As 2018 comes to a close, one key policy area that is sure to take center-stage in 2019 is the passage of the updated North American Free Trade Agreement (NAFTA), renamed the United States-Mexico-Canada Agreement (USMCA). While the USMCA is a big win for startups in several areas, Congress should continue to push the Administration in two areas to ensure that entrepreneurs will flourish under the new agreement. Overall, the USMCA sets a high standard for future free trade agreements and will positively impact the growth of American startups.
First, let’s look at the good news. USMCA is the first trade agreement of its kind to codify protections startups rely on to innovate in a digital world. Here’s why:
Increasing Digital Trade. USMCA includes a prohibition on duties or discriminatory measures on digital goods. This means that cross-border data transfers are protected and encouraged in law, ensuring that digital flows of information, video, communication, transactions, etc. will not be disrupted.
Banning Data Localization. Countries worldwide have been considering (and implementing) laws to require companies to manage, store, or process data locally, however, the USMCA specifically prohibits this practice. This means that startups will not be forced to open facilities in each country to store or process data for users, saving time and money and reducing barriers to entry, as well as protecting users.
Reducing Technical Barriers to Trade. Duplicative or contradictory standards and regulations can hurt the ability of startups to scale quickly and disrupt incumbents. USCMA helps reduce these barriers by recognizing more international standard-setting bodies which will avoid duplicative testing. Additionally, the USMCA sets strong provisions for regulatory transparency, meaning startups can build their products with clear regulatory standards.
Establishing Robust Intermediary Liability Protections. One reason for the success of American startups has been Section 230 of the Communication Decency Act which allows companies to host and moderate content on their platforms without being held liable for the speech of their users. That’s allowed platforms like Airbnb, Tinder, eBay, Pinterest, and others to reach millions of users worldwide. USMCA extends the U.S. framework to Mexico and Canada, a significant boon to startups in all three countries.
Ensuring Access to Government Data. Many startups are building innovative commercial applications and services using publicly shared government data. USMCA promotes access to open and machine-readable government data, allowing startups to continue developing new technologies, particularly in the areas of artificial intelligence and machine learning.
Protections for Source Code. USMCA prevents parties from requiring the disclosure of source code as a condition for import, distribution, sale, or use of that software. This is important for startups as it reduces the risks of parties imposing mandates for algorithmic transparency, potentially exposing small companies to intellectual property risks.
Two areas where Congress needs to ask the Administration to provide clarity and push for changes are de minimis taxes and copyright provisions:
Need to Protect the De Minimis Taxes Streamlining. Since more startups are innovating in the direct-to-consumer retail market, the provisions in USMCA designed to streamline customs procedures are a huge victory. The current text makes it easier for small businesses to export American products throughout North America and increases the de minimis rates in both Canada and Mexico. However, there remains work to be done in the implementation phase of the agreement to ensure that this design becomes a reality. The threat by the U.S. to lower the U.S. de minimis level to a “reciprocal amount,” included in footnote 3 to Article 7.8(1)(f) in the Customs and Trade Facilitation Chapter of USMCA, would undo any gains made by increased de minimis amounts in USMCA.
Need for a Balanced Copyright Framework. Startups in the U.S. have long benefited from a copyright framework that protects creators while enabling innovation and consumer benefits. The USMCA includes some key U.S. copyright laws, including safe harbors like the Digital Millennium Copyright Act (DMCA)’s notice-and-takedown regime. However, the agreement does not protect key limitations and exceptions, notably fair use, that U.S. innovators and creators rely upon. Fair use laws underpin much of our innovation economy and will continue to provide a framework for startups in sectors as diverse as artificial intelligence and precision agriculture to crowdfunding platforms. Congress should urge the United States Trade Representative (USTR) to include these key provisions, which U.S. innovators and creators depend upon.
America’s entrepreneurial spirit is deeply rooted in our nation’s trade history, and startups have always been central to job creation and innovation. Today’s startups are able to fuel our economy because sensible trade rules provide the backbone for international growth. The Internet allows startups to easily and cheaply expand their customer base worldwide. Despite the global nature of the Internet and digital trade, for U.S. startups, the top two export destinations are Canada and Mexico. We hope that USMCA will be swiftly enacted and we look forward to working with the Administration and Congress to address these remaining issues.