The U.S. Digital Trade Strategy: Evolution and Challenges in FTAs

by An Mu, NYU Law J.D. Class of 2026

The development of U.S. digital trade policy within Free Trade Agreements (FTAs) reflects a strategic effort to regulate the digital economy while maintaining flexibility. The rise of digital trade has exposed limitations in the existing multilateral framework under the WTO, particularly in establishing consensus-driven rules. In 1998, WTO members adopted a work program on “electronic commerce,” but progress has been slow. The 2019 Joint Statement Initiative (JSI) now involves 91 members, though many developing countries remain outside, and the 2024 “Agreement on Electronic Commerce” reflects a scaled-back ambition compared to earlier drafts. The United States has turned to bilateral and regional agreements incorporating specific provisions related to e-commerce and digital products. This approach allows the United States to advance its trade and political objectives, providing a regulatory framework that seeks to ensure the non-discriminatory treatment of digital products. Over the past two decades, this framework has evolved, with agreements such as the 2004 U.S.-Chile FTA, the 2012 U.S.-Korea FTA, the draft Trans-Pacific Partnership (TPP), and the 2020 United States-Mexico-Canada Agreement (USMCA) showcasing U.S. efforts to navigate the complexities of digital trade without directly addressing the challenge of categorization between goods and services.

I. U.S. Regulatory Strategies for Digital Trade in Free Trade Agreements

The slow advancement of WTO negotiations has been increasingly apparent since the Doha Round. This is particularly true as digital trade emerges as an essential catalyst for growth in major economies. The establishment of consensus-driven agreements and regulations has been obstructed by systemic deficiencies and divergent interests. In the early 21st century, the United States began pursuing digital trade regulations through bilateral and regional agreements, seeking to compensate for shortcomings of the multilateral trade framework established by the WTO. The United States aimed to fulfill its trade and political objectives by incorporating chapters and articles on e-commerce and digital trade into FTAs. By embedding digital trade provisions in its FTAs, the United States seeks to establish global norms that align with its national interests and influence the structure of international digital commerce. This strategy focuses on securing market access for U.S. enterprises and preserving U.S. leadership in the digital economy. Consequently, FTAs have emerged as the principal framework for analyzing U.S. economic and trade regulations, especially regarding the non-discriminatory treatment of digital items.

Since 2004, when the U.S.-Chile FTA came into force, the United States has executed over 10 FTAs in two decades, each incorporating specific language regarding the non-discriminatory treatment of digital products. The U.S. trade rule framework regarding the non-discriminatory treatment of digital products evolved from the U.S.-Chile FTA to the U.S.-Korea FTA, then to the abortive TPP, and finally to the USMCA, which the United States touts as a “high-standard trade agreement” of the 21st century. These agreements generally include the definition of digital products, national treatment, most-favored-nation treatment, and exclusions, but the language and applicability of these definitions have changed over time.

1. Defining Digital Products and the Evolution of U.S. Trade Agreements

The U.S. regulatory framework operates on the assumption that FTAs offer explicit definitions for digital products, thereby addressing the challenges associated with the classification of digital products as either “goods” or “services” before applying trade rules. Digital products frequently obscure the distinction between “goods” and “services,” possessing characteristics of both. For example, software can be sold as a physical product (on a disc) or delivered as a service (via cloud subscription), creating ambiguity in how trade rules are applied. This ambiguity makes it difficult to apply traditional trade regulations, which typically treat goods and services differently. This issue is becoming especially salient as digital trade grows, prompting countries to rethink regulatory approaches to ensure the non-discriminatory treatment of digital products within trade agreements. Such re-thinking has resulted in the inclusion of separate clauses regarding the non-discriminatory treatment of digital products inside e-commerce sections.

Article 15.6 of the U.S.-Chile FTA categorizes digital products as those conveyed electronically via optical, magnetic, or photonic methods, encompassing computer programs, texts, videos, photos, recordings, and more products. Chapter 15 establishes the basis for U.S. digital product regulations, explicitly delineating the product’s characteristics and the transmission method. Although no significant alterations have occurred, minor modifications have been made to improve the definition. Article 16.8.4 of the U.S.-Australia FTA explicitly provided that digital products may exist autonomously, be included within goods, or be utilized in the supply of services. Article 15.9 of the U.S.-Korea FTA stipulates that digital products, regardless whether they are stored on physical media or sent electronically, are permissible for commercial sale or dissemination. Article 14.1 of the TPP decreased the emphasis on physical media, emphasizing the electronic transfer of products. The USMCA incorporates the language that had been in the draft TPP without significant modifications.

The key reason for the consistency in U.S. FTAs’ definition concerning digital products is that the fundamental issue is not in their definition but in their classification. The classification of digital products as either goods or services has significant implications on how trade rules apply, as different WTO agreements and trade rules apply depending on whether something is classified as a good (falling under The General Agreement on Tariffs and Trade (GATT)) or a service (falling under The General Agreement on Trade in Services (GATS)). Since 2004, U.S. FTAs have circumvented this issue by explicitly specifying digital items without adhering to a classification. By doing so, the United States guarantees that digital products are afforded non-discriminatory treatment, evading the intricate legal distinctions and requirements associated with classifying goods and services under international trade law. Characterizing digital products by their transmission method offers an approach that ensures consistent regulation across agreements, regardless of their categorization under other trade regulations. This strategy has enabled the United States to implement non-discriminatory treatment for digital products that are flexible and responsive to the dynamic nature of digital commerce. By avoiding classification, the United States circumvents potential issues with established regulations for commodities and services. This flexibility benefits the United States in advancing its digital economy by diminishing regulatory hurdles and enabling more seamless cross-border digital trade transactions. Nevertheless, whether abstaining from classifying digital products was a desirable long-term answer is yet to be determined. The increasing significance of digital commerce may necessitate more explicit differentiation between products and services, and the efficacy of the United States’ existing strategy will hinge on its ability to continue to manage digital trade without confronting these categorization challenges directly.

In conclusion, the U.S. regulatory framework for digital products in FTAs circumvents the complex issue of classifying digital products as either goods or services by providing definitions and establishing separate provisions for non-discriminatory treatment. While this approach offers consistency across agreements, its long-term effectiveness remains uncertain. The decision to avoid classification raises questions about whether this strategy will achieve the intended outcomes, particularly as digital trade continues to evolve and pressure for more precise distinctions between goods and services grows. Further evaluation is necessary to determine if this approach is sustainable.

2. The Evolution of Non-Discriminatory Treatment Provisions for Digital Products in U.S. FTAs

The United States incorporates explicit provisions in its FTAs for the non-discriminatory treatment of digital products. Nevertheless, a majority of the FTAs classify these provisions alongside the mandate to exempt electronic transmissions from tariffs within the digital products clause. This practice originated in 1998 when WTO members achieved a consensus to temporarily exempt electronic transmissions from tariffs. Despite initially receiving little attention, the development of digital trade has rendered tariffs on electronic communications contentious, prompting U.S. FTAs to distinguish between the two matters.

In terms of the scope of non-discriminatory obligations, the core content remains consistent: no contracting party may provide less favorable treatment to digital products based on their creation, production, publication, storage, transmission, contracting, commissioning, or initial offering outside its territory, or based on the nationality of the author, performer, producer, developer, or distributor of the digital product (whether from a contracting or non-contracting party). The specific extent of these obligations has undergone several phases of expansion and contraction. In contrast to the U.S.-Chile FTA, the 2005 U.S.-Australia FTA broadened the non-discriminatory responsibilities to include digital service providers from non-contracting parties. Since the U.S.-Korea FTA, the language of national treatment for digital service providers from non-contracting parties has been removed. The 2005 Central America Free Trade Agreement stipulates explicitly that the clause does not confer any rights to non-contracting parties. The draft TPP narrowed the scope of non-discriminatory treatment, allowing contracting parties to refuse such treatment for non-contracting party apps sold on platforms. Consequently, the scope of protection for non-discriminatory treatment has evolved from a broad framework to a narrower one, emphasizing the safeguarding of rights for participants directly associated with digital content rather than those solely providing storage or distribution services.

The U.S. template for non-discriminatory treatment of digital products within FTAs reflects a gradual evolution, balancing the growing complexities of digital trade with the need for clear and consistent rules. While initially grouped with provisions exempting electronic transmissions from tariffs, these clauses have progressively expanded to address broader digital trade concerns. The shift in focus from a broad framework to a more specific one, particularly regarding digital content creators over service providers, demonstrates a more refined approach to regulating digital products. However, as digital trade continues to evolve, the narrowing of protections may raise new challenges, particularly for entities involved in storage or distribution. The U.S. strategy to modify the scope of non-discriminatory obligations signals a flexible but evolving stance, aiming to align digital trade rules with the realities of commerce.

II. U.S. Digital Trade Policy in FTAs: Advancing Economic Interests

Although the language and terminology of the non-discriminatory treatment clauses for digital products in the U.S. FTAs have progressed, the regulatory framework and core position adopted by the United States remains unchanged, consistently aligned with the nation’s overarching international trade strategy.

Since World War II, as the United States’ national power and international prominence have increased, its economic strategy has transitioned from regionalism to globalism. Consequently, its international trade policy has progressed through several phases, transitioning from reciprocal trade to free trade and, more recently, to fair trade. Nonetheless, the inherent stability of U.S. trade policy, grounded in the nation’s economic geography and political framework, has persisted. Despite variations in trade policies across presidential administrations, the primary objective remains to advance U.S. national economic interests.

Adhering to the principle of “fair trade,” the Biden administration has reverted to multilateralism, in contrast to the Trump administration’s pronounced unilateralism, by rejoining the Paris Climate Agreement, ceasing its withdrawal from the World Health Organization, re-entering the UN Human Rights Council, and collaborating with the majority of nations in the appointment of a new WTO director-general. Nonetheless, this does not imply that the Biden administration engages in the pre-Trump approach to multilateralism. The Trump and Biden administrations sought to advance U.S. digital economic development through a flexible minilateralism strategy focused on specific issues. “Minilateralism” refers to a more focused and flexible approach to international agreements, involving a limited number of countries or specific sectors rather than the broad, inclusive nature of traditional multilateralism, such as the WTO framework. Unlike broader multilateral agreements, minilateralism allows participating countries to form issue-specific coalitions, often targeting niche or emerging sectors like digital trade, where consensus among all global players may be difficult to achieve. The fundamental character of foreign policy, arising from domestic interests and executed internationally, is inherently shaped by internal choices. These preferences gradually evolve progressively, influencing the most appropriate foreign policy measures for national interests. Digital trade policy similarly adheres to the principle of advancing U.S. interests and conforming to national strategies.

The U.S. regulatory framework for digital products in FTAs has adeptly navigated the complexities of classifying digital products by offering flexible definitions and separate provisions for non-discriminatory treatment. This strategy has allowed the United States to maintain consistency across agreements while promoting its broader economic and geopolitical interests. By embedding digital trade provisions into its FTAs, the United States ensures market access for its companies while also influencing global digital trade norms in ways that align with its national objectives. However, as digital trade continues to evolve—especially with the rise of cloud-based services, AI-driven technologies, and new regulatory standards like those seen in the EU and China—the United States may face increasing pressure to clarify distinctions between goods and services. The recent trade dispute consultation between the United States and Canada over Canada’s new digital services tax has raised concerns that such taxes may violate USMCA provisions by unfairly targeting U.S. digital companies. This highlights the ongoing challenges in aligning trade rules with the rapidly changing digital landscape as countries increasingly implement their regulations in the absence of clear global standards.

This raises critical questions about whether the current approach will remain sustainable in the long term, or whether the United States may need to reconsider its classification strategy to stay competitive in the rapidly changing global digital economy. As international trade dynamics shift, the United States will need to balance its flexible regulatory approach with more precise frameworks to maintain its leadership in shaping global digital trade while advancing its economic and geopolitical goals.