Executive summary

North American competitiveness and resilience to geopolitical and climate disruptions increasingly depend on whether the region can co-design and co-locate its digital and manufacturing supply chains, so they reinforce rather than constrain one another. This approach provides a new paradigm and framework, one based on “ring-fencing” supply chains. Alongside efforts to shift factories closer to home and secure physical inputs, it is equally important to create trusted rules and interoperable systems for data, cloud, and digital services that now sit inside every physical product, production infrastructure, and process.

The imperative arises from the structural shifts happening in trade and the associated economy. Digital technologies are increasingly embedded in products, delivered through services, and sold as complementary solutions, thus blurring the traditional boundary between goods and services. As a result, “digital trade” and the “digital economy” are becoming inseparable from physical supply chains.

Governments must navigate a data trilemma of balancing 1) economic value from cross-border data flows through scale, efficiency, and AI training, 2) public privacy, and 3) national security concerns. “Ring-fencing” physical and digital supply chains to form a flywheel provides a framework for resolving this trilemma. Physical ring-fencing (trade preferences, rules of origin, targeted incentives) attracts advanced manufacturing and upstream capacity. Digital ring-fencing (trusted data corridors, privacy and cybersecurity safeguards, paperless trade and e-invoicing “plumbing”) reduces compliance friction and enables region-wide operations. Together, they increase investment confidence, strengthen traceability, shorten recovery time during shocks, and convert cross-border integration into true resilience.

This framework can be operationalized through a Digital Special Economic Zone (DSEZ), a trusted perimeter for industrial data and digital services that complements physical SEZs and leverages the U.S.-Mexico-Canada (USMCA) Free Trade Agreement’s digital trade commitments. It is not a physical boundary but a digital ring-fence around the digital trade that accompanies the physical supply chain.

Introduction

In earlier eras of globalization, supply chain excellence was measured in physical terms: production costs, lead times, inventory buffers, and logistics reliability. Today, competitive advantage increasingly comes from the performance of cyber-physical systems, i.e., products and factories whose value depends on integrated hardware, software, sensors, connectivity, and AI. This shift is visible in trade itself. Digital technologies embedded in products (e.g., automated vehicles), delivered via services (e.g., remote diagnostics), or offered as complementary toolkits (e.g., digital identity systems) blur the historic line between goods and services.

In cross-border commerce, this convergence is captured by “digital trade”: international trade that is digitally ordered and/or digitally delivered. Within this “digital economy” ecosystem lies the infrastructure and technology that generate economic activity and enable digital trade. As digital trade expands, the critical determinant of competitiveness is not simply whether a region can manufacture. It is whether the region can operate integrated networks that move both goods and data across borders in ways that are trusted, secure, and legally predictable.

This is why resilience and competitiveness in physical and digital supply chains must be addressed together. When data and goods are tightly coupled, a disruption to data governance (privacy rules, cybersecurity incidents, localization requirements, export controls on digital components)  can halt a factory as effectively as a disruption to physical inputs. However, well-designed cross-border digital governance can improve physical supply chain performance by enhancing visibility, coordination, and responsiveness.

The data trilemma and the rise of competing digital stacks

Digital policy introduces a central tension: the data trilemma. Governments and firms must balance:

1. Economic utility from cross-border data flows (scale economies, high-quality datasets for training AI, lower transaction costs).
2. Public privacy protections (preventing misuse of sensitive personal information).
3. National security requirements (protecting IP, sustaining competitiveness in high-R&D sectors, and ensuring cybersecurity across systems that generate and use data).

In a geopolitically fragmented environment, there is no universal consensus on how to trade off these priorities. Restrictions can appear as taxes on cross-border data transfers, localization requirements, demands for source code or algorithm disclosure, or divergent technical definitions of anonymization and security. These frictions lead to and are reinforced by competing “digital stacks”, i.e., distinct governance models across identity, payments, data, cloud, and platforms. A region’s choice of digital governance influences where data centers are built, how AI is trained and deployed, and which firms can operate integrated cross-border platforms at scale [1].

For North America, the strategic goal is high-trust interoperability: not necessarily identical rules across the U.S., Canada, and Mexico, but compatible safeguards and predictable processes that allow firms to treat the region as one operational environment for cyber-physical industries.

Building a competitiveness–resilience flywheel through ring-fencing of physical and digital supply chains

“Ring-fencing” supply chains is a design choice: creating a preferential regional core that remains globally connected, but is engineered to be more reliable, governable, and investable for strategic industries.

Physical ring-fencing tools include preferential trade agreements, export-import controls, soft loans, subsidies, and tariffs that encourage in-region manufacturing hubs and upstream capabilities. Digital ring-fencing tools increasingly take the form of “trusted digital corridors”: rules, standards, and institutional cooperation that allow data and digital services to flow more freely within a club of partners than with the rest of the world. Membership is conditioned on creating and maintaining agreed-upon safeguards for privacy, cybersecurity, consumer protection, and increasingly AI governance.

Digital ring-fencing need not happen within the same physical borders as the physical supply chain. Instead, it is a digital ring-fence around the digital trade that accompanies the physical supply chain. It can be hosted and processed in any geographic location (outside of sanctioned states) if the value and origin can be consistently and reliably attributed to companies within the region.

Competitiveness and resilience can be mutually reinforcing when physical and digital ring-fencing are designed as a coherent system rather than a patchwork of ad hoc measures. A virtuous cycle emerges when ring-fencing is built as a flywheel with four reinforcing effects.

1. A trusted perimeter reduces uncertainty and attracts investment
When firms can predict market access conditions and compliance requirements, they can justify long-term investments in advanced manufacturing, logistics infrastructure, and cloud/edge compute. Physical incentives bring factories and upstream capability, while digital trust reduces hidden compliance costs and legal risk for cross-border data-dependent operations.
2. Digital scale strengthens industrial scale, and industrial density strengthens digital scale
AI and modern operations benefit from scale and high-quality datasets. A region that keeps trusted data moving across borders enables integrated planning, production, and service delivery for cyber-physical goods. In turn, dense regional production networks generate operational data, supplier learning, and feedback loops that improve predictive maintenance, quality control, and end-to-end visibility—raising both productivity and shock recoverability.
3. Compliance capabilities become resilience capabilities
Tighter rules and enforcement can push firms to map multi-tier bills of materials, document supplier relationships, and build traceability systems. These capabilities become decisive during disruptions. Firms can identify alternative suppliers more quickly, validate substitutions with greater confidence, and coordinate rerouting with fewer delays.
4. Institutions for continuity convert integration into resilience
Integration improves efficiency during normal times, and resilience depends on whether the region can maintain flows during disruptions. Ring-fencing, therefore, requires governance mechanisms and emergency-response coordination that operationalize continuity rather than leaving it to ad hoc crisis management.

Mind the gap: Cyber-physical products expose gaps between physical and digital rules

The core implementation challenge is that trade rules, traditionally framed for physical goods, have not evolved with the increasing digitization of value creation and the content of goods. Rules of origin determine tariff treatment and regulatory application, but “origin” is harder to define for cyber-physical goods and digital transactions because of globally distributed labor, boundary-less cloud infrastructure, and the lack of standardized “digital bills of material” comparable to HS codes for physical goods.

This becomes acute in the automotive and advanced manufacturing sectors. Regional value content is relatively straightforward for stamped metal and assemblies, but far murkier when a vehicle becomes “a computer on wheels.” The product includes sensors, chips, and AI systems sourced globally, making RV compliance difficult and costly, even when final assembly is regional.

This cyber-physical value paradigm creates a subtle tension within the USMCA and across North America’s wider digital trade environment. On paper, the USMCA strongly supports regional digital integration. At the same time, the agreement, in its current form, imposes restrictions when necessary to achieve a legitimate public policy objective. Such language is common across multiple digital trade agreements. As a result, even when agreements prohibit forced data localization, ambiguity around legitimate public policy objectives, as well as differences in privacy protection requirements and implementation across digital stacks, can indirectly encourage firms to localize data, services, or digital infrastructure to manage compliance and value attribution.

1. Within USMCA
For firms building cyber-physical ecosystems, where software, sensors, cloud analytics, payments, logistics, and after-sales services must work together across borders, this ambiguity creates a practical compliance problem. The treaty discourages explicit localization mandates, but it does not remove the operational need to show regulators where data sit, who can access them, and which entity is accountable for them. Firms will shift towards conservative architecture choices, such as country-specific cloud instances or nationally ring-fenced compliance environments, even when a regionally optimized model would be cheaper and technically superior. Research on cross-border data transfers supports this broader concern: patchworks of rules create uncertainty about applicable standards and increase the cost of operating across borders [2].

2. Across regional trade agreements and adjacent transfer mechanisms
The tension becomes sharper when North American firms operate under overlapping external free trade agreements. Under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)’s electronic-commerce chapter, parties must maintain legal frameworks to protect personal information, but the agreement also allows restrictions on cross-border transfers and on the location of computing facilities when they are justified by legitimate public policy objectives. Canada and Mexico are both part of the CPTPP and need to adhere to these rules. Outside trade agreement frameworks, firms also navigate mechanisms such as the UK Extension to the EU-U.S. Data Privacy Framework. UK personal data may be transferred under this mechanism only to U.S. businesses with active certification [3]. Taken together, these overlapping regimes create a layered compliance map in which firms often design to the most restrictive or most easily auditable rule set, rather than to the most regionally efficient one.

Without explicit governance to reconcile these pressures, ring-fencing can unintentionally weaken the regional scale advantages that make North American cyber-physical ecosystems competitive. That risk matters economically. For North America, the business and policy challenge is therefore not just preventing formal localization mandates, but building interoperable privacy, supervisory-access, and compliance frameworks so firms can operate across the region as one integrated digital production space rather than three adjacent national silos. They should have the freedom to integrate with other economic zones while maintaining their core competitive advantage within the USMCA.

One solution approach is to create a Digital Special Economic Zone for North America.

From Physical to Digital Special Economic Zone

A physical Special Economic Zone (SEZ) is a geographically delimited perimeter where governments offer regulatory simplification, fiscal incentives, infrastructure support, and one-stop administrative services to attract investment and cluster industrial activity [4]. SEZs reduce coordination and transaction costs by concentrating both infrastructure and governance.

A Digital Special Economic Zone (DSEZ) extends this logic to data, software, and digital services. Instead of focusing only on customs and land-based industrial infrastructure. A DSEZ creates a trusted perimeter in which qualifying firms can exchange data across borders with lower compliance friction, clearer accountability, and higher security, while still meeting privacy and national security requirements. In effect, it institutionalizes “data free flow with trust” rather than defaulting to localization [5].

In North America, a DSEZ can be built as an overlay on USMCA’s digital trade architecture, which includes commitments supporting digital trade and reducing barriers (e-signatures, paperless trade), requires each Party to maintain personal information protection frameworks, and includes cybersecurity cooperation commitments.

The DSEZ’s value proposition is practical: cyber-physical manufacturing depends on a continuous digital thread comprising design files, software updates, machine telemetry, quality data, supplier documentation, and logistics signals. These must cross borders as seamlessly as parts and subassemblies. A DSEZ would standardize the “plumbing” for this digital thread and create predictable governance for disputes, audits, and upgrades.

A resilient platform emerges when these strengths are deliberately linked through: (1) integrated siting of data centers, industrial parks, and clean power; (2) interoperable digital governance that resolves the data trilemma for industrial data; (3) DSEZ-style trust frameworks alongside physical SEZs that reduce compliance friction; and (4) continuity institutions that keep cross-border flows moving under stress.

Conclusion

Ring-fencing physical and digital supply chains can promote national competitiveness and regional resilience when treated as an integrated design problem. We need to build trusted governance for data and platforms, investable rules for manufacturing and trade, and reliable energy infrastructure to power the digital economy. North America’s opportunity is to convert existing trade architecture into an operational ecosystem, one where energy, compute, and production reinforce one another, and where interoperability promotes resilience instead of increasing fragmentation.

End Notes

[1] Borchert, I., & Winters, L. A. (Eds.). (2021). Addressing impediments to digital trade. CEPR Press.

[2] Casalini, F., López González, J., & Nemoto, T. (2021). Mapping commonalities in regulatory approaches to cross-border data transfers (OECD Trade Policy Papers No. 248). OECD Publishing.

[3] Information Commissioner’s Office. (n.d.). How does the UK Extension to the EU-U.S. Data Privacy Framework work?

[4] United Nations Conference on Trade and Development. (2019). World Investment Report 2019: Special economic zones (Chapter IV).

[5] World Economic Forum. (2020, June 10). Data Free Flow with Trust (DFFT): Paths towards free and trusted data flows (White paper).