Bill C-11, the government’s online streaming legislation, has caught the attention of the U.S. government, which raised it as a concern during a recent meeting between U.S. Trade Representative Katherine Tai and Canadian Minister of International Trade Mary Ng. The issue is cited in the U.S. readout of the meeting, though the Canadian readout of the same meeting notably excludes any reference to the issue. The readout specifically states that “Ambassador Tai expressed concern about Canada’s proposed digital service tax and pending legislation in the Canadian Parliament that could impact digital streaming services.” The reference to concerns with a digital services tax has been raised before, but the inclusion of Bill C-11 is new. The concerns may reflect Canadian Heritage Minister Pablo Rodriguez’s decision to regulate user generated content, an approach not found in any other country in the world.
The creation of a new trade irritant with Bill C-11 could prove extremely costly as it opens the door the possibility of hundreds of millions of dollars in retaliatory tariffs. Those tariffs can target any sector, meaning they could be levied on dairy, steel or other sensitive economic sectors. Minister Rodriguez has claimed that the bill could result in $1 billion in new revenues, though his own officials have since admitted that the number is only an “illustrative estimate.” Whatever the number, the CUSMA would allow the U.S. to levy tariffs of an equivalent commercial effect in the event of a violation of the treaty.
Article 19.4 of the CUSMA covers non-discriminatory treatment of digital products. It provides:
Article 19.4: Non-Discriminatory Treatment of Digital Products
1. No Party shall accord less favorable treatment to a digital product created, produced, published, contracted for, commissioned, or first made available on commercial terms in the territory of another Party, or to a digital product of which the author, performer, producer, developer, or owner is a person of another Party, than it accords to other like digital products.
2. This Article does not apply to a subsidy or grant provided by a Party, including a government-supported loan, guarantee, or insurance.
In addition, Article 32.6 provides a broad exception for the cultural industries, with Article 32.6(2) stating:
This Agreement does not apply to a measure adopted or maintained by Canada with respect to a cultural industry, except as specifically provided in Article 2.4 (Treatment of Customs Duties) or Annex 15-D (Programming Services).
So does that mean Canada can ignore the U.S. concern about the bill? Not exactly. First, the bill quite clearly prohibits discriminatory treatment of digital products, including potential payment requirements for companies that do not enjoy equal access to the benefits and the possibility of discoverability requirements that could lead to U.S. content being downgraded or discriminated against when compared to Canadian content. This has implications for the treatment of digital services, digital advertising revenues, and other digital commercial activities.
While Bill C-11 faces charges of discriminatory treatment, Canada could cite two responses: 19.4(2), which excludes subsidies or grants, and the 32.6 exception. The problem with the first argument is that Bill C-11’s discriminatory treatment of content extends beyond just subsidies or grants. In doing so, that exclusion does not apply to all of Bill C-11’s potential regulations. Assuming there is a violation, the 32.6(2) exception would kick-in, but it would not eliminate the ability for the U.S. to apply retaliatory tariffs. That is because Article 32.6(4) states:
Notwithstanding any other provision of this Agreement, a Party may take a measure of equivalent commercial effect in response to an action by another Party that would have been inconsistent with this Agreement but for paragraph 2 or 3.
Put simply, the agreement permits Canada to violate the non-discrimination provisions for the cultural sector, but it grants the U.S. the right to levy “measures of equivalent commercial effect” in response. This provision is often referred to as a culture “poison pill” as it designed to discourage the use of the exemption. Since the provision does not limit retaliation to the cultural sector, the U.S. may levy equivalent tariffs on its choice of Canadian products or services. This was its strategy when it responded to a French plan to levy a new digital tax, which led to threats to impose US$2.4-billion in tariffs against French goods such as wine, cheese and handbags.
From a Canadian perspective, the CUSMA cultural exemption allows for discriminatory policies but at a price with Bill C-11 opening the door to U.S. retaliatory measures that would be designed to match any new benefits dollar-for-dollar. With the U.S. now signalling its concern with the legislation, the risks of pushing ahead with the unprecedented regulation of user content just got much bigger.