CUSMA | The Silo

From: Chris Christie
To: Nervous Canadians
Date: November 6, 2024
Re: Canada Should Embrace the Opportunities of a Second Trump Presidency

A second Donald Trump presidency, if approached strategically, offers Canada more opportunities than risks.

Donald Trump’s campaign rhetoric is often erratic, of that there is no doubt. And I, as you might have heard, am not a Donald Trump advocate.

But what happens in governance under Trump is a far cry from his provocative online posts or bombastic speeches, as I argued in the latest C.D. Howe Institute Regent Debate. His track record speaks for itself, and whether you choose to acknowledge it or not, Canada has already benefitted from Trump-era policies.

Let’s take the US-Mexico-Canada Agreement – CUSMA in the Canadian rendering – as a prime example. Trump’s renegotiation of NAFTA wasn’t just about putting “America first.” It was about reshaping trade relationships in North America to benefit all three countries. The agreement secured economic ties between the US, Canada, and Mexico in a way that ensures long-term growth for all parties involved.

Trump views that agreement as one of his crowning achievements, and rest assured, it’s not going anywhere. It is a durable platform for growth in North American trade.

Looking forward, the question isn’t whether Trump is unpredictable. It’s whether Canada can recognize and leverage the opportunities his policies present.

With Trump re-elected, his administration will continue to focus on policies that drive economic growth – lower taxes, reduced regulations, and energy independence. A booming US economy means a stronger Canada, as our two economies are deeply intertwined. When one prospers, the other stands to benefit through increased trade and investment.

Trump’s approach to trade – especially tariffs – has often been misunderstood. Yes, his speech-making is aggressive. But we need to separate rhetoric from reality. Trump’s actual policies were more measured than many anticipated. And they will be again.

The real adversary for Donald Trump is China, not Canada. If Trump tightens the screws on China’s unfair trade practices, it could create space for Canadian companies to flourish on a more level playing field, particularly in sectors like technology and intellectual property, where China has been a major violator.

Trump’s economic philosophy – focused on cutting taxes and regulations to unleash private-sector growth – should also serve as a wake-up call for Canada. Under Prime Minister Trudeau, Canada has taken a ruinous policy road, with higher taxes and more government intervention in business.

But what if Canada aligned itself more closely with the pro-growth policies Trump advocates?

Imagine the potential for Canadian businesses if they operated in an environment with fewer barriers to growth. A thriving private sector in Canada would strengthen the economy and create more opportunities for collaboration and trade with the US.

I won’t pretend that a second term comes without challenges. But instead of focusing on the personality occupying the Oval Office, Canada should focus on how to navigate the opportunities presented by our shared future as neighbours and trade partners.

It’s time to stop seeing Trump as an unpredictable threat and start recognizing the potential opportunities his policies can bring. Canada stands to benefit if it plays its cards right. For the Silo, Chris Christie.

Chris Christie was the 55th Governor of New Jersey and a participant in the C.D. Howe Institute’s recent Regent Debate. Send comments to Chris via this link.

From: Jon Johnson
To: Global Affairs Canada

On August 30, the US requested consultations respecting Canada’s Digital Services Tax Act under the dispute settlement procedure set out in the Canada-US-Mexico Agreement (CUSMA). The US maintains that by imposing the tax, Canada has failed to provide US service providers and investors treatment no less favourable than it provides to Canadian service providers and investors. Given Canada’s unique trade relationship with the US, this could have major implications.

The essence of the complaint is that Canada is violating a specific CUSMA obligation to grant US firms terms that are no less favourable than its own companies receive.

This is called national treatment. The crux of the US argument is that the revenue and earnings thresholds are so high that no Canadian service provider would be subject to the tax, but at least some US providers would be. While the DST is not discriminatory on its face, its practical effect is discriminatory.

Canada’s taxation of digital services has been an on-going contentious issue with the US. The new legislation entered into effect on June 20 and imposes a 3-percent levy – retroactive to January 1, 2022 – on revenue (not income) earned from digital services when certain thresholds are met. Annual gross revenues in a calendar year must exceed €750 million for the tax to apply. The taxpayer must also earn at least C$20 million in Canadian digital services revenue in a calendar year. Affected companies are to start paying the tax next June 30.

On August 1, the Congressional Research Office released a paper outlining multiple concerns. It cites industry associations that maintain that Canada’s DST could “cost US exporters and the US tax base up to $2.3 billion annually and could directly result in the loss of thousands of full-time US jobs.” The paper also cites possible violations of CUSMA and WTO obligations.

The paper also notes that the United States Trade Representative (USTR) has applied sanctions under Section 301 of the 1974 Trade Act against digital services taxes enacted by other countries. Section 301 is much broader in its application than either CUSMA or the WTO.

The CUSMA panel could decide for the US if the facts establish that only US companies meet the €750 million threshold for overall earnings and whose Canadian digital earnings exceed C$20,000,000.

Aside from the possibility of an adverse panel decision and action by the US under Section 301, there are other factors that Global Affairs Canada should consider before the Canadian government commences with the retroactive portion of the tax.

CUSMA is up for renegotiation on July 1, 2026. The process on the US side starts with a USTR report to Congress, due by the end of 2025, that will include an assessment of CUSMA’s operation, as well as a recommendation on CUSMA extension. As Canadian initiatives to impose digital taxes have been a US concern for years now, the recommendation will doubtless address the question of Canada’s DST regime. If that regime remains an open issue and US concerns are not satisfied, the stage could be set for the ultimate demise of CUSMA in 2036.

CUSMA Article 32.6 also provides that a party can withdraw from CUSMA upon giving six months’ notice to the other parties.

Decision time for the Canadian government falls on June 30, 2025, and it has to decide whether to go ahead and start collecting its retroactive DST and face the inevitable hostile reaction of its largest trading partner. This has to be carefully managed, or this small issue could become a big one. For the Silo, Jon Johnson.

Jon Johnson is a former advisor to the Canadian government during NAFTA negotiations and is a Senior Fellow at the C.D. Howe Institute.

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Canada Should Embrace Trump Presidency Opportunities