Canada makes a first concession to Donald Trump

Lately Mark Carney has profited from firmly ditching his predecessors’ policies. At the start of the year, during his campaign to run the Liberal Party, he promised to throw out the consumer-facing portion of Canada’s carbon tax and backed smoothly away from progressive positions that had been miring the Liberals in culture wars. This made him look pragmatic and serious. It helped him win the party leadership and take the Liberals to a rare fourth term in power.

On June 29th he performed a similar manoeuvre, jettisoning Canada’s digital-services tax (DST), enacted in the last parliament, hours before it was due to come into effect. On June 27th Donald Trump had threatened to abandon trade talks if the DST was not dropped. Mr Carney was swift to oblige. The levy would have collected 3% of local revenue from tech firms operating in Canada, including American giants like Google, Uber, Meta and Amazon. But unlike Mr Carney’s previous reversals, scrapping the DST in exchange for the privilege of merely negotiating with Mr Trump may prove costly.

After the fact, Mr Carney suggested he always expected to dump the DST as part of a larger deal with Mr Trump, which he hopes will remove American tariffs of 50% on Canadian steel and aluminium and 25% on cars. But he was surely counting on dropping the DST as part of an agreement that eliminated those tariffs, not as mere table stakes to keep talking.

Other countries have refused to eliminate their digital-services taxes in the face of Mr Trump’s demands. The British prime minister, Keir Starmer, was the first leader to make a pact to reduce some American tariffs, but Britain’s 2% DST remained in place. France was the first European country to impose a DST, in 2019. It has signalled it will not rescind the tax unless an agreement on the taxation of multinationals is reached by the OECD, a club comprised mainly of rich countries.

Mr Trump’s administration was not the first to grumble about the DST. His predecessor, Joe Biden, complained about it to Justin Trudeau, Canada’s previous prime minister. So how did Mr Trump’s vexation cause a law passed in Canada’s parliament to be summarily scrapped?

It was probably the fact that his tariffs are already hurting Canadian workers. Unemployment rose to 7% in May, its highest rate (barring the pandemic years) since 2016, according to Statistics Canada. Exports of cars to the United States fell by 23% month-on-month in April—when Mr Trump’s tariffs were first applied to vehicles—following cuts in production. Unifor, the union that represents most of Canada’s auto workers, says 6,000 of its members have been laid off due to slowed or halted production. In steelmaking, 1,000 Canadian workers have already lost their jobs. The damage is showing up in the overall trade figures too. Exports from Canada to the United States have been collapsing; goods exports over Canada’s southern border are down by 26% since their peak in January.

Mr Trump’s spokesperson, Karoline Leavitt, bolstered his reputation as an ungracious winner after Mr Carney’s concession. “It’s very simple: Prime Minister Carney and Canada caved to President Trump and the United States of America.”

None of this should stick to Mr Carney if he can fashion an agreement with the United States that eliminates or significantly reduces the tariffs by July 21st, the deadline both men have set for their bilateral talks. But there is no guarantee that this concession will stifle further demands. Mr Trump has a record of exploiting weakness, and Canada’s economy is one tenth the size of America’s. He has also offered shifting reasons for crippling Canada with tariffs, from minuscule flows of fentanyl, to a trade deficit built on America’s thirst for Canadian oil, or protectionist measures that insulate Canada’s dairy farmers from American competition.

Nor has he given up his biggest designs on Canada. Canadians can pay tariffs and $71bn for ballistic-missile defence under Mr Trump’s “Golden Dome”, or they could agree to become the 51st state. “It’s up to them,” Mr Trump shrugged, as he left the G7 summit in Alberta on June 16th. ■