Recommendation #4: Encouraging Innovation and Digital Trade While Protecting Intellectual Property and Canadian Culture 

Recommendation Summary
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 [L2]

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 .