The U.S. President Joe Biden’s visit to Ottawa this week has begun to place the spotlight on the mounting tensions over digital policy. For months, Canadian officials have not only been dismissive of the issue, but – as this week’s fishing expedition into Google and Facebook demonstrates – have not shied away from making the issue front and centre. I have been posting about trade-related risks with Canadian digital policy for months, noting that the risks are real and could result in billions in retaliatory tariffs that hits some of Canada’s most sensitive sectors. Indeed, this issue has been raised at every major meeting between senior trade officials for the past year. Is retaliation likely to happen? Certainly not immediately, but the longer the issues fester, the greater the impediment to advancing Canadian trade priorities. As Scottie Greenwood notes, “these are top-of-mind issues. They are not a small obscure issue.”
So what are the issues? I see at least four: digital services tax, Bill C-11, Bill C-18, and the undemocratic fishing expedition launched by the Standing Committee on Canadian Heritage that exclusively targets U.S. critics of Bill C-18 and not the Canadian organizations who stand to benefit and may have engaged in questionable practices. It should be noted that these issues raise a combination of potential direct trade action for violations of the Canada-U.S.-Mexico Trade Agreement (CUSMA) and policies that may not violate a trade agreement, but could still spark U.S. retaliation.
At the very top of the list is likely Canada’s plans to implement a digital services tax next year (this is distinct from digital sales taxes, which is already in place). I’ve covered this issue on many blog posts and Law Bytes podcast episodes (here and here). The issue dates back to the 2019 election campaign with a campaign promise to institute a digital services tax primarily designed to target large U.S. technology companies that generate significant revenues in Canada from online advertising and user data. The policy has been adopted in several other countries, repeatedly sparking a response from the U.S. that threatens to retaliate with tariffs on sensitive sectors of the economy. For example, after France announced plans for a similar tax, the U.S. threatened to levy billions in tariffs on French products. In 2021, the OECD reached an agreement on addressing the longstanding concern regarding multinational companies, particularly tech companies, paying their fair share of taxes on revenues earned from online advertising, online marketplaces, and user data. The agreement included a provision in which all parties agreed to remove digital services taxes and not introduce any new measures.
Nevertheless, Canada has said that it will move ahead with a DST next year if by that time the OECD agreement has not taken effect. The Canadian plan would apply a three per cent tax on revenues from four sources: online marketplace services revenues, online advertising services revenues, social media services revenues, and user data revenues. Canadians can expect to hear more about this issue in next week’s budget. Note that this is not a CUSMA issue. Rather, it is straightforward tax dispute with significant dollars at stake. The U.S. has pushed back against similar plans elsewhere and can be expected to do the same here.
The Bill C-11 trade concerns arise from several potential violations of CUSMA, discussed in this post. The takeaway is that there are several provisions in the bill that – depending on CRTC implementation – could result in discriminatory treatment against U.S. companies. The basic starting point for the trade deal is national treatment and non-discrimination for U.S. and Canadian entities. Given the prospect of Cancon rules that could result in greater benefits for Canadian firms while requiring U.S. entities to still pay into the system or that U.S. streamers could face content requirements not applied to Canadian services, there is a risk of a trade challenge. Canada could respond by acknowledging that its rules violate the non-discrimination rules but that CUSMA has a carve out for the cultural sector. In other words, Canada is permitted to violate the agreement with Bill C-11. The problem with that approach is that the agreement still gives the U.S. the right to retaliate against the violation, meaning Canada can breach the national treatment provisions but would still be on the hook for paying an equivalent in retaliatory tariffs.
Bill C-18 also raises the possibility of a trade challenge. Late last year, the Heritage committee expanded the rules associated with eligible news businesses in the bill, bringing hundreds of broadcasters into scope merely based on holding a CRTC licence. These broadcasters may not even be required to produce news, yet have nevertheless been deemed as eligible news businesses under the law. The trade risk associated with this approach is that only Canadians can hold one of these CRTC licences. In other words, Bill C-18 now deems hundreds of Canadian broadcasters eligible under the law but excludes their U.S. counterparts, many of whom may be border broadcasters with Canadian audiences. The change not only undermined the premise of the bill that is ostensibly about facilitating access to news, but may have also opened the door to a trade challenge.
Finally, there is the fishing expedition into Google and Meta as retribution for opposing Bill C-18. There is ample reason to believe that some Canadian media organizations have engaged in questionable lobbying tactics with a blurring of editorial and business that have led to non-disclosed conflicts. Yet the committee seems uninterested in those issues. Instead, it is targeting the two U.S. companies with demands that could still cover the private communications of Canadians. As Greenwood noted earlier this week, “This feels like a gratuitous shakedown targeted at the U.S. If the roles were reversed and the U.S. legislature was targeting Canadian companies, there would be an outrage in Canada.” That sounds about right and helps explain why digital policies could crash the party at this week’s U.S. Presidential visit.
There is no sign of “mounting tensions over digital policy” in regard to Bill C-11 except among those, like Michael Geist, who seek to stir the pot in opposition to the legislation. Obviously, this includes US lobby groups, such as the United States Chamber of Commerce, the Computer and Communications Industry Association, and the Software & Information Industry Association, who signed the March 20th letter to Joe Biden. The “potential” violations of CUSMA resulting from Bill C-11 identified by Michael Geist are not real — depending as they do on a distorted view of what the CRTC “might” do in the way of implementation. As long as the CRTC’s regulations are applied uniformly to digital broadcasting undertaking, regardless of national origin, there is no valid basis for a challenge under CUSMA.
The right to levy retaliatory measures of “equivalent commercial effect” in response to Canadian cultural policies has been in our trade agreement with the United States since the Canada-US FTA of 1987. The United States has never undertaken such retaliatory measures.
Regarding your statement ‘depending on a distorted view of what the CRTC “might” do’, well that is the crux of it all. The government rejected some amendments because they meant that the government (or rather the Governor in Council, meaning the PM) could no longer direct the CRTC to make certain changes by regulations. There are a number of places where governments in Canada have effectively made changes to Canadian law by way of regulation; for instance the current government a couple of years ago used it to change the Firearms Act to change the definition of what constitutes a “Prohibited” firearm that capture previously “Unrestricted” firearms. This included firearms with a muzzle energy > 10kJoules and firearms that could be modified to make them automatic. The problem with the latter is that modifying a firearm to make it automatic is already a criminal code violation.
As a result one cannot look at the current wording of a bill but rather one needs to look at the loopholes in the bill that would allow the government to extend its reach beyond what was originally sold to the public as, and without resorting to that pesky requirement to pass something through Parliament to change the scope should it become law.
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The U.S. Trade Representative is not a lobby group.
This is from the U.S. Trade Representative, at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/july/readout-ambassador-katherine-tais-meeting-canadas-minister-international-trade-export-promotion
“Additionally, 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 very next line is a concern about Canada’s “unfairly subsidized and dumped imports” of softwood lumber, a trade issue that has been around for decades. If I was on their side, I would jump at the chance to introduce unchallengeable tariffs in this area as countervailing against the culturally protected regulations from our side. And – note that concerns about “non-tariff barriers” can also be raised, which is what I would use to justify such tariffs even the the CRTC is only requiring engagement from these US companies. Responding to the CRTC takes time and money, and that can be sufficient basis to launch such claims.
If you were on their side, you would be safeguarding and promoting the sale of US goods and services in Canada – which is the mission of the U.S. Trade Representative. It remains that the USTR’s statement in July 2022 and the letter from US lobby groups in March 2023 are hardly a sign of “mounting tensions” over digital policy. It seem to me that the web giants such as Facebook, Amazon and Tik Tok are creating mounting tensions of their own in Washington..,
Remember that paragraph 6 of the Preliminary Draft Policy Direction (sic) to the CRTC dated August 2020 in relation to Bill C-10 (C-11’s predecessor) specified that “The CRTC is directed to regulate and supervise the Canadian broadcasting system in a manner that is flexible, fair, and equitable, and which… (g) ensures that non-Canadian online services receive treatment no less favourable than comparable Canadian online services.” We should expect the same kind of direction to come in regard to C-11.
What’s going on here! Ukraine war, trade tensions, big bank collapse…
Great information, thanks for sharing.
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