What if killing Canada's digital services tax is just the beginning for Donald Trump?

Hamilton Spectator

a day ago

OTTAWA—Call it a prudent climbdown, a show of weakness, or an unavoidable concession. There are several ways to look at Prime Minister Mark Carney's 11th-hour decision to cancel the federal government's Digital Services Tax last weekend.
But what if it's also a tangible example of exactly what Carney warned would happen?
The Liberal leader won a minority government on April 28 with a pitch that no one was better placed than himself to protect Canada from Donald Trump. The U.S. president has mused about using 'economic force' to annex Canada. As if taunting or teasing this country, he questions why it exists, and keeps floating the prospect of it becoming the '51st state' of the U.S.
Two days before the election, Carney spelled out how he understood all of this.
'The U.S. is trying to put economic pressure on us to gain major concessions, to the extreme of a level of integration of our countries that would impinge our sovereignty,' Carney said that day in King City, north of Toronto.
Carney, in his final campaign conference, ruled out any prospect the U.S. would use military
Flash forward to last week. There was Trump,
posting
on social media that Canada's incoming Digital Services Tax — a policy that would force American tech giants and other firms, including Canadian ones, to pay up — was nothing short of a 'blatant attack' on the United States. Trump declared he had cut off all negotiations to resolve the trade war that started earlier this year with his wave of tariffs on Canadian goods. In other words, Canada's most important commercial and military partner, the destination for 76 per cent of
all exports last year
, was willing to ditch talks and dictate terms that could jeopardize thousands of jobs and hundreds of billions of dollars in economic activity. All over a domestic policy the Americans didn't like.
Barely 48 hours later, shortly before midnight on a Sunday, the government announced the tax was dead. Not only would Canada not implement the policy as planned, it would repeal the 2024 law that created it.
Is this Trump using economic pressure to force Canada's hand?
'It is exactly that,' said Lawrence Herman, a veteran trade lawyer and special counsel with the firm, Cassidy Levy Kent.
'It's an example of, on a particular issue, how much pressure can be brought to bear to force Canada to abandon not only a policy, but a law that has been in force for 18 months.'
In Herman's view, the decision looks like a 'significant retreat' by the government, which shows 'how dependent we are on a reasonable relationship' with Canada's largest trading partner. Other policies that Trump has complained about, such as the supply management system for dairy and poultry, could be next, he said. Pete Hoekstra, the U.S. ambassador to Canada,
told the CBC
this week that he has a 'strong belief' Canada could water down that system by changing a law designed to protect it if that becomes part of a new trade deal.
'It's not a particularly good start to this so-called new economic and security relationship,' Herman said.
He was referring to Carney's stated goal of talks that are now continuing under an agreement struck at the Group of 7 summit in the Alberta Rockies last month to strive for a deal to redefine the relationship by July 21. Others have been harsher in their judgment. Lloyd Axworthy, a former Liberal foreign affairs minister, posted online that Carney was acquiescing to Trump in a way that contradicts his 'elbows up' mantra on the campaign trail.
'Forget any dreams of a more sovereign, self-directed Canada. We're doubling down on the corporate cosiness and U.S. dependency that's defined our last half-century,' he
wrote
on Substack.
Axworthy did not respond to an interview request Thursday.
For Jean Charest, a former Quebec premier who sits on the government's Canada-U.S. advisory council, the situation illustrates the 'chaos' of dealing with Trump, whose administration is grappling with trade talks and tariffs threats against most countries on the planet. This meant that Carney's government was operating 'in a world of very bad choices,' Charest said. Deciding to scrap the Digital Services Tax, in that context, was 'certainly a legitimate choice,' he said.
'We are not in an ordinary world of negotiations,' Charest added. 'It would be nice to think, 'You give, I give ... we compromise.' It doesn't work that way with Donald Trump, and we're making our way through this by trying to protect essentially what's the most important for us in the short term, and that's a negotiation that has some legs.'
Charest noted that there was opposition inside Canada to the Digital Services Tax, which would have applied back to 2022 with a three per cent tax on Canadian revenues from digital services companies with more than $1.1 billion in global earnings and $20 million inside Canada. The U.S. also pushed back against the policy when Joe Biden was in power.
David Pierce, vice-president of government relations with the Canadian Chamber of Commerce, said his business lobby group felt the Digital Services Tax should be paused. He also said it would have been wrong to proceed with it after the U.S. dropped a controversial provision from Trump's major budget bill last week: the so-called 'revenge tax' that would have hit the U.S. assets of foreign businesses and individuals.
That decision came as the G7 agreed to exempt American firms from a co-ordinated effort to ensure corporations pay a minimum tax, which was 'absolutely a win' for the U.S.
Even so, Pierce said Canada likely had no choice but to drop the policy, given Trump's exploitation of Canada's 'weakness' — its major economic reliance on trade with the U.S.
'We just hope that this now paves the way for a good renewed deal,' said Pierce.
The ultimate goal of the federal government in that deal, at least publicly, has been to return to the terms of the Canada-United States-Mexico Agreement (CUSMA), which Trump signed in 2018 during his first term, after disparaging North American free trade as unfair to his country. That would mean lifting the rounds of tariffs Trump has imposed since the winter, with import duties tied to concerns about drugs and migration over the border, and others that Trump slapped on Canadian autos, steel and aluminum in a bid to promote those sectors in the U.S.
Canada has responded with countertariffs on its own that the government says hit more than $80 billion worth of American imports to Canada.
Canada's lead trade negotiator with the Trump administration, Ambassador Kirsten Hillman, was not available for an interview this week, the embassy in Washington told the Star.
Charest, however, said he believes it is possible that Canada could accept some level of tariffs in a July 21 deal, so long as they have no material effect. Such 'zero-effect' tariffs could only kick in at levels of trade that Canada doesn't or likely won't achieve, for example.
Yet there's a question of how much any deal can be relied upon, so long as Trump is in the White House, unilaterally imposing tariffs that Canada views as 'illegal' violations of the 2018 trade deal.
'Trump is arguing about supply management and the (Digital Services Tax), but it's the U.S. that is in flagrant breach of its trade obligations. It's abandoned the CUSMA, virtually behaving as if it did not exist and the U.S. signature has no meaning,' Herman said. 'So we are in a world where rules and the rules-based system, and the stability that that treaty was supposed to provide, have gone by the board.'
That means, at least for now, the Carney government is operating in a world where Canada's foremost ally, the colossus to the south, will use economic force to get what it wants.