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USMCA's digital chapter may increase e-commerce among Mexico, U.S. and Canada

The "new NAFTA" does not represent a breakthrough in trade and may even reverse liberalization in some aspects, say analysts, but is a step ahead for the digital economy

A new chapter on commercial relations in North America was inaugurated on July 1, as the cumbersomely titled United States-Mexico-Canada Trade Agreement (USMCA) replaced the previous, 26-year-old, North American Free Trade Agreement (NAFTA). Many analysts remain skeptical about the new agreement’s advancements, but even they concede that for e-commerce and the digital economy the deal represents a step ahead.

Timing is also relevant, as USMCA, after being signed by its three constituent countries in November 2018, came into force  as the global economy and international trade have stumbled upon the crisis brought by the coronavirus pandemic.

The flow of goods among the three signatories – which totaled $1.2 trillion last year – in April dropped to the lowest level in more than a decade. USMCA may not reverse the fallout, but at least it is a sign of commercial integration when there’s a scarcity of them.

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In particular, its digital chapter, which did not exist on NAFTA, has three main targets:

  • Strengthen and promote the development of digital commerce through a legal scheme that encourages electronic operations and, at the same time, provides safety for users of electronic media;
  • Promote a digital environment that favors operations by safe electronic means;
  • Generate and drive innovation in high-quality digital content, products and services, to transform the way in which people and companies interact.

The agreement has provisions aimed at facilitating customs and trade so as to reduce the costs and bring ease and predictability into cross-border transactions, including the flow of millions of low-value e-commerce parcels.

The most practical difference is that Mexico’s and Canada’s thresholds for imports subject to duty collection and customs declaration doubled. The increases benefit online retailers shipping across the region’s borders and small businesses importing small orders.

According to Roberto Salinas León, director of the Center for Latin America at the Atlas Network and an expert on trade, economic development and monetary policy, the provisions may give a boost to an upward trend. “Because of Covid, we’ve already seen an increase in e-commerce. But now that these new rules come into effect, in which it’s easier to set up e-commercial exchanges, I would venture to say that they are going to significantly increase this trade across the board”, Salinas told LABS.

Dr. Roberto Salinas León, director of the Center for Latin America at the Atlas Network. Image: Atlas Network.

USMCA’s highlights include data protection and simplification

Global eTrade Services (GeTS), a trade platform company, recently listed what it considers the high points of USMCA for the digital economy, as the following:

  • Creates a new informal shipment level of $2,500, so that express shipments under that amount benefit from reduced paperwork;
  • Raises the level of imports subject to taxes and duties in Canada from C$20 to C$40 and up to C$150 exempt from only duties. In Mexico, these thresholds are now $50 exempt from duties and taxes, and $117 duty-free for express shipments.
  • Prohibits customs duties on digital products distributed electronically (e-books, videos, music, software, games, etc.).
  • Protects cross-border data flows and limits data localization requirements thus enhancing and protecting the global digital ecosystem

“The ease of doing business and increasing the exemption values will make it easier for more businesses, especially small- and medium-sized ones, to be a part of cross-border trade”, says a report by GeTS. 

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Customs and other charges on digital products such as music, games, videos and e-books are now prohibited. And USMCA also protects internet platforms from liability related to third-party information they publish.

Salinas is a vocal critic of USMCA, which in many ways it considers a step back from NAFTA in matters of trade liberalization, but he says that, on the other hand, the new agreement is a modernization of digital components. 

“I do think that we’re going to see some very interesting developments and very interesting things, as far as digital economic integration in North America, in the wake of the USMCA”, he says. “But this is all speculation right now. It remains to be seen what the data tells us. Given the experience of what happened in the first NAFTA, we’re hopeful that it’ll yield very good things. Again, it’s not the best accord that I would have liked to see. Rules of origin are very protectionist.”

USMCA is a new deal not far removed from the old NAFTA

Michael Shifter, president of the Inter-American Dialogue, a U.S.-based think tank focusing on Latin America, also has a skeptical view over USMCA. “Obviously it has been updated for the digital economy since NAFTA came together in the 1990s when we were not thinking of the digital factor, but it is not so different from NAFTA”, he says.

Michael Shifter, president of the Inter-American Dialogue. Photo: The Dialogue/ Courtesy

He points out that the new deal has a lot more monitoring of protection of labor rights in Mexico, something that was not very welcomed by the Mexican government but may have drawn support from the country’s population. “The polls show that the Mexicans have a favorable view towards this deal. The big mistake with NAFTA, and I hope it is not repeated with this deal, is to oversell it.”

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This is a trade deal, trade did increase significantly after NAFTA, trade will continue with this deal, but it is not going to resolve the fundamental economic problems in Mexico.

Michael Shifter, president of the Inter-American Dialogue

Mexico, in particular, expects USMCA to boost public and private investment in technology, helping to offset the current economic crisis. The Latin American partner on USMCA is one of the countries that least invests in tech and development as a percentage of its GDP – less than 1%, versus 3% in the U.S. and 3.5% in China, according to Amcham

Jésus Seade, Mexico’s Deputy Foreign Minister for North America. Photo: Gobierno de Mexico.

Jesús Seade, Mexico’s Deputy Foreign Minister for North America and chief negotiator for USMCA at the Mexican administration – and a candidate to be the next director-general at the World Trade Organizationrecently told Expansión that one of Mexico’s priorities is to encourage companies to invest more in technology and research. “How are we going to compete with the United States and China, if we are not giving it at least the percentage that these countries allocate to research and development?”, he asked.