Canada’s Digital Policy Undermines Ties With Its Most Important Trade Partner and Global Collaborator
This week, Canada’s Parliament passed a new discriminatory tax into law that targets largely U.S. companies in the digital sector while sparing domestic giants in competitive sectors. The policy, a digital services tax (DST) that the United States has opposed on a bipartisan basis, is the latest entry in a recent trend of one of the closest allies and trading partners of the United States targeting one of its strongest exports.
In just the last year, Canada has enacted laws targeting the revenue of U.S. digital services exporters in the online streaming space as well as services that provide information and host links to news articles. In total, the three laws will cost U.S. digital exporters billions of dollars annually and are predicted to lead to thousands of job losses, while also imposing onerous requirements that will result in difficulty delivering online services and operating in the Canadian market, harming Canadian consumers and businesses that depend on digital technologies.
The extent to which Canada’s targeted actions that hinder U.S. digital exports are out of step with U.S.-Canada bilateral relations cannot be understated. Trade in goods and services between the two countries was estimated at $908.9 billion in 2022, with imports to the United States totaling $481.2 billion—a total amount, by way of comparison, a little under 9 times the U.S. trade with France. The two countries have one of the strongest and most comprehensive free trade agreements in the world, certainly among those the United States is party to, in the shape of the U.S.-Mexico-Canada Agreement (USMCA).
In the diplomatic space, the two are key partners leading advances in shared policy priorities in the Group of Seven (G7), the Group of 20, the World Trade Organization, and several initiatives in the Americas. This year, a major effort of the Canadian government has included touting U.S.-Canada ties through “Team Canada” meetings with American counterparts, collaborating on supply chain resiliency and digital governance. Next year, Canada will hold the G7 Presidency, where it will seek to lay out shared values on trade, tax, and digital policy between the world’s industrialized democracies, first and foremost with the United States.
Canada’s work undermining U.S. digital exports to its market are therefore increasingly out of step with this broader relationship.
Make no mistake, these laws hit one of the most important group of exporters in the United States economy. U.S. digitally-enabled services exports to Canada were $46.7 billion in 2022, representing 65.6% of all U.S. services exports to Canada that year. As detailed recently in a Council of Economic Advisers (CEA) post, the digital economy is a powerhouse of the U.S. overall economy, particularly the export of digital services, the growth of which has driven the U.S. overall services trade surplus since the early 2000s. The CEA post noted that, with the right digital trade policy, the United States is “poised to lead the growth in intangible flows given that the digitally-enabled services sector is one of the highest-paying and innovative segments of the economy.” The presence of these services in Canada also drives investment in domestic audiovisual production, improves efficiency of advertising for Canadian companies, and facilitates the export of both Canadian goods and services to the rest of the world.
The laws in question coming from Canada are the digital services tax, the Online Streaming Act, and the Online News Act. Each law is crafted to largely target U.S. and other foreign providers while sparing local incumbents, with revenues leveraged to support domestic political priorities. The DST is tailored through the size thresholds and definitions of digital services to leave out Canadian brick-and-mortar, broadcasting, and other entities that are competitors to U.S. suppliers in the advertising space. The Online Streaming Act, by imposing contribution requirements and broadcast-era discoverability regulations on internet-enabled streaming services to support and promote rigidly-defined “Canadian content,” discriminates against non-Canadian content and providers that cannot own or access funds to develop such content by the government’s own definitions. And the Online News Act’s mandatory compensation by online service providers to news publishers for online news links threatens the open internet and amounts to unfair investment obligations.
For the latter two policies, Canada does have the ability under USMCA to claim they are to protect cultural industries and exempt them from USMCA commitments, but the United States would then be empowered by the agreement to obtain compensation from Canada of equal value that Canada would not be able to challenge. This tit-for-tat outcome is unhelpful to ties between the two countries and does nothing to alleviate the harms experienced by U.S. providers in Canada, nor those by the potential Canadian firms that are recipients of U.S. retaliation. Indeed, it is a right not intended to be liberally exercised, but, rather, a tool to dissuade bad conduct in the first place. A fair investment environment for firms from both countries is a more productive result for all.
Taken together, the landscape for U.S. digital services providers in Canada is becoming increasingly difficult to navigate. And it is not only U.S. exporters that benefit from the protections guaranteed by USMCA and open trade between the two countries—Canadian exporters and producers enjoy vast benefits from access to the U.S. market. That relationship is worth nurturing and protecting for all stakeholders, particularly in a world that appears to be increasingly moving towards “friendshoring,” where countries seek to center supply chains on trade with like-minded allies. However, once violations to agreements begin to accrue, the integrity of the agreement wanes. To ensure the relationship between these two great partners remains strong, it will take addressing these concerns to a key U.S. export in a massive market.
