Canadian Prime Minister Mark Carney handed US President Donald Trump a win in the hope of making bigger gains in trade negotiations.
Carney’s new government ditched its 3% digital services tax on technology companies on Sunday night, hours before it was set to come into effect. Trump had denounced the tax as “egregious” and suddenly halted all trade discussions on Friday. Carney decided he needed to do a U-turn to restart the talks.
“We’re making progress towards a final deal. There’s more to be done, to be clear,” he said Monday in Ottawa.
Canada and the US have set a target of reaching an accord by July 21. But the 60-year-old prime minister still faces a massive challenge in getting to his ultimate goal — to keep intact, as much as possible, the North American trade agreement that allows mostly tariff-free trade across the continent.
“The president likes tariffs. I think he likes the revenue that’s generated from tariffs,” Alberta Premier Danielle Smith said in an interview. “I think it’s that simple.”
Trump has placed import taxes of 50% on foreign steel and aluminum, along with levies on cars and trucks, in what Canada says is a violation of the 2020 US-Mexico-Canada Agreement signed by Trump. Removing all of those tariffs will be difficult, given the administration’s hardened stance and what other US trading partners are doing.
The European Union, for example, is willing to accept a trade arrangement with the US that includes a 10% universal tariff on many of its exports, but wants the Trump administration to commit to lower rates on industries such as pharmaceuticals and aircraft, people familiar with the matter told Bloomberg News.
One potential approach would see Canada agree to US tariffs on certain products but negotiate quotas below which a lower tariff rate would apply. That would be similar to what British Prime Minister Keir Starmer achieved in a framework that allows UK manufacturers to sell as many as 100,000 vehicles to the US at a 10% tariff rate. A 25% levy remains in place on British steel, however — a warning sign for Canada.
‘Cards to Play’
Canada still has leverage in areas like energy, where the US depends on its northern neighbor, said former Quebec Premier Jean Charest, who’s now a member of the government’s advisory council on Canada-US relations. “We do have cards to play. How we play them and when we play them is a question of tactics and strategy,” he said.
Getting rid of the worst effects of tariffs is the real aim, he said. “It’s doable, and there may be headline tariffs that are not applicable because there are quotas, because there’s exceptions,” Charest said.
A spokesperson for Dominic LeBlanc, the minister responsible for Canada-US trade, declined to provide answers to questions from Bloomberg News, pointing only to Carney’s earlier comment to reporters.
Canada’s economy can handle some tariffs if a deal brings greater certainty they won’t be suddenly increased, according to economists.
“There’s a tariff effect, but there’s the uncertainty effect that may be even even bigger because of the hit on business investment, on hiring decisions and so on,” said Jimmy Jean, chief economist at Desjardins Group.
Desjardins estimates that the effective US tariff rate on Canadian goods sits at around 7%. Outside of steel, aluminum and vehicles, most Canadian products are currently exempt because they’re being shipped under the rules of USMCA.
“Let’s say what we have is what we get, and we can move on from this. I think we will have a positive response from an economic standpoint,” said Jean, though he’s still concerned about some sectors and regions, including Ontario and Quebec. Trump’s tariffs are weighing on manufacturers, driving up unemployment and likely tipping the economy into a contraction in the second quarter.
“The key for Canada is going to be specific sectoral tariffs,” said Sean Stephenson, a trade lawyer at Dentons in Toronto. “There’s a slew of additional investigations that are in progress in the US on things like critical minerals, pharmaceuticals, semiconductors, lumber, all sort of key elements to Canada. So how do we manage those sectoral tariffs?”
Some opposition politicians panned Carney’s move to give in on the digital services tax.
“It’s a kind of chicken-dance government,” said Garnett Genuis, the Conservative Party’s shadow minister for employment. The New Democratic Party said it was “pure caving in to Trump and his billionaire friends.”
But others suggest Carney was just being pragmatic. “It’s all part of the broader negotiation. There was more theatrics than we needed to get there. Addressing the DST has always been a priority for the US in the negotiations,” said Brad Wood, senior director for trade and innovation policy at the Washington-based National Foreign Trade Council. “There’s going to have to be concessions.”
Canada has also beefed up border security to prevent fentanyl flows and has pledged to meet the North Atlantic Treaty Organization obligations on defense spending — addressing two irritants of the US administration.
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