Giving Donald Trump Some of His Own Medicine on Services Trade

The Canadian government recently abandoned its new Digital Services Tax (DST), which since January 1 2024 had collected a 3% levy on all revenue in Canada from sales of digital advertising or marketplace services. The companies which dominate this industry (like Google, Meta, Amazon, or AirBnB) typically avoid most or all normal corporate income tax, by shifting revenue and profits from countries like Canada to tax havens where taxes are low or zero. As a result they pay little toward Canada’s social and physical infrastructure (vital to their own businesses’ success), despite the harm they are doing in many areas of life (such as undermining established mass media). The government abandoned the DST after U.S. President Donald Trump broke off trade talks.

In this commentary, originally published in the Toronto Star, Centre for Future Work Director Jim Stanford argues the DST spat pulled back the curtain on an underappreciated dimension of Canada-U.S. trade: services. Canada incurs a large annual deficit in services trade with the U.S, because of the dominance of U.S. firms in key transborder services sectors – including the giants who will now avoid paying the DST. Services trade is the fastest-growing component of international trade. As Canada gears up to fight the Trump tariffs, leveraging their huge profits in Canada should be part of the negotiating strategy – rather than laying out a welcome mat.

For more detail on the importance of services in Canada-U.S. trade, and the consequent leverage that the Canadian government could exercise in trade talks with Trump, please see our previous report, Who’s Subsidizing Whom (especially pages 16-19).

Canada’s now-abandoned digital services tax was never enough to begin with

By Jim Stanford

Days after U.S. President Donald Trump broke off trade talks with Canada, Ottawa suddenly rescinded its new 3% Digital Services Tax (DST).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% 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% 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% tariff on all services purchased from the U.S. The DST’s 3% levy (imposed on tech companies which usually evade normal income tax) looks positively easy-going, in comparison.

Incidentally, even on merchandise trade, Trump’s formula would imply a tariff of just 8% 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.