What the USMCA means for Data Localization Rules and Local Businesses in Canada

By Michael Geist

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The digital policy implications of the US, Mexico and Canada agreement (USMCA) have attracted increasing attention, as Canadians consider the risks regarding the agreement and how it could limit future policy flexibility. In particular, the agreement restricts the use of data localization, an increasingly popular legal method for addressing public interest concerns associated with the collection of online information.

By mandating that data be stored within the local jurisdiction, data localization has the potential to spark increased investments in Canada’s cloud infrastructure. This would result in greater investment while also generating employment.  It may also provide greater assurances on security safeguards and the application of Canadian laws.

Restrictions on data localization are not entirely new to Canada, since similar provisions are found in the Comprehensive and Progressive Agreement for Trans- Pacific Partnership (CPTPP- the successor to the Trans Pacific Partnership).

That means that Canada has already agreed to limits on data localization with or without the USMCA. However, the USMCA’s data localization provision differs in a significant way. This suggests that the Canadian government has agreed to an even more restrictive approach than that found in the CPTPP.

The USMCA provision contained at Article 19.12 states:

No Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that territory.

There are no further exceptions or limits to the data localization provision in the chapter. However, Article 32.1(2) of the USMCA notes that paragraphs a, b, and c of Article XIV of the General Agreement on Trade in Services (GATS) is incorporated into the digital trade chapter.

Those paragraphs create exceptions for measures: (1) designed to protect public morals or maintain public order (2) protect human, animal, or plant life or health, (3) comply with laws and regulations including prevention of deceptive practices, protection of privacy, and safety.

Canadian negotiators presumably interpret the GATS provision as providing an opening for privacy protection, thereby allowing the provinces of British Columbia and Nova Scotia to retain their provincial data localization laws.

By comparison, Article 14.13 of the CPTPP features the same general prohibition and the applicability of the GATS exception, but adds the following additional exception:

Nothing in this Article shall prevent a Party from adopting or maintaining measures inconsistent with paragraph 2 to achieve a legitimate public policy objective, provided that the measure:

(a) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and

(b) does not impose restrictions on the use or location of computing facilities greater than are required to achieve the objective.

In other words, Canada previously agreed to restrictions on data localization rules in the CPTPP but carved out an exception for any legitimate public policy objective (subject to not being applied in a discriminatory manner or beyond that necessary to achieve the objective).

The USMCA removes that flexibility, creating a significant limitation on the ability for Canadian governments to safeguard the public interest. Indeed, once implemented, policy measures on data localization will be restricted beyond the limits imposed by the CPTPP, leaving Canada vulnerable to a challenge should future governments seek to introduce data localization mandates.

The USMCA removes that flexibility, creating a significant limitation on the ability for Canadian governments to safeguard the public interest.

Overall, the USMCA digital economy chapter largely mirrors the CPTPP. On the plus side, this means consistency across trade agreements. From a negative perspective, many of the provisions are untested. This raises concerns around unintended consequences, with mounting provisions in another major trade agreement.

USMCA’s Impact on Local vs Multinational Corporations

Canadian firms have been relatively quiet about the impact of the USMCA. While some Canadian branches of larger international companies in the pharmaceutical or internet sectors are supportive, Canadian firms have typically been less focused on the digital provisions in the trade agreement.  As a country one-tenth the size of the US, trade negotiations with the larger neighbor to the south carry significant risks and challenges. In many instances, Canadian firms are hoping for limited harms as opposed to significant benefits.

As a country one-tenth the size of the US, trade negotiations with the larger neighbor to the south carry significant risks and challenges.

 Moreover, the data transfer and data localization rules work well for large multinational businesses, accustomed to operating in multiple jurisdictions. That may be less relevant for smaller firms seeking to develop an initial footprint in the marketplace. The weaker net neutrality provisions are also likely to disadvantage smaller firms who would benefit from a level playing field online.

So while the benefits of USMCA’s digital economy chapter are professed to be accessible to all, large global firms will be particular beneficiaries.

 
 
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