Earlier this month Congress passed the National Defense Authorization Act (NDAA)—and pro-Jones Act special interests are elated. Regular Americans, however, may be less enthused. Buried deep within the bill—on page 1010 to be exact—is language that significantly pares back the executive branch’s ability to temporarily waive the 100-year-old law restricting domestic waterborne transport to vessels that are U.S.-registered, U.S.-built and mostly U.S.-owned and crewed.

Such waivers are perhaps best known for their use in recent decades to speed relief following natural disasters. After Puerto Rico was hit by Hurricane Maria in 2017, for example, the Trump administration waived the law for ten days so that foreign ships could transport supplies from U.S. ports to the beleaguered island. Other uses of this waiver authority include permitting non-Jones Act vessels to deliver petroleum products in the wake of Hurricanes Katrina (2005) and Sandy (2013). Expanding the universe of vessels allowed to deliver supplies not only saves money but, more importantly, time. Vessels closest to the disaster scene and best prepared to quickly provide relief are not always those that comply with the Jones Act’s restrictions.

But the use of administrative waivers in such disaster scenarios has now been cast in serious doubt.

Rather than allowing for Jones Act waivers deemed “necessary in the interest of national defense” as was previously the case, the NDAA limits such suspensions of the law to those viewed as “necessary in the interest of national defense to address an immediate adverse effect on military operations” (emphasis mine). The provision of assistance to Americans imperiled by natural disaster seems unlikely to qualify. In fact, it’s not clear that the vast majority of administrative waivers issued over the last 20 years would have met this new standard.

That Jones Act supporters made the limiting of such waivers a legislative priority isn’t surprising. While most Americans were searching for ways to help Puerto Rico in 2017 following Hurricane Maria, backers of the law hastily arranged a Capitol Hill “listening session” at which industry insiders and members of Congress implored President Trump not to waive the Jones Act. And in 2019 when news surfaced that President Trump was considering a long-term Jones Act waiver to provide Americans expanded access to domestically produced liquefied natural gas (LNG), the law’s supporters quickly mobilized to halt the measure.

Such vociferous opposition is curious given the limited or non-existent downside of these temporary and infrequent waivers for the domestic maritime industry. In the aftermath of Hurricane Maria, for example, U.S. vessels experienced no shortage of demand for the transportation of goods to Puerto Rico, while the proposed LNG waiver would have had no impact at all given that bulk transport of the fuel is not a service offered by Jones Act-qualified ships.

Nevertheless, allowing Americans access to foreign ships for domestic transport—even in emergency situations such as natural disasters—is something Jones Act supporters apparently cannot abide. This may be explained by the fact that waivers provide transparency into the cost savings and possibilities that could be unlocked through the domestic use of foreign ships. And that, in the minds of Jones Act supporters, appears intolerable.

The U.S. maritime industry may count the NDAA as a legislative win, but for the rest of the country it’s a very clear loss.

Shortly after the COVID-19 outbreak began last year, numerous politicians and pundits proclaimed that the pandemic revealed massive vulnerabilities in global supply chains for essential medical goods — vulnerabilities that imperiled Americans’ health and national security and therefore necessitated major government interventions (read: subsidies and protectionism) to bolster U.S. supply chain “resiliency.” Pharmaceuticals, in particular, topped the list of medical goods that required government action, and the alleged threat to American pharmaceutical access — supposedly dependent on China and India — was so dire that the Trump administration fast-tracked hundreds of millions of dollars in federal support to domestic producers of drugs and raw materials in order to “reduce reliance on other countries for drugs.”

At the time, I and others noted repeatedly that, while there were some gaps in the public data, the information we had on U.S. pharmaceutical production, R&D, and trade did not indicate a forthcoming pharmaceutical crisis. Now, the nonpartisan United States International Trade Commission has provided additional data in a massive new report on “U.S. industries producing COVID-19 related goods and the supply chain challenges and constraints that impacted the availability of such goods,” which for the most part confirms that our skepticism was warranted.

The report overall reveals a far more complicated and benign picture of the medical goods situation in the United States — one characterized by unprecedented supply and demand shocks, as well as substantial domestic resources (especially for pharmaceuticals, medical devices, and N95 masks), quickly-adapting domestic and international supply chains, and beneficial global specialization and cooperation. It’s a great resource for those interested in manufacturing issues, and should help to inform the broader debate in Washington about the pandemic, supply chain resiliency, and national security.

The report also should temper specific concerns about the pharmaceutical supply chain, which the USITC finds worked quite well during the once-in-a-generation pandemic due in part to its globalized business model (emphasis mine):

The United States has a large, geographically diverse pharmaceutical industry with established supply chains that proved resilient during the first half of 2020. The flexibility and number of manufacturing sites inherent in the global footprint of the pharmaceutical sector allowed firms to respond relatively quickly to demand and deliver additional medicines to aid in the response to the pandemic… The U.S. industry, which comprises companies ranging from large multinational firms to small and medium-sized firms (SMEs), was operating at almost full capacity in the second quarter of 2020 to meet demand. These supplies were delivered via the existing wholesale distribution network.…

The Commission’s report also details the immense size and scope of the U.S. pharmaceutical industry (which has supposedly shriveled due to globalization) — nearly 5,000 establishments spanning numerous states and all stages of production (upstream, downstream, and “fill and finish”); increasing shipments that reached $268.7 billion in 2019; and an expanding workforce that hit 310,000 workers in early 2020. The report further notes that U.S. manufacturers responded to the pandemic by substantially increasing pharmaceutical shipments (even while bringing new COVID-19 products to the market) because they maintained their own “emergency plans” to utilize significant available inventories, different production sites, or contract manufacturers. Finally, the USITC report shows that some of the industry’s resilience has stemmed from its diverse foreign sourcing of raw materials and finished products, while noting that China and India are significant (but not dominant) suppliers — essentially confirming my analysis of the import data earlier this year.

For those (like me) who have been fascinated by the COVID-19 vaccine rollout in the United States, the USITC’s conclusions about the pharmaceutical supply chain’s resilience during the pandemic shouldn’t come as much of a surprise: Pfizer, for example, utilized its existing U.S. manufacturing capacity, as well as other domestic and international resources (not to mention lots of immigrants), to test and produce millions of vaccine doses with unprecedented speed. Moderna, meanwhile, has relied on smaller in-house facilities and a partnership with a large Swiss pharmaceutical manufacturer, which has production sites in the United States and Switzerland. As a result of these and other multinational efforts, the vaccine bottlenecks we’re now experiencing have been related to government distribution, not private sector production, of finished doses. (Lessons abound.)

Still, the USITC report has a wealth of new data and is especially welcome given the incoming Biden administration’s plans to “rebuild” American pharmaceutical supply chains through top-down mandates like the Defense Production Act. Surely, the pandemic has put real strains on Americans’ access to essential medical goods as demand skyrocketed and supply raced to catch up, and it’d be good for the country to get a better handle on the virus and vaccine distribution. But the pharmaceutical supply chains themselves have fared pretty well so far, and there’s little evidence that government could improve them.

News reports indicate that COVID-19 vaccinations in the United States are happening more slowly than officials promised and in comparison to other countries. Some health care providers are racing — and some are failing — to administer their stock vaccines before they expire. In one case, more than 500 doses spoiled when an employee removed them from a freezer, allegedly on purpose.

These episodes highlight just some of problems inherent to using government rationing rather than market prices to distribute vaccines.

If manufacturers and retailers could charge, and consumers could pay, whatever they like, distribution of COVID-19 vaccines likely would be more rapid than today and likely none of the existing stock would expire.

Anecdotal reports indicate that some consumers are willing to pay $25,000 to receive the vaccine. If retailers could make thousands or even hundreds of dollars in profit from every dose they sell, they would have the incentive and the ability to invest greater resources in securing the vaccines and distributing them quickly. They would take greater steps to protect the vaccines from sabotage by deranged employees. (The law could also do so, if penalties for destroying the vaccines rose with the market valuation of each dose.) They would hire more personnel (e.g., nurses) at higher-than-usual wages to organize distribution and/​or to administer the vaccines. They could even train more personnel to administer vaccines — and form a lobby to demand that states suspend government regulations that prevent them from doing so.

If manufacturers could make thousands or even hundreds of dollars in profit from every dose they sell, they would have greater incentive and ability to expand production and produce more vaccines faster.

Would market prices guarantee that vaccines would go to the highest-value recipients first? Not at all. But market allocation doesn’t have to be perfect. It just has to outperform the alternative of government rationing.

In an earlier post on government vs. market distribution of COVID-19 vaccines, I wrote, “If the government could allocate vaccines in a way that gets more of them to the highest‐​value recipients than market forces would,” then government distribution would be defensible. But, “To improve on market forces, government must actually know who the highest‐​value recipients are[,] actually be able to allocate vaccines on that basis, [and] not detract from whatever good market forces would do on their own, or…diminish the incentives for pharmaceutical companies to boost production.” That does not appear to be happening.

Government rationing is detracting from the good that market forces would do, and slowing the distribution of COVID-19 vaccines, by diminishing the incentives for speed and security on the part of manufacturers and retailers. In many cases, it is resulting in low-value recipients receiving vaccinations before high-valued recipients do. It is diminishing the incentives for manufacturers to accelerate production. And in some, cases it is costing lives by allowing vaccines to spoil.

Jones Act supporters, including the owners of ships operating in the domestic fleet, often claim the law is necessary to thwart China’s maritime ambitions. But it’s unclear how many of them actually believe such rhetoric. Despite professed concerns about China and the need to avoid foreign reliance for U.S. maritime needs, Jones Act shipping companies regularly make use of shipyards outside the United States for repairs, maintenance, and upgrades of their vessels. Including facilities in China.

No operator of Jones Act ships is a more enthusiastic patron of Chinese dry docks than shipping firm Matson, whose vessels have paid more than 50 visits to the state-owned COSCO (China Ocean and Shipping Company) shipyard in Nantong for needed work. Indeed, Matson has been such a loyal customer that COSCO hosted senior executives from the U.S. firm last year to celebrate the two companies’ 20‐​year relationship.

And Matson isn’t alone. A vessel owned by Jones Act shipping firm Pasha Hawaii, the Horizon Spirit, recently departed Nantong after nearly 50 days in a local shipyard, suggesting its stay was for more than a mere paint job.

According to maritime attorney Wayne Parker, who served for nearly eight years as in-house counsel to Matson and now-defunct Horizon Lines, “I never heard of any of our Jones Act-qualified container vessels being dry-docked, surveyed, or undergoing routine maintenance in U.S. shipyards. This was always done in foreign, usually mainland Chinese, shipyards.”

Although there is nothing objectionable about this from a free trade perspective, the irony and hypocrisy are inescapable. Both Matson and Pasha Hawaii have board of directors positions with the American Maritime Partnership, a leading Jones Act lobbying and advocacy group that frequently asserts the 100‐​year‐​old law serves as a bulwark against China. Yet these same Jones Act companies regularly send ships to the country to save on repair and maintenance costs.

Incredibly, the Jones Act actually helps keep Chinese repair yards humming. While ships plying the world’s oceans are typically scrapped at 15–20 years of age, Jones Act vessels—thanks to a U.S.-build requirement that dramatically raises the cost of buying new ships—are often kept in service until age 40 or beyond. An old fleet means more maintenance—and more business for Chinese shipyards. 

Let’s review what’s going on here. By massively increasing vessel replacement costs through its U.S.-build mandate, the Jones Act promotes the use of older ships requiring more maintenance. Some of this maintenance is then hypocritically performed in Chinese state‐​owned shipyards, a portion of the cost savings from which is then spent on lobbying and advocacy work urging the Jones Act’s retention as a vital tool against China.

You can’t make this up.

Beyond the rankling hypocrisy, this use of Chinese shipyards further illustrates the gaping chasm between the Jones Act’s intended results and reality. The Jones Act has not fostered a vibrant domestic maritime industry or freed the United States from foreign reliance to meet its maritime needs. What it has produced is economic harm, a domestic fleet insufficient to meet U.S. national security needs, and shipyards so uncompetitive that vessels are dispatched to the far side of the Pacific Ocean for repair and maintenance.

This is a case study in the failure of protectionism, and one that should no longer be tolerated.

On Christmas day, the EU and UK released the text of their new Trade and Cooperation Agreement. It still needs to be cleaned up by having the lawyers go over each word with a fine‐​toothed comb, but with this agreement, the post‐​Brexit trade relationship between the EU and UK is now mostly spelled out.

There’s a lot to digest in this text, and I won’t try to do it all in this one blog post. Instead, I want to focus on one particular point that has received a good deal of attention: The “level playing field” relating to regulation in the EU and UK. In a nutshell, the level playing field is about concerns from the EU that the UK will use its newfound regulatory independence to lessen its regulation of various sectors of the economy so as to give UK producers a competitive advantage over their European counterparts. (To be clear, under the rules as written, things could go the other direction too — the UK could be upset about EU regulations).

Are such changes to UK regulation likely to happen? I really have no idea, and British politicians probably don’t know yet either. I hear talk from some Brits about deregulating and I hear talk from other Brits about ratcheting up regulations. I’m not sure which way this is all headed.

But now we know what the EU-UK trade agreement says about the possibility of regulatory changes, and the level playing field parts are a little worrying. I put forward some specific comments and questions on the level playing field provisions here, but to offer a broader take, I would say the following. On paper, what these provisions do is let one party to the agreement impose “rebalancing measures” whenever the other party “regresses” in the following policy areas: “labour and social, environmental or climate protection, or with respect to subsidy control.” So, as a simple example, if the UK were to ease up on environmental regulations in its auto industry (not that I think they are planning to), the EU could impose tariffs — which are one possible rebalancing measure — in response.

Now, it’s not actually as simple as that, because there’s a whole set of criteria to satisfy before tariffs can be imposed. For example, there must be “material impacts on trade or investment between the Parties” that “aris[e] as a result of significant divergences between the Parties in the [policy] areas”; and the rebalancing measures must be “restricted with respect to their scope and duration to what is strictly necessary and proportionate in order to remedy the situation.” I expect that some sort of domestic procedure will be set up for the EU and UK governments to make a determination that these criteria are met. In addition, if a rebalancing measure is proposed, the party that will be subject to that measure can challenge it before a neutral tribunal, arguing that the criteria for imposing it have not been met. For these reasons, in practice it may not be all that easy to impose these measures, and if that’s the case, there won’t be much impact on a government’s regulatory decisions.

Nevertheless, this agreement goes further than any other trade agreement I’ve seen in providing for what look like “trade remedies” for situations where one party changes its regulations in a way that the other party considers to be less strict and somehow unfair. Recall that “trade remedies” typically refers to anti‐​dumping, countervailing duties, and safeguards, which permit the use of extraordinary tariffs under certain conditions. In a sense, the level playing field provisions look like a new category of trade remedies. Given the abuse we have seen with trade remedies over the years, we should be concerned about what might happen here.

It was always risky to go too far with including issues related to regulation in trade agreements. The more you do with regulation there, the harder it gets to control what happens. In some areas, today’s trade agreements require stricter domestic regulations (intellectual property is a good example); in others, they impose constraints on regulations (such as the requirement in most U.S. trade agreements that food safety standards be based on science). Here, we had a situation where there were concerns from the EU over UK intentions about loosening regulations. As a political matter, the level playing field provisions helped smooth the issue over and get this deal done in the specific context of the EU-UK situation.

Now, as I noted above, it may turn out that the provisions don’t have much impact. They are untested and it’s unclear how they will be applied. But it’s also possible that they could serve as an impediment to governments who want to revisit regulations that they believe are not serving their purpose or are excessively burdensome. It’s a mistake to see regulations as a one way ratchet, with more somehow always better. And it’s a mistake to think there is only one appropriate way to regulate, with any deviation considered problematic somehow. If that’s how these level playing field provisions operate in practice, they should not be replicated in future agreements.

If I had to choose a word to describe the trade landscape in 2020, a strong candidate would have to be disruption. The first three quarters of the year witnessed an 8.2 percent drop in the volume of world merchandise trade, compared to last year, and it is still unclear if there will be a deeper plunge as the year draws to a close. But this downward trend, while rapidly accelerated by the pandemic, had already begun in 2019 due to increasing global trade tension. In fact, the World Trade Organization (WTO) estimated a 0.1 percent drop in merchandise trade volume in 2019, with the dollar value of world merchandise exports falling by 3 percent, to the tune of $18.89 trillion USD. While it will take time for us to recover, I offer five practical ideas for trade policy in 2021 that can help ease the economic burden on Americans, repair our fraught relationship with our closest trading partners, and revitalize the rules-based trading system.

Rein in executive authority on trade policy

In just one term, the Trump administration has been responsible for nearly a quarter of all Section 232 investigations initiated since 1962. This statute has allowed him to levy tariffs in the name of national security—such as on steel and aluminum products from our allies. The administration has threatened action on automobile imports as well—as if importing cars is a national security threat. These actions have been overtly protectionist, encouraged cronyism through a lack of transparency, and hurt our economy. Economists Lydia Cox and Kadee Russ estimate that by mid-2019, the rise in input costs due to the Section 232 tariffs led to 75,000 fewer jobs in U.S. manufacturing. As my colleague Scott Lincicome and I argue in a forthcoming paper, the tariffs imposed under Section 232 should be rescinded, and the law reformed to rein in future abuse of presidential power.

But Section 232 is not the only executive branch trade issue. Long before Section 232 became the talk of the town, antidumping policy had been abused, and it has only gotten worse in recent years. As my colleague Dan Ikenson explains, U.S. antidumping laws have “become a commercial weapon used by U.S. companies against other U.S. companies” and “a convenient channel through which domestic firms can saddle their competition (both foreign and domestic) with higher costs and their customers with fewer alternative sources while giving themselves room to raise their own prices, reap higher profits, and reinforce their market power.” It is an issue that is ripe for reform.

Avoid knee-jerk protectionism

The COVID-19 pandemic has triggered a substantial amount of economic nationalism, including calls from many politicians to “re-shore” supply chains and reduce trade dependency on other countries. As my colleagues Dan Ikenson and Simon Lester explain, using the pandemic to justify protectionism or to promote deglobalization would do more to hurt than help the U.S. economy, for it ignores the many benefits we derive from participating in the global economy. Furthermore, claims of U.S. overdependence on global trade are overblown, and not really a “problem” worth solving. And, as we all eagerly await our jab in the arm, it’s a good time to remember that the COVID-19 vaccine is a triumph of globalization. Now, more than ever, it’s critical to keep the trade lanes open, not least because most Americans actually think positively about trade and globalization. And as my colleague Jim Bacchus lays out—Democrats can rehabilitate the failed trade policies of the last four years by embracing the benefits of trade that their constituents are already well aware of.

Lower the temperature in our trade war with China

This may have been the year where every trade policy discussion included the question, “but what about China?” Indeed, China has occupied the Trump administration since day one, and the many issues we need to resolve will undoubtedly carry over into the Biden administration. But, the approach should be different. As my colleagues Simon Lester and Huan Zhu suggest, a better way forward will include working with our like-minded allies to discipline China’s unfair trade practices at the WTO, and to push for further liberalization. U.S. policy towards China must be informed by an understanding that normalizing our trade relationship with China was a good decision that has benefitted both our countries. Keeping China out of the WTO would not have made Americans better off. Of course, this doesn’t mean that there isn’t anything we can improve upon, but having these discussions in a less-heated and acrimonious way may generate more progress on these issues than we’ve seen over the last four years. Also, the United States would benefit from a reflection on the lessons of China’s rise—which my colleague Dan Ikenson argues, policy makers have simply got wrong.

Get the WTO back online

The WTO has faced a number of challenges this year, with the United States continuing to block appointments to the organization’s highest court, known as the Appellate Body. This has left the appeals mechanism defunct, and damages WTO dispute settlement more broadly. Imagine a situation where the U.S. no longer had a functioning Supreme Court—that’s where the WTO is now. The United States has raised many concerns about the WTO’s dispute settlement system, but discussions on reform have gone nowhere. It’s time for some real practical discussions on how to improve dispute settlement—not a continuation of the status quo. My colleagues Jim Bacchus and Simon Lester have offered some thoughts on how to make dispute settlement more effective and efficient, and remain optimistic that a solution is within reach.

Another issue that requires immediate resolution at the WTO is the appointment of its Director General (the top administrator of the institution), a post that has been vacant since September. The United States has also held up this process, despite the fact that a front-runner candidate has emerged. Getting a Director General in place will not only help move important negotiations along, but also help facilitate discussions on broader issues of reform.

Conclude negotiations on fisheries subsidies

WTO Members have been trying to wrap up a deal to eliminate subsidies that contribute to illegal, unreported, and unregulated fishing, as well as some subsidies that lead to overcapacity and overfishing. So far, they’ve missed two deadlines, though some progress has been made. One of the major snags in these talks is the fact that developing countries, which historically have been given special treatment at the WTO to take on less ambitious obligations, are critical to tackling the issue of fisheries subsidies. For example, 9 out of 15 of the largest marine capture fish producers are developing Members— and some, such as China and India, have requested flexibilities on their commitments, citing developing country status. This mindset has to change for negotiations to be successful.

Importantly, the fisheries talks must be multilateral—the last time I checked, fish do not respect territorial boundaries. Overfishing is by definition a global problem requiring a global solution. But it’s also important the keep in mind that the five main providers of fisheries subsidies are China, the European Union, the United States, South Korea, and Japan, who account for 58 percent of all global fisheries subsidies. These Members must recognize that they are the biggest part of the problem and avoid trying to create so much flexibility for themselves that it makes the agreement merely symbolic. The future of the WTO’s negotiating function depends on it.

Looking for the light amidst the darkness

The holidays give us time to reflect on the year, and think about ways we hope to improve ourselves and the state of the world. And what a year it has been. With so much loss brought on by the pandemic, many other policy areas feel so marginal. But at the same time, everything else also seems more relevant than ever. The fact is, we will need to pull together and think big about how each of our respective areas of expertise can shine a light in a year of so much darkness, and work towards making our country, and the world, more open and more prosperous. My trade policy wish list is a small contribution to that end, but one that I hope generates a discussion on how the disruptions of this year have amplified the benefits of liberalization and the heavy costs of protectionism.

A controversial proposal to block foreign providers of digital services from offering their services in Mexico if they fail to comply with Mexico’s digital tax rules has just been signed into law. The scope of the law is broad enough to encompass a whole host of digital services that individuals and businesses consume everyday—from streaming and dating services to online shopping, and virtually anything that exists in the cloud. The economic costs could also be severe—for example, blocking access to YouTube for a single day would cost the economy $18 million USD. As the world pulls itself up from the economic shock of COVID-19, Mexico’s latest action has the potential to dampen recovery efforts, and also to further strain U.S.-Mexico relations.

On December 8, 2020, President Andrés Manuel López Obrador approved the law despite numerous concerns raised about whether the new measure is in breach of Mexico’s obligations under the U.S‑Mexico-Canada Agreement (USMCA). His action marks an open provocation of U.S. business interests, as well as Mexican consumers of foreign digital services. Taking a look at the content of the law, it becomes clear that this issue should be high on the incoming U.S. Trade Representative’s agenda, for it is likely to not only violate the USMCA, but also many core principles of digital trade governance the United States is hoping to replicate in other agreements.

Why does Mexico want the power to block foreign service providers from providing services in Mexico over the internet?

Mexico enacted changes to its value-added and income tax laws as part of the FY2020 budget proposal, which resulted in certain non-resident (foreign) digital service providers becoming liable for paying its value added tax (VAT). In some cases, platforms such as Airbnb would also have to withhold and surrender income taxes. Digital service providers must also comply with a series of administrative requirements, including registering with the Mexican Tax Administration Service (SAT), designating a legal representative and address on Mexican soil, and processing their advanced electronic signature. Since these changes went into effect on June 1, 2020, 48 foreign digital service providers have obtained registry under the SAT.

When these new rules were first proposed in October 2019, the Ministry of Finance began floating what is referred to as the “kill switch” mechanism, a tax enforcement tool that would essentially block Mexican consumers from having online access to digital services from a company that is purported to not be in compliance with Mexican law. For example, say YouTube was not in compliance with the law—the kill switch would allow the Mexican tax authorities to order YouTube to be blocked—if someone in Mexico tried to access the site on her internet browser, the site could not be viewed.

The Ministry of Finance proposed the kill switch as an enforcement tool because it argued that the new tax obligations would not be effective in achieving compliance with the laws on their own. But the mechanism was ultimately struck from the proposed reforms to Mexico’s tax laws, following amendments submitted by deputies from multiple parties. The issue seemed resolved for the time being.

Then, in the fall of 2020, as discussions were underway for the FY2021 budget, the kill switch was brought up again, but no evidence was provided to support the claim that the current tax law was insufficient in assuring compliance. Despite this, the Finance Commission of the Mexican Chamber of Deputies supported the inclusion of the kill switch and also proposed to extend it to the Income Tax Law.

This time, the kill switch was passed by the Chamber of Deputies and left untouched by the Senate. Following modifications to other aspects of the bill by the Senate on October 29, 2020, it returned to the Chamber of Deputies and was ratified on November 5, 2020. With AMLO’s signature on December 8, 2020, the kill switch will enter into force under both the VAT and Income Tax Laws on January 1, 2021.

How does the kill switch work?

If a foreign digital service provider is noncompliant with Mexican tax laws, the SAT (tax authority) can publish an order to block access to that service on the internet for people in Mexico. Examples of non-compliance are: if a service provider fails to pay its tax bill, misses consecutive deadlines for reporting information on returns, or if it fails to meet a number of other administrative requirements, such as voluntarily registering under the Federal Taxpayer Registry, designating a legal representative and address within Mexican territory, or failing to process its advanced electronic signature.

Once the order to block access to a foreign provider has been published, the respective network carriers (the internet service providers) will be notified, and they must carry out the order within a period of five days.

The foreign provider has a right to reply to the order, and is granted a period of 15 days (with a one-time, optional five-day extension) to bring itself into compliance with its tax obligations, or alternatively, to justify its non-compliance. In the case of the latter, the tax authority would evaluate the information provided within 15 days, and either issue an extended deadline for compliance or proceed with the decision to block said provider’s access to the internet. This very short period of time to respond could potentially make compliance difficult, particularly for small and medium-sized enterprises that do not have the same resources as larger companies.

But, generally speaking, the whole process by which the kill switch may be implemented is quite vague, and it is not clear how it will actually work in practice. For instance, it appears to place a lot of power in the hands of the tax authority to take the decision to employ the kill switch, but the details of how an investigation would be initiated, and what that would entail remain uncertain. It is also unclear how the tax authority would coordinate with internet service providers, and even how the over 400 internet service providers in Mexico would coordinate among themselves to actually block the service provider’s access.

The technical specifications of how the kill switch will be implemented are not laid out in the law, casting a large cloud of uncertainty over both providers and end-users of digital services. There are many ways to block access, all of which have a number of challenges to implement. Contrary to how the kill switch has been described—as an on and off switch for noncompliant companies—it’s actually not that straightforward. Say, for instance, that a payment processing service is blocked, and can no longer process transactions. Small businesses rely on third-party payment processing all the time—think of when you’re shopping online and you proceed to check out, and your payment is processed by PayPal, or redirected to another site. Imagine the impact if all of a sudden the payment processing service isn’t working. Not only is the company that was originally targeted hurt, but many more can be impacted in the process. The technical precision required to block access for a single provider is incredibly complex and easy to get wrong. In taking out one shop, internet service providers could end up shutting down an entire mall.

And, since many sites are housed within cloud services, blocking one could have ripple effects that take out many others in the process, impacting the broader internet ecosystem. The overall lack of transparency in the procedural requirements of applying this enforcement mechanism warrants scrutiny, as the lack of detail raises serious questions about government regulation of the internet and also makes it potentially ripe for abuse.

Does the kill switch breach the USMCA?

There is strong opposition to the kill switch, both in Mexico and abroad. Trade associations from all USMCA partner countries and elsewhere in Latin America sent a letter to the leaders of the Mexican Congress on October 23, 2020, arguing that the measure was not only inconsistent with Mexican law, but also with the USMCA. With regard to the USMCA, the trade associations argue that the measure is inconsistent with Article 15.3 (National Treatment), Article 18.3 (Access and Use), and Article 19.10 (Principles on Access and Use of the Internet for Digital Trade).

It is certainly possible that the measure could be in violation of Article 15.3 of the chapter on Cross-Border Trade in Services because it appears to apply a unique enforcement tool to foreign service providers. Since the kill switch cannot be applied to domestic service providers, a case could be made that the measure is, on its face, discriminatory. In addition, it could be argued that the tax registration rules that require foreign service providers to designate a legal representative and address on Mexican soil could violate Article 15.6, which prohibits such local presence requirements “as a condition for the crossborder supply of a service.”

If the kill switch is employed, it could also be in violation of Article 18.3 of the Telecommunications chapter, which requires USMCA partners to “ensure that any enterprise of another Party has access to and use of any public telecommunications network or service, including leased circuits, offered in its territory or across its borders, on reasonable and non-discriminatory terms and conditions.” While Mexico may try to make the case that employing the kill switch is reasonable to enforce its tax laws, it will have a hard time showing that it is non-discriminatory, as noted above. Furthermore, it does not appear that the kill switch would fall under any of the exceptions of this chapter, such as those that governments can take to protect the privacy of personal data. Taking action to restrict internet access on the basis of tax-related issues does not, therefore, appear justified under the terms of the USMCA.

Finally, the measure could be in violation of the USMCA’s digital trade chapter, the most comprehensive of any trade agreement. It would likely violate Article 19.4, which requires the parties to the agreement to treat foreign and domestic digital products in the same way—meaning, that a government cannot discriminate against a digital product just because it is foreign. There is also a possible claim to be made with regard to Article 19.11 that prohibits restrictions to the free flow of information between the parties. A similar provision under the Financial Services chapter, Article 17.17, could also potentially be raised as well.

Article 19.10 might be the more difficult claim to litigate because the language of this provision does not create a binding obligation on the parties; rather, it simply states principles they recognize as important. It would be interesting to see how a USMCA panel would rule on this issue, but it appears that there are many other viable claims of violation that could be made against the measure.

What will happen next?

It is always important to keep in mind that violating trade rules does not automatically trigger action. And, at the moment, Mexico’s kill switch is not yet in force. It remains to be seen if the mechanism will ever be used. If it is, the repercussions could potentially be quite significant.

At a time when we feel reliant on digital services more than ever, with so many people around the world working and running businesses from home, the potential impact of implementing the kill switch could be severe. The measure would undoubtedly place a burden on businesses, particularly small and medium-sized enterprises that rely on digital services. When so many people are struggling from the economic shock brought on by the COVID-19 pandemic, it seems counterproductive for Mexico to take any action that would hamper their recovery, including disrupting access to foreign digital service providers.

Service providers and the businesses and consumers that rely on their services should continue to push for reform in the hopes that the government will ultimately remove the kill switch from the law. In addition, some have suggested that Mexico should bring its laws into alignment with Chile’s procedures for compliance with digital service tax regulations, which are considered global best practices.

In fact, the Latin American Internet Association (ALAI), which represents U.S. and Latin American digital services providers across the region, has been vocal on this point and claims that Mexico’s process for the registry of non-resident digital services providers is the “most complex and laborious” to be observed in Latin America thus far. The Chilean regime, which also entered into force on June 1, 2020, has seen more than 105 non-resident digital service providers registering in that country (as of September 2020), compared to the 35 that had registered in Mexico at that point. As one tax expert explained, there are “examples of companies that took months to be able to prepare everything and register” whereas in other countries this process would take hours at most. Mexico’s problems with tax collection may thus have a lot less to do with a lack of compliance from foreign companies than its own internal obstacles.

It, therefore, seems difficult to justify taking such an extreme measure as the kill switch. In fact, blocking tax-owing non-resident digital service providers from accessing the internet is not employed in any other country. Mexico’s use of the kill switch could, however, encourage other countries to follow.

The unique nature of the measure could also have broader implications that are currently unseen by the Mexican government. The potential for abuse of the kill switch for purposes other than tax compliance cannot be ruled out, not least because of the lack of transparency and detail on how the enforcement mechanism will actually work in practice. In addition, restricting access to the internet in this way also raises concerns about the government’s authority to regulate the internet for a whole host of unrelated reasons—it creates a slippery slope that could usher in additional regulatory actions and abuse of power.

It is difficult to predict what will come of the kill switch, once in force. But, from examining the design and architecture of the measure, it raises significant questions about Mexico’s compliance with its USMCA obligations. The kill switch is clearly an outlier as an enforcement tool, and it would not be surprising if the U.S. moves quickly to try to push Mexico to regulate in a manner that is more in line with the rest of the world. To assure access to the internet for both providers and consumers of digital services, it would be incumbent upon the incoming U.S. Trade Representative to raise this issue with Mexico as soon as she takes office. We’ve already experienced a rocky four years in relations with one of our most important trading partners, and if Mexico goes forward with implementing the kill switch, the repercussions for this critical relationship could be much larger than policymakers ever imagined.