy and security concerns, and narrowly tailored to avoid restricting the free flow of information across borders.  In addition, complying with data localization requirements can significantly raise the cost of doing business, thus creating a barrier for companies seeking to expand into new markets.
  • Protect Encryption Keys and Source Code.    NAFTA does not currently prevent a country from conditioning market access for technology imports on the disclosure of source code or encryption keys.  Many would like to see such a prohibition included to ensure companies can access NAFTA countries without being forced to disclose sensitive information that could deliver a devastating financial blow to a company if disclosed in an unauthorized manner.
  • Include Protection Against Liability for Third-Party Content. Many in the technology community would also welcome the addition of a protection similar to that of Section 230 of the Communications Decency Act.  Section 230 of the CDA provides immunity from liability for providers and users of an interactive computer service who publish information provided by others.  The Electronic Frontier Foundation has called Section 230 “one of the most valuable tools for protecting freedom of expression and innovation on the Internet,” because without such protections, online intermediaries that host or republish speech might be held legally responsible for the information published by third parties.  Online intermediaries that have benefited from the protections afforded by Section 230 range from bloggers who host comments on their blog, to Internet service providers and companies such as YouTube, Google and Facebook.  Neither Mexico nor Canada have a similar legal framework, thus increasing potential liability for online intermediaries.
  • Provide a framework for Electronic Transactions.  NAFTA should also include updated provisions that provide a much-needed framework for electronic transactions, such as terms on payments, authentication, and e-signatures.
  • Customs duties. NAFTA does not currently prevent a country from imposing customs duties on music, videos, e-books or other digital products.  Updating NAFTA’s rules to protect e-commerce exports would offer protection to content creators in all NAFTA countries who depend on online sales.

Although the unpredictable current political climate leaves the fate of NAFTA negotiations unsure, modernizing NAFTA to address the role of digital trade in the global economy could provide a much-needed update to NAFTA that takes into account the many technological advances that have occurred over the past 23 years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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