Special Report

Breaking down the new NAFTA trade deal

Prime Minister Justin Trudeau and Minister of Foreign Affairs Chrystia Freeland hold a press conference regarding the United States Mexico Canada Agreement (USMCA) at the National Press Theatre, in Ottawa on Monday, Oct. 1, 2018. THE CANADIAN PRESS/Sean Kilpatrick
Prime Minister Justin Trudeau and Minister of Foreign Affairs Chrystia Freeland hold a press conference regarding the United States Mexico Canada Agreement (USMCA) at the National Press Theatre, in Ottawa on Monday, Oct. 1, 2018. THE CANADIAN PRESS/Sean Kilpatrick
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The deal is done.

This afternoon, both the U.S. and Canadian governments stood before the cameras to make their cases for a job well done. It was telling that while the Canadian government spoke of victories in the auto sector and in preserving the middle class, the United States celebrated intellectual property and digital trade.

The Logic spent last night and this morning analyzing the deal—known as USMCA, or the United States-Mexico-Canada Agreement (phew!)— and what it means for the innovation economy. Our findings are broken down below.

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Intellectual property

Canada capitulated on two big files here: the terms of protection for biologic drugs have been extended from eight years to 10, and the duration of copyright from 50 years after the death of the work’s creator to 70 years after.  

Graeme Moffat, a senior fellow at the University of Toronto’s Munk School of Global Affairs and Public Policy, said the agreement effectively brings Canada under the U.S. intellectual property (IP) regime, and its strong protections will hurt a country that’s a net importer of IP like ours. “Are we trading away the STEM jobs of Canada’s future to protect the factory jobs of today?” he asked.

Jim Balsillie, chair of the Council of Canadian Innovators and former chair and co-CEO of Research In Motion (now BlackBerry Ltd.), said the deal raises IP protections for mostly American firms, who “can entrench and extend their monopoly rights and rents for decades to come.”

In a statement to The Logic, Innovation Minister Navdeep Bains emphasized the importance of Canada becoming “a leader in generating and leveraging intellectual property,” and highlighted the government’s national IP strategy. “The IP chapter [of USMCA] will support the competitiveness of our creators and innovators, while providing Canadian exporters and investors with a predictable and transparent framework of rules,” it continued.

Myra Tawfik, EPICentre professor of intellectual property commercialization and strategy at the University of Windsor’s law faculty, said the lengthening of copyright protections will benefit Canadian creators. But U.S. companies and artists hold much more IP to start with, which they can then use to control new entrants’ access to a field of business or work, thus stifling innovation in those fields. Canadians will also have to pay copyright fees for an extra two decades.

Winner: The U.S.

Talking Point

New intellectual property rules extend the terms of protection for biologic drugs and the duration of copyright—great news for the U.S. companies that tend to own both assets. Canadians can now purchase $40 worth of goods from the U.S. without paying tax. Data centres won’t need to be located in Canada to do business here and tech giants won’t be held responsible for content on their platforms.

De minimis

Canadians can now purchase $40 worth of goods from the U.S. without paying tax, and $150 without paying duty. The U.S. had been pushing for an increase to US$800. Mexico agreed to allow purchases of US$100 without tax.

Harmonized sales tax adds a 13 per cent markup to the price, whereas duty typically adds about two per cent, according to Karl Littler, senior vice-president of public affairs at the Retail Council of Canada.

In other words, Canadians will save about 13 per cent (the tax varies for different goods) for anything between $20 to $40, and about two per cent (duty also varies) for anything between $20 to $150.

Littler was happy the threshold wasn’t raised even higher.

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“Realistically in the scenario we found ourselves with pressure from the White House, the U.S. trade representative and a multimillion lobby by Amazon, ebay and UPS, we’re pretty pleased with how little Canadian negotiators gave up,” said Litter.

However, Andrea Stairs, general manager of eBay Canada and Latin America, criticized the two-tier threshold with one level for tax and one for duty. “If this is the case,” she said, “consumers and SMBs will face additional bureaucracies and a further complicated customs system.”

Stairs said eBay is also unclear on whether the new thresholds only apply to courier shipments, or if they also include postal shipments, which make up the bulk of shipments received by Canadians. That eBay doesn’t know this is significant in itself, as it has been lobbying hard on this for years.

“At this point, there seem to be many open questions and it is unclear whether Canadian consumers will meaningfully benefit from this change, or whether small businesses will see improved competitiveness and predictability,” said Stairs.

Amazon spokesperson Kaan Yalkin would only say, “We’re pleased they’ve come to an agreement.”

Winner: Canadian retailers, Canadian consumers (for purchases up to $40)

Data centre location and information transfer

The Trump administration is also touting new provisions that would allow companies to host data in any country they choose, regardless of where their users live, and transfer data across borders without restriction. That’ll make things easier for businesses. As The Logic reported last week, it’s a provision that the Business Council of Canada has been hoping for.

There’s a carve-out for restrictions that serve a “legitimate public policy objective.” That doesn’t include banking, however. The “financial services” chapter states that countries can’t require computing facilities to be located within a country in order to do business there.

According to Moffat, data flow could encourage competitiveness and innovation by Canadian firms in the AI, neurotech and health tech spaces, among others. But the government will need to explain whether these clauses can be used to challenge Canadian privacy laws, or prevent a future law that emulates the protections of the European Union’s General Data Protection Regulation (GDPR), he said. The most sensitive case: personal medical information. “Can patient data cross the border?” he asked. “On its face, this looks like [it can].”

Winner: U.S. data centres, nascent Canadian tech companies in burgeoning fields (e.g. AI and neurotech)

Tech firms not responsible for content on their platforms

In a move that mostly affects U.S. Big Tech, tech companies won’t be responsible for the content created on their platforms. That means a company like Facebook, for example, wouldn’t be held responsible for Cambridge Analytica-style skulduggery. Tech companies—including Google, which has nearly endless potential legal headaches from both its own search results and videos posted on YouTube, its subsidiary—tried to get this kind of provision in both the Trans-Pacific Partnership and the Trade in Services Agreement.

This isn’t a blanket indemnity: tech companies will still be held responsible for prostitution and the sexual exploitation of children on their platforms. Mexico has three years to comply with these provisions, but Canada and the U.S. will need to comply right away.

These rules are in direct opposition to the new GDPR regime in Europe, which aims to hold tech companies responsible for content on their platforms and threatens to levy heavy fines. As pressure grows for global harmonization around these rules, GDPR and USMCA rules are destined to clash.

Winner: U.S. Big Tech companies

OTHER TIDBITS

Governments won’t be allowed to examine source code. Proponents have said this is about protecting trade secrets. Opponents have said this makes it harder to regulate the Internet of Things and ensure algorithms aren’t biased. Code can still be examined if it’s for a specific investigation.

Bell can run Canadian Super Bowl ads. Bell and the NFL tried to get Canada’s Supreme Court to let them do this in January, but lost. Marc Choma, Bell communications director, welcomed the move as a “positive outcome for content creators, advertisers and the overall Canadian broadcasting industry.”

Challenging the Big Three telecoms. There’s a lot of new language about cracking down on anti-competitive practices in the telecommunications industry. That doesn’t mean it’ll happen, but this is the kind of legal framework that Verizon and AT&T have long wanted before coming to Canada.

Cross-border banking gets a boost. The new regulations strip away some of the provisions barring U.S. banks from entering Canada, and vice versa. This also applies to fintech companies, which could cause problems for Canadian success stories, such as Wealthsimple, if their larger U.S.-based competitors now try to enter Canada.

The deal will last for 16 years, unless all three countries agree to renew it for another term during an automatic review that must take place before the six-year mark. If there’s no decision to extend, the reviews will become yearly until one is made. That means if Donald Trump is elected to a second term, the first review could fall within the last days of his presidency.

The Logic will be holding a subscriber-only conference call breaking down the deal and what it means for you this Thursday, October 4 at 12 p.m. EST/9 a.m. PST.

Subscribers can RSVP here.

Non-subscribers can purchase a subscription here.