Why Canada's digital tax concession won't solve trade tensions with US

Canada's decision to scrap a digital service tax on US tech companies this week was aimed at safeguarding trade discussions with President Donald Trump. 

However, a more significant point of contention in these ongoing negotiations could be agriculture.

According to analysts, Canadian Prime Minister Mark Carney found it politically straightforward to abandon the digital services tax, Reuters said in a report. 

In contrast, even discussing Canada's supply management system for dairy, eggs, and poultry presents a much greater challenge.

This system, in place since the 1970s, rigidly regulates supplies by limiting production and curbing imports through burdensome tariffs.

After a mid-June meeting, Carney and Trump had set a target of July 21 for a new economic agreement. 

Trump’s threats

However, Trump threatened to impose new tariffs and derail talks on Friday via a Truth Social post, citing the digital service tax, which was slated to begin on Monday. 

In the same post, Trump also criticised dairy product tariffs. Both Carney and Trump have since confirmed that negotiations have resumed following the removal of the tax.

"Trump is basically one Truth Social post away from creating political chaos in Canada," Sylvain Charlebois, a food industry analyst and professor at Dalhousie University was quoted in the report.

Despite being a contentious issue during Trump's first term, Canada's supply management system remained intact through the 2020 US-Mexico-Canada Agreement (USMCA). 

However, by March of his second term, Trump again threatened reciprocal US tariffs on dairy, citing Canada's "tremendously high" tariffs.

The USMCA did allow for limited duty-free quotas for US dairy products. 

Nevertheless, tariffs on quantities exceeding these quotas can surpass 200%. For years, Washington has unsuccessfully challenged Ottawa's method of allocating these USMCA dairy quotas.

Further discussions

Although some viewed Canada's decision to drop the digital services tax as a sign of weakness, the tax itself was not widely known to many Canadians, and its removal did not create significant political controversy.

Conversely, just before the summer break, parliament unanimously amended legislation to safeguard supply management from being included in trade negotiations, a move that received full support from all political parties in the House of Commons.

According to trade experts, the recent legislation would not prevent Canada's negotiators from discussing the matter.

Tyler McCann, managing director of the Canadian Agri-Food Policy Institute, believes many farmers falsely assume the legislation is binding. 

He stated: 

However, Gabriel Brunet, spokesperson for Canada-US Trade Minister Dominic LeBlanc, issued a statement affirming the federal government's unwavering support for the Canadian dairy industry.

The statement said:

Significance of Canada’s dairy industry

Canada's dairy industry holds significant sway in Ottawa, largely due to the concentration of dairy farms in Quebec and Ontario. 

These populous provinces are considered crucial for securing a federal election victory.

Notably, supply management within the dairy industry has persisted despite various international trade agreements. 

It survived concessions made to Trump during his first term and remains intact within both the USMCA, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Canada-EU trade deal, as highlighted by McCann.

Trump's Friday statement was 'not supported by the facts,' according to the Dairy Farmers of Canada, a lobby group. 

They highlighted that the US dairy industry exports more American dairy products to Canada than Canada sends to the US.