Recommendation #4:
Encouraging Innovation and Digital Trade While Protecting
Intellectual Property and Canadian Culture
Recommendation Summary
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Canada should aim for balanced IP rules in NAFTA 2.0 that encourage
new innovative activities yet do not unduly penalize the buying of
ideas.
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NAFTA 2.0 should include a chapter dedicated to e-commerce. However,
with the digital economy rapidly evolving and often leading to
“winner takes all” dynamics, Canada should be careful with the
provisions that will be included in the e-commerce chapter, making
sure Canada maintains some flexibility with regards to future digital
policies.
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One of the key areas transformed by our digital age is culture.
Supporting Canadian content in the digital age will require us to keep
our freedom to develop our own cultural policies. NAFTA 2.0 should
maintain the broad cultural exception, rather than agreeing to the
weaker cultural reservations found in the Trans-Pacific Partnership.
Innovation is the key driver behind greater wealth and prosperity for
the Canadian economy. However, Canada has been a consistently poor
performer on measures of innovation.11The Conference Board of
Canada, How Canada Performs: Innovation . Thanks in part to
trade, Canada has been able to maintain a high standard of living
despite struggling on innovation and the commercialization of ideas.
Most discussions about NAFTA focus on maintaining Canada’s access to the
U.S. market for existing goods and services. However, it is also
critical that a new agreement addresses provisions that enhance, or at
least maintain, Canada’s potential to create the innovations that will
lead to future growth.
Intellectual property protection can create the commercial incentives
for organizations to innovate, while at the same time stifling the
knowledge transfer and exchange that produce innovations in the first
place. Similarly, Canada has a rich cultural base, and culture and
creativity go hand in hand. Canada’s NAFTA negotiators will need to
identify and strike a fine balance on these complex and controversial
subjects.
Intellectual Property: Maximizing Canada’s Innovation
Potential With Balanced IP Rules
[L2]
Most discussions about renegotiating NAFTA focus on maintaining Canada’s
access to the U.S. market. But it is also critical that the new deal
maintains and enhances Canada’s innovation potential.
While innovation goals may be better addressed through domestic policy
tools, intellectual property (IP) rules have now been brought into free
trade agreements.22Curtis, “What’s Not in the TPP.” IP
rules—such as patents, trademarks, and copyright protection—protect
creators of IP. Transparent IP rules can create incentives to innovate.
But IP rules that are too stringent can discourage innovation. This can
happen, for example, if they encourage patent trolls or enrich existing
patent holders rather than encourage new innovative activities.
NAFTA was the first trade deal to include IP provisions. More recently,
in the TPP, the U.S. negotiated stronger IP rules that more closely
mirror U.S. rules. It is therefore likely that the U.S. will push for
similarly strong provisions in a renegotiated NAFTA. These could include
extending copyright terms or reforms to patents, such as pharmaceutical
patents (which were strengthened under CETA).
Canadian researchers and policy-makers need to spend much time thinking
through the innovation and economic impacts of U.S. IP rules that will
likely be part of the NAFTA renegotiation.
On the one hand, Canada imports more IP (copyrights, patents,
trademarks, etc.) than it exports, making this country a net importer of
ideas. Even so, Canadian companies do not buy enough new ideas and
technologies. Stronger IP standards in NAFTA could make it more
expensive to buy IP, disadvantaging a country such as Canada and
reducing investments in new technologies even further. Moreover,
whatever gets enshrined in a renegotiated NAFTA could set a precedent
for stronger global IP standards, which could further disadvantage net
IP importers.
On the other hand, innovating Canadian firms that are commercially
minded and globally oriented will aim to obtain U.S. patents to be able
to operate globally. For them, renegotiated NAFTA rules more aligned
with existing U.S. patent rules should have little impact, since their
aim is obtaining the U.S. patent. Harmonizing basic IP rules with U.S.
IP rules would also have a positive effect on domestic innovators and
copyright holders.33Schwanen and Jacobs, Patents,
Copyright, and Competition . And, as Canada increasingly exports
culture and research, there may also be a longer-term opportunity to
become more active IP exporters, in turn benefiting from stronger IP
protections.44Ibid.
Canada should therefore aim for balanced IP rules in NAFTA 2.0 that
encourage new innovative activities yet do not unduly penalize the
buying of ideas.
Digital Trade: Updating NAFTA to the Digital Age While
Protecting Canada’s Interests
[L2]
NAFTA 2.0 will likely include a chapter on e-commerce to take into
account the trade implications related to the digital economy. To ensure
Canada’s interests are protected, this chapter will have to be carefully
drafted and reviewed to ensure the protection of Canadian citizens’
privacy and to maintain Canada’s ability to support industries affected
by the winner-takes-all dynamics characterizing the digital economy.
When NAFTA was signed 23 years ago, the Internet was still in its
infancy. Today, information and communications technologies are the
backbone of our economy, powering all economic sectors and fostering the
creation of new digital products, services, and business models. The
rise of the digital economy has been accompanied by booming digital
trade (i.e., domestic and international commerce leveraging the Internet
to order, produce, or deliver products and services).55There are
no standard definitions for digital trade. This definition is based on
the United States International Trade Commission’s digital trade
definition in Stamps and Coffin, Digital Trade in the U.S. and
Global Economies, Part 2 . Examples of products traded and delivered
electronically include IT services (software as a service, cloud
computing), digital content (books, news, music, games, movies, videos),
and social media.
In turn, increased digital trade is contributing to the explosion in
cross-border data flows (i.e., the constant stream of information
transmitted through digital networks across countries).66For
more information, see Hodgson and Goldfarb, Canada’s New Trade
and Technology Paradigm . While global trade in goods and services
has flatlined in recent years, cross-border data flows have soared,
quadrupling since 2012, and they are expected to post another fivefold
increase within the next five years. 77Global trade in goods and
services, based on UN Comtrade data. Cross-border data flows based on
the McKinsey Global Institute’s estimates and definition found in
Dobbs, Manyika, and Woetzel, Digital Globalization . In fact,
according to the McKinsey Global Institute, cross-border data flows
already contribute more to the global economy than trade in
goods.88Ibid.
With global digital trade and cross-border data flows rising rapidly, it
became imperative for free trade agreements to address international
trade taking place electronically. As such, both CETA and the TPP have
an e-commerce chapter to promote digital trade across the countries
involved, and this will be an essential addition to NAFTA 2.0.
As found in CETA and the TPP, NAFTA 2.0’s e-commerce chapter should
include a provision preventing countries from imposing customs duties on
products and services delivered electronically.99CETA’s
provision 16.3 and TPP’s provision 14.3. See Government of Canada,
Text of the Comprehensive Economic and Trade Agreement . This
provision, as outlined in CETA and the TPP, still maintains each
country’s ability to charge internal taxes on digital products and
services should it wish to, in the same way that these would normally
apply to products and services produced and consumed domestically.
The TPP goes several steps further than CETA by also including
provisions to prevent parties from restricting cross-border data flows
or requiring computing facilities to be located domestically (also known
as “data localization” rules). Although these provisions do not apply
to government procurement under the TPP, if incorporated into a NAFTA
2.0, they could limit the Canadian government’s future leeway to protect
the privacy of Canadian citizens.1010Geist, ”What Would a
Digital-Economy-Era NAFTA Mean for Canadians?”
Given that the digital economy is still in its infancy, and given the
growing concerns around data privacy and cybersecurity, more
consultation and research should be dedicated to these issues. In
particular, potential provisions on data localization and cross-border
data transfers should be studied carefully during the renegotiation of
NAFTA to ensure they are in line with Canada’s interests and provide
enough flexibility to protect the privacy of Canadian citizens in the
future.
Another aspect that will be important for Canadian trade negotiators to
keep in mind for the e-commerce chapter is the tendency of the digital
economy to lead to winner-takes-all dynamics.1111Baller, Dutta,
and Lanvin, The Global Information Technology Report 2016 .
Given these rapidly evolving market dynamics, Canada should aim to
maintain a certain level of flexibility with regards to future digital
policies at home should Canadian firms and industries need some support
to stay competitive in markets dominated by a few digital players.
We are seeing winner-takes-all dynamics in numerous markets, including
social media (Facebook, Twitter), cloud computing (Amazon, Microsoft),
search engines (Google), online streaming (Netflix and YouTube),
e-commerce (Amazon and E-bay), ride sharing (Uber), and online payments
(PayPal), to name a few. Through their disruptive innovations that are
used by customers around the world, these players have transformed
traditional industries and come to dominate their markets. In turn, this
can lead to market dynamics closely akin to monopolies, with the
associated rent-seeking behaviour. In fact, market domination can be a
deliberate business strategy pursued by digital players.1212The
business strategies pursued by Amazon and Uber to gain monopoly power
are discussed in Khan, ”Amazon’s Antitrust Paradox,” and Horan,
Can Uber Ever Deliver?
A business with a large degree of monopolistic power may not be
problematic when it operates in a small niche market. However, when its
ramifications are global in nature and capture value across entire
industries, it can lead to undesirable consequences, as we are seeing
today in the Canadian news industry. According to a report from the
Ottawa-based Public Policy Forum on the state of news and democracy in
Canada, Google and Facebook together collect-two thirds of online ad
spending in this country, leaving little for Canadians news outlets and
putting the long-term survival of these outlets at risk.1313Public
Policy Forum, The Shattered Mirror .
Culture: Ensuring Canadian Culture Can Thrive in the Digital
Age
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Over the past two decades, the Canadian government has protected the
cultural sector from the commitments that apply to most goods and
services under free trade agreements. Canada should maintain this
position in the upcoming NAFTA negotiation, especially given the growing
importance of digital channels in the creation, distribution, and
consumption of cultural content.
Culture is the backbone of a country’s social fabric. Creative
expression—such as music, films, TV shows, books, magazines, and
documentaries—contributes to building stronger communities, promoting
the culture of minorities, and building a greater sense of national
identity. What is more, the economic footprint of culture is
significant, accounting for 3 per cent of Canada’s GDP and 3.5 per cent
of employment.1414Statistics Canada, Income and Expenditure
Accounts Technical Series: Provincial and Territorial Culture
Indicators, 2010 to 2014 . The country’s film and television
production industry alone drives over 140,000 full-time equivalent
jobs.1515Nordicity Group Ltd, Profile 2016: Economic Report
on the Screen-Based Media Production Industry in Canada .
Historically, Canadian governments have provided extensive support to
cultural industries, notably through “policies and programs that
promote Canadian content, foster culture participation, encourage active
citizenship and participation in Canada’s civic life, and strengthen
connections among Canadians.”1616Statistics Canada,
Conceptual Framework for Culture Statistics 2011 . Culture can
be viewed as a “public good,”1717Dachis and Schwanen,
Changing the Channel . one that if left to market forces alone
would be underproduced. Culture’s benefits for society go well beyond
the economic value attached to it.
For this reason, when negotiating free trade agreements over the past 25
years, the Canadian government made sure that cultural industries would
not be subject to the provisions that apply to most goods and services.
As such, NAFTA includes a broad cultural exception, which maintains the
right of each party to adopt measures and policies that support its
cultural sector.1818NAFTA Secretariat, Chapter Twenty-One:
Exceptions—Annex 2106.
When negotiating NAFTA 2.0, Canada’s goal should be to maintain this
exception, rather than agreeing to the kind of weaker cultural
“reservations” found in recent trade agreements, including the
Trans-Pacific Partnership. The significant change in Canada’s stance
with regards to cultural industries under the TPP was the subject of
much debate when the agreement was signed, and several voices have
expressed their concerns.1919For a detailed explanation of the
different treatment of culture under the TPP compared with other free
trade agreements Canada has signed, see Maltais, The TPP and
Cultural Diversity ; Geist, The Trouble With the TPP, Day 18 ;
Geist, The Trouble With the TPP, Day 26 ; Geist, The
Trouble with the TPP, Day 29 ; Alliance of Canadian Cinema Television
and Radio Artists, Trans-Pacific Partnership Agreement .,
2020An article in Le Devoir also discusses the importance
of maintaining NAFTA’s cultural exception to protect French content
and culture, especially in the digital age. See Baillargeon,
”L’exception Culturelle.”
In particular, the TPP treatment of culture could have implications with
regards to purely digital cultural content. Under the TPP, cultural
content delivered solely through digital channels could be subject to
provisions that require the non-discriminatory treatment of digital
products, as found in the e-commerce chapter.2121Geist, The
Trouble with the TPP, Day 29 . Therefore, maintaining NAFTA’s current
broad cultural exception in NAFTA 2.0 would ensure that Canada keeps its
ability to support cultural content, whether delivered digitally or not.
In a digital world characterized by winner-takes-all dynamics, having
the freedom to develop our own cultural policies will be essential to
our ability to create and distribute a wide variety of Canadian
content.2222The ongoing digital transformation and its
implications for the creation and distribution of Canadian cultural
content are discussed at length in the following reports: Nordicity
Group Ltd, Canadian Media in a Digital Universe ; Stursberg,
Cultural Policy for the Digital Age .,
2323In the fall of 2016, the Canadian government led an extensive
public consultation on Canadian Culture in a Digital World . The
findings and conclusions from this consultation are presented in
Ipsos, What We Heard Across Canada .