Days after U.S. President Donald Trump broke off trade talks with Canada, Ottawa suddenly rescinded its new three per cent digital services tax (DST). We all knew bargaining with Trump would be full of drama, threats and bluster. But Canadians had their elbows up.
Abandoning the DST so quickly, weeks before the July 21 deadline for a deal, is a worrying sign. What will Trump demand next? At any rate, given Trump’s deals with other countries (which are not binding, and leave U.S. tariffs in place), it’s not clear any deal (if reached) will be worth the paper it’s printed on.
The DST fiasco highlights an important but underappreciated dimension of Canada-U.S. trade: services. Trump rages about merchandise imports — stuff that arrives via container ships, trucks and pipelines. He blames other countries’ supposedly unfair practices for chronic U.S. trade deficits.
This narrative is economically laughable. U.S. deficits (which have persisted for 50 years) reflect ongoing capital flows to America, not mistreatment by foreigners.
Curiously, Trump seldom talks about services trade. But it’s the fastest-growing segment of trade — growing 60 per cent over the last decade (more than twice as fast as merchandise trade), and now making up one-quarter of all trade.
America’s home to the biggest banks, consultants and tech firms. Their CEOs sat in the front row at Trump’s inauguration. Their global reach and power generates large U.S. trade surpluses in services. That’s why Trump doesn’t talk much about services: his arguments about poor, mistreated America have no relevance.
The DST spat, however, pulls back the curtain on the importance of services in Canada-U.S. trade. According to the U.S. Census Bureau, Canada is the second-largest export market for U.S. services. American firms sold us $90 billion (U.S.) worth last year (and that doesn’t count many digital services which official statistics miss).
Sales of Canadian services to the U.S. are much smaller: $57 billion in 2024. That produced a $33-billion surplus for America.
If the tables were turned, a deficit that big would elicit foaming outrage from Washington. For example, consider Trump’s so-called ”Liberation Day” tariffs, announced April 2. They were imposed on merchandise from over 180 countries — and even some uninhabited islands!
Trump claimed these tariffs would offset tariffs and other unfair practices by U.S. trading partners. But the formula for calculating them horrified economists. Trump’s team took the bilateral U.S. deficit with each country, divided by the total volume of imports from that country. They applied two odd additional factors — which magically multiplied to equal one, thus having no impact on the final result. The resulting ratio was then divided by two, for no apparent reason (Trump said because the U.S. is “nice”).
The whole charade is nonsensical — and under pressure from financial markets, Trump quickly postponed them for 90 days (until July 9). But what if his theory applied to Canada-U.S. services trade?
America’s surplus equals 37 per cent of total Canadian services imports from the U.S. Because Canadians (unlike Trump) are genuinely “nice,” we’ll also divide that by two. That implies an 18.5 per cent tariff on all services purchased from the U.S. The DST’s three per cent levy (imposed on tech companies which usually evade normal income tax) looks positively easygoing, in comparison.
Incidentally, even on merchandise trade, Trump’s formula would imply a tariff of just eight per cent on Canadian exports — much smaller than what Trump has already imposed on our steel, aluminum and cars (and threatened on virtually everything else).
Even by Trump’s perverted logic, we should be taxing U.S. tech giants (and other service providers) far more than the baby-step DST. Canadian negotiators must start to wield the bargaining power that comes with our status as a huge and profitable market for U.S. services firms. Being ready to curtail their access to that market is how we’ll get some leverage, not by rolling out a welcome mat.
There’s no economic rhyme or reason to Trump’s demands. Trump’s whole trade war is not actually about trade (the DST, after all, applied to companies of any nationality, even Canadian). It’s about projecting imperial power, and further enriching the most profitable corporations (and the wealthiest individuals) in the world. It is daunting to confront that threat. But Mark Carney won a mandate from Canadians to do precisely that.
