USMCA Set the World's Digital Trade Standards Six Years Ago. Now It Can Raise Them

The digital trade chapter of the United States-Mexico-Canada Agreement (USMCA), a trilateral free-trade pact that entered into force in 2020, was considered "the strongest disciplines on digital trade of any international agreement at the time." Six years is rarely enough time to justify reopening a trade agreement, but since the parties are already reviewing the agreement, they should reform and modernize its digital trade chapter.

After the mandatory six-year joint review of the agreement kicked off on July 1, the Office of the United States Trade Representative (USTR) announced that the United States will not extend the agreement in its current form. To be clear, the USMCA was not terminated, it remains fully in force and will now be reviewed annually. But these annual reviews will ultimately harm North America’s economy by increasing uncertainty and delaying investment, particularly in sectors where firms make multi-year capital commitments, such as autos, semiconductors, critical minerals, logistics, and advanced manufacturing. The preferred outcome would be that the United States renews the USMCA, yet it could use the annual reviews to improve the existing agreement.

Negotiators finalized the agreement before the COVID-19 pandemic accelerated the adoption of digital services, e-commerce, and remote work, and before generative artificial intelligence reached the mass market. Since the USMCA entered into force, governments have also adopted more discriminatory regulations targeting large technology firms and increasingly embraced “digital sovereignty” policies that restrict cross-border data flows, favor domestic firms, and fragment digital markets. This is why the digital trade chapter could be modernized to include new provisions suited to a scenario in which North America has the opportunity to further lower barriers to AI adoption, protect companies from discriminatory digital practices, and widen the gap between a Western pro-innovation digital framework and the Chinese surveillance model.

As a starting point, it is worth recognizing what the digital trade chapter already does, particularly the binding rules that form the architecture of North America’s digital economy. A recent report by the Information Technology and Innovation Foundation (ITIF), jointly published with the Center for North American Prosperity and Security (CNAPS) in Canada and Fundación IDEA in Mexico, examines these provisions in detail. Among the chapter's most important binding commitments are:

• Place a moratorium on customs duties which keeps software, media, and other digital products duty-free;
• Prohibit discrimination against digital products which supports an integrated North American market for software and digital content
• Guarantee the free flow of data which underpinscloud computing, software, logistics, finance, and digital trade;
• Ban data localization which prevents forced local infrastructure and protects cloud efficiency;
• Protect source code and algorithms which safeguard intellectual property (IP) from forced disclosures.

However, the existing digital trade chapter also has its flaws. For example, because government procurement is exempt from USMCA’s digital rules, this carve-out was originally intended to preserve governments’ use of public resources and protect sensitive government-held information, but can actually enable governments to circumvent otherwise binding provisions. In particular, all three USMCA partners impose domestic data-storage requirements, but since the agreement does not clearly limit such measures to cases in which they are necessary and proportionate, governments can apply them broadly to activities involving public procurement. This allows them to impose de facto data localization requirements that remain outside the USMCA’s core digital trade disciplines while still complying with the agreement. More concerning is that other proposals from Canadian authorities, such as imposing digital services taxes (DSTs)—reversed in 2025—or imposing an online streaming tax, plainly run counter to the USMCA’s “non-discriminatory treatment of digital products” provision.

Marginal improvements to the USMCA digital trade chapter should include:

• A more limited carve-out for public procurement. The public procurement exception to USMCA’s digital trade rules should apply only when a government demonstrates that a localization requirement is necessary to protect classified, national-security, or similarly sensitive information—and the other two parties do not object to the rule.
• A provision explicitly banning DSTs and other discriminatory taxes. ITIF has previously outlined that DSTs represent a distortive tax that typically levies the domestic revenue of multinational companies in a narrow range of business models, and include thresholds to exclude all but the largest firms. Along with banning DSTs, a renewed digital trade chapter should prohibit other resource-extractive measures affecting digital goods and services, such as the online streaming tax discussed above.

These marginal improvements are necessary, but not sufficient to create a robust North American digital ecosystem to compete globally—particularly to counter Chinese influence in the region and in other jurisdictions. In November 2025, ITIF proposed that the USMCA digital trade chapter become a “digital economy and security chapter,” reflecting a shift in understanding of what the chapter covers. The reframing from “digital trade” to “digital economy” should be understood as allowing the chapter to encompass all digital issues, including AI and emerging topics such as research collaboration in quantum technologies. Including a security angle would allow U.S. policymakers to —for example—include export control alignment provisions, which are currently absent from the USMCA.

The USMCA digital trade chapter was designed to apply free trade rules to cross-border online transactions. That is insufficient in the current geopolitical context. A renewed framework for cross-border digital rules should be more ambitious—compatible with a deep, strategic trade partnership that reflects partners’ geopolitical interests and the pace of technological change.

Many countries and multilateral organizations are shaping digital trade rules that are not fully aligned with USMCA’s standards. For example, the recent World Trade Organization’s Agreement on Electronic Commerce (ECA), signed last March among 67 members, is a much weaker version of USMCA’s digital trade chapter—it does not ban data localization or set free cross-border data flows. Some smaller economies—Chile, New Zealand, and Singapore—are seeking to innovate in all trade matters, including digital; launching the Digital Economy Partnership Agreement (DEPA) in late 2020 and exploring a plurilateral Green Economy Partnership Agreement (GEPA). More broadly, many U.S. trade partners are engaging in trade negotiations with Washington while simultaneously looking to reduce dependence and shift their supply chains away from U.S. trade routes.

If the United States does not take the lead in modernizing and aligning digital trade rules with its interests, no other country will do so on its behalf.