The first three posts in this series on Bill C-11 have focused on the risks of regulating user content, the risks to Canadian creators, and the risks of increased consumer costs and less competition. Today’s post identifies another risk with the bill: the prospect of a trade challenge under the CUSMA that could lead to billions on tariff retaliation that target some of Canada’s most important economic sectors. The possibility of a U.S. trade battle over the bill is no idle speculation even if downplayed this week by an official from Global Affairs. This summer, U.S. Trade Representative Katherine Tai raised the issue directly with Canadian Minister of International Trade Mary Ng. While the Canadian readout of the meeting notably excluded any reference to the issue, it was cited in the U.S. readout of the meeting:
“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 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. Canadian Heritage Minister Rodriguez has claimed that the bill could result in $1 billion in new revenues (a figure debunked by his own officials), but 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.
There are several grounds for a potential challenge. First, Article 19.4 of the CUSMA covers non-discriminatory treatment of digital products. It provides:
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.
Given the prospect of Cancon regulations that would limit the benefits for foreign streaming services, Canada may be in breach of this obligation.
Second, Article 14.10 limits performance requirements:
No Party shall, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party
in its territory, impose or enforce any requirement, or enforce any commitment or undertaking:
(a) to export a given level or percentage of goods or services;
(b) to achieve a given level or percentage of domestic content;
(c) to purchase, use, or accord a preference to a good produced or a service supplied in its territory, or to purchase a good or a service from a person in its territory.
If the CRTC’s discoverability rules require a certain percentage of Canadian content, Canada could be offside this obligation.
Third, there are the national treatment obligations in Article 14.5:
1. Each Party shall accord to investors of another Party treatment no less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.
2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.
But Bill C-11 does not treat foreign streamers and domestic broadcasters equally. For example, foreign streamers may face obligations to make French-language content available. There is no such regulatory obligation on equivalent Canadian services, again raising the possibility that Canada would be in breach of its treaty obligations.
Supporters of the bill will point to Article 32.6, which provides a broad exception for the cultural industries. Article 32.6(2) states:
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. 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. .
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. While some have sought to argue that retaliatory measures have always been available, Bill C-11 (and Bill C-18) are clearly more sensitive and costly than previous legislative reforms. With the U.S. signalling its concern with the legislation, the risk of a trade challenge and the tariff retaliation that could follow is very real.