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The world’s response to America’s Revolution
Last week, I wrote about the political revolution that President Donald Trump has launched in the United States and how it has made America a fundamentally unreliable player on the world stage.
This week, I’ll take on another question I detailed during my recent “State of the World” speech in Tokyo: How can/should the rest of the world respond to this new reality?
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When dealing with a leader of the world’s most powerful country who ignores counsel and acts on impulse, most governments will have to avoid actions that make Trump-unfriendly headlines. (Looking at you, Doug Ford.)
This is the logic that led Canada to surrender on its plan to impose a digital services tax earlier this year, and why a TV ad aired by the province of Ontario using clips of Ronald Reagan to criticize Trump’s tariffs was hastily taken down when the US president got angry. It’s why Japan was wise to make unilateral concessions on Nippon Steel and automotive tariffs. To safeguard their national interests, if a fight can be avoided, other governments should avoid it – by whatever means necessary. Let the spotlight of Trump administration hostility fall on others.
Many US allies have moved to proactively limit damage from any future fight with the White House. The United Kingdom, the European Union, and a number of Southeast Asian countries have offered non-reciprocal trade deals. See also Saudi Arabia, the UAE, Argentina, and El Salvador.
From governments that have much more bargaining leverage – like China, Russia, and India – we’ve seen that standing up for yourself and a willingness to absorb punches can create needed space. That strategy won’t work for everyone. Japan, South Korea, Mexico, Brazil and many others need to stay on a positive track with Washington.
But all countries, whatever their current relationship with the White House, will need to build their own long-term capacity and reinforce their own stability – to become more economically dynamic and competitive for the future.
That’s China’s current approach. Beijing has also doubled down on its support for existing international institutions, in part because it calculates that an American step-back will create new opportunities to change them.
In short, when faced with an America that’s become a more unreliable player on the global stage, one that can’t be counted on to safeguard allies who have underinvested in their own security, the right strategy is defense first, hedge second.
Just as Russia’s invasion of Ukraine persuaded Europeans to quickly reduce their own dependence on Russian energy, European governments want to avoid finding themselves at the mercy of shifting policies from Washington.
America’s traditional allies will have to regain their competitive position. That means a focus on growth, robust industrial policy, streamlined regulatory and bureaucratic authorities, and expansive investment in new technologies. They must attract and invest in entrepreneurship, assert more diplomatic leadership internationally, and accept responsibilities in building multilateral architecture.
Models already exist. In particular, there is Mario Draghi’s crucial competitiveness report for the European Union. On a smaller scale, there is Mark Carney’s thoughtfully crafted “Canada Strong” plan. Most every global leader should be thinking in these terms.
It’s easier said than done. The near-term politics of making these transformations is daunting. The EU is not a single state, and Europe's need for consensus rulemaking and pushback from more euro-skeptic governments (which could arrive even in France and Germany in the next election cycle) pose an enormous challenge.
There will be opposition from the fast-rising Reform Party in Britain and some provincial governments in Canada.
But once all these economic, political, security, and diplomatic investments are made, America’s unreliability, in the years well beyond Trump, will matter less.
As for hedging…
- Europe has committed to spend much more money on its own defense and to address the security coordination problems NATO will suffer without clear US leadership.
- The Saudis have signed a nuclear deal with Pakistan to hedge against any future security neglect from Washington, and there’s already more defense and intelligence-sharing among Gulf States.
- India’s Narendra Modi is working hard to stabilize his country’s relations with China and to temper their rivalry.
- The EU has finalized three free trade agreements — with South American bloc Mercosur, Mexico and Indonesia — and is working toward an agreement with India.
- Mercosur sealed a free trade deal with the European Free Trade Area, four European countries outside the EU. It has restarted negotiations with Canada.
In short, the defense and hedging strategies are well underway and likely to succeed to varying degrees in various places over time – though we should be more skeptical about even a medium-term turnaround in competitiveness.
We’re now living in a post-American order, with no one willing or able to fill the vacuum. China has its own problems and isn’t about to bite off more than it can chew. Which means a deeper G-Zero world, leading to more conflict, inflicting more damage, and lasting longer.
This trajectory isn’t sustainable. During the Cold War, it took the Cuban Missile Crisis to convince leaders that armed confrontation would be catastrophic – and that new communication channels and agreements were essential. We don't know what form “the crisis we need” to build a new order will take this time. But it's coming.
Until then? The old rules don’t apply anymore, and new rules haven’t been written yet. We must brace for sustained turbulence.
Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland takes part in a press conference in Ottawa, Canada, on Jan. 29, 2024.
Canada’s threatened tax on tech giants risks trade war
Canadian Finance Minister Chrystia Freeland plans to unveil the federal budget on April 16, a release that will be keenly watched north and south of the border. Big Tech companies, in particular, will be looking for clues about when Canada will implement its long-promised digital services tax.
Justin Trudeau’s cash-strapped Liberal government hopes to raise up to $2.5 billion over five years by imposing a 3% tax on companies like Alphabet, Meta, Uber, Amazon, and Airbnb. First promised in the 2021 budget, the Trudeau government said it would implement the tax on Jan. 1, 2024, retroactive to 2022.
Aside from raising much-needed funds, targeting tech giants has the additional benefit for Trudeau of being popular politically. His government has already whacked Alphabet and Meta with its Online News Act, forcing them to share revenues with Canadian news publishers (Meta responded by removing news links from Facebook in Canada), and its Online Harms bill, which compels social media platforms to regulate harmful content or face punitive fines.
Freeland says the digital tax is a “matter of fairness,” given that tech giants have been booking their profits in low-tax jurisdictions.
A move by OECD countries to implement a global minimum corporate tax rate of 15% has gained traction, but US opposition persuaded a majority to vote for a year-long delay last summer. Freeland said she preferred a multilateral approach but that Canada is prepared to move forward alone.
US trade representative Katherine Tai has warned that the Biden administration considers the tax discriminatory and will retaliate with tariffs.
A letter from Senate Finance Committee chair Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) in October said that any retaliatory steps would have bipartisan support.
Those threats seem to have registered with Freeland. In her fall economic statement, she removed the Jan. 1 deadline, while introducing legislation that would allow the federal government to implement the tax later. The budget may indicate whether Canada still plans to go it alone and risk Washington’s wrath, or wait for a new multilateral effort.
Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland.
Will Trudeau’s digital services tax lead to trade dispute?
After all, US Ambassador David Cohen warned in July that if Canada introduces such a tax, his country would have “no choice but to take retaliatory measures in the trade context, potentially in the digital trade context.” Canadian Finance Minister Chrystia Freeland, no stranger to trade disputes with her American friends, appears determined to proceed.
"It's really a matter of fairness," she said. "There are other countries, our partners, who are today collecting DST. That DST is helping make essential investments in their countries, and it's just not fair for Canadians to be deprived of that revenue."
The Canadian argument is that tech companies collecting billions of dollars of revenue in Canada — like Netflix and Amazon — are able to shelter their profits in low-tax jurisdictions and are not contributing meaningfully to the economy. The Americans, unpersuaded by these arguments, don’t want to see Canada break from an OECD consensus, which is to wait until there is an international tax agreement. Business groups in both countries have asked Canada to hold off to avoid the uncertainty and disruption of a trade dispute.
The new legislation introducing the tax did not include a date, which means the government could implement it when it sees fit. Freeland may be hoping that it gives her leverage in trying to convince her American counterparts to accept the tax without imposing countervailing duties.
Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks to journalists on Parliament Hill.
Expect a ‘big fight’ over digital service tax
The US ambassador has once again warned Canada that it should expect consequences if it proceeds with a plan to impose a digital service tax on the tech giants. David Cohen, in response to an audience question at a Canadian Club luncheon in Ottawa, signaled that it could get nasty.
“That will be an area of contention unless it is resolved," he said. “There’s a place where we’re either going to have to have agreement, or we’re going to have a big fight.”
Finance Minister Chrystia Freeland surprised observers, and her friends in the United States, when Canada refused to agree with other countries to delay adopting such a tax at a meeting of the OECD this summer, complaining that it had waited long enough.
The tax would impose a 3% levy on big tech firms — many of them American — that earn revenue from Canadian customers without paying tax in the country. It is scheduled to kick in on Jan. 1.
On Wednesday, Freeland said that after a recent trip to Washington, she was “cautiously optimistic” that she would reach a deal with the Americans and avoid a showdown.
Neither side would benefit from a high-profile dispute over the matter, so a face-saving compromise would be welcomed by both countries’ business communities, which have warned Freeland against forging ahead in the face of opposition from Washington and Silicon Valley. If a showdown has been averted, Freeland may reveal as much in her department’s Fall Economic Statement, due for release later this month.
Ottawa, Washington at odds over digital tax plan
The Canadian government has outlined its plans for a digital services tax, which will hit online retailers and social media platforms with a 3% tax on Canadian revenue.
Trouble is, the Liberals’ tax battle with tech titans poses a threat to the carefully laid international plans of their political allies in Washington, according to a Politico report.
The Biden administration is worried that this could change the dynamics in OECD negotiations on a global digital service tax. The OECD is leading talks with more than 130 nations that want a portion of the profits made by US tech companies in their countries to stay within their borders. The US managed to postpone the taxes until at least 2025 but worries that other countries may follow Canada’s lead and move forward unilaterally.
Business groups in Canada and the United States have loudly objected to Canada’s plan, and Washington has threatened to seek redress if Canada proceeds, although it is not clear that the measure would be captured under USMCA, a trade deal between the US, Canada, and Mexico, rules since large Canadian companies would likely also be required to pay.
Treasury Secretary Janet Yellen is reportedly lobbying Canadian Deputy Prime Minister Chrystia Freeland to drop her plans, but Freeland – who played a key role in negotiating the USMCA and has deep connections in Washington – has insisted Canada must proceed. The tax is expected to come into force by January of next year.
Trudeau’s fight with big tech could bleed into US election
Justin Trudeau and Joe Biden appear to be headed for a showdown over tax policy that could bleed into the US presidential election – and Bruce Heyman, one of Canada’s best friends in the United States, is worried.
Heyman, a former Goldman Sachs banker who Barack Obama sent to Ottawa as ambassador to Canada in 2014, is normally upbeat about the relationship between Washington and Ottawa. During the long and difficult USMCA negotiations, when Donald Trump threatened to tear up NAFTA, Heyman was a loud and persistent voice calling for calm, pointing to the benefits of the enormous cross-border trade.
But he has been worried since last Friday when he watched Finance Minister Chrystia Freeland firmly defend Canada’s plan for a new digital service tax at a forum in Aspen, and absorbed a stern warning from current Ambassador David Cohen. The plan is to impose a 3% tax on big tech revenue in Canada.
“I would recommend everybody take Ambassador Cohen’s comments last week very seriously,” Heyman says. “The US would have to respond in some way.”
In a Canadian interview published Friday, Cohen said that if Canada proceeds with its tax plan, the United States will have “no choice but to take retaliatory measures in the trade context, potentially in the digital trade context.”
On the same day, in Aspen, Freeland stood firm, delivering lines that sounded very much like those she delivered during the high-stakes USMCA negotiations.
“We believe in being nice,” she said. “We believe in being polite. When we have disputes we think they should be negotiated in a civil way. But we also believe at the end of the day you have to stand up for the national interest.”
How we got here
The roots of the dispute go back to the Canadian election of 2019, when the Liberals promised to “make sure that multinational tech giants pay corporate tax on the revenue they generate in Canada,” in the form of a 3% digital services tax, similar to measures in the UK, France, and Italy. Freeland included the measure in a budget document in 2020 but postponed the plan for two years while OECD members worked toward an international agreement. The 143 countries in the tax deal are trying to reallocate taxing rights on about $200 billion in profits from multinationals to the countries where they do business.
But the OECD talks ended two weeks ago with the parties agreeing to another delay, at which point Freeland said Canada would bring in its own tax on Jan. 1, 2024. “Canada is being asked, again, having agreed to a two-year standstill, to agree to further standstills with no fixed date … so for us, that’s clearly a disadvantageous position,” she said in Aspen.
Canada is isolated. Of the countries in the tax talks, only four other countries — Belarus, Pakistan, Russia, and Sri Lanka — rejected a one-year extension. “When you look at the countries that do not agree with that position, they are not countries that you would normally think Canada wants to be a part of,” Cohen said. “They are a combination of autocracies and Third World countries.”
This is the second run the Canadians have taken at Silicon Valley this year. In June, Trudeau’s government passed a law that would require social media platforms to make payments to Canadian news outlets. Both Meta and Google have balked and moved to drop Canadian news from their platforms rather than pay, embarrassing the government.
Tyler Meredith, a former advisor to Trudeau, helped write the tax policy in question. He says the Canadians are determined to implement a digital services tax, in part because multinationals are able to shelter their profits in low-tax jurisdictions, meaning they extract money from Canada without contributing meaningfully to the economy.
How Washington will respond
Meredith says that while the United States can impose tariffs, they may not win a trade-dispute resolution process on the issue because the tax measure is within Canadian jurisdiction, and any tax would apply to both Canadian and foreign companies. He says the government won’t want to just drop its plan.
“Having put effectively four years into this effort and already made assumptions in our fiscal framework … and having worked in partnership with the US and other OECD partners, it’s very hard for Canada to move off that position without confidence we’re getting something in return.”
But Heyman warns that Cohen isn’t bluffing. “The US embassy and the US government are going to work hard to stand up for US industry. I don’t know what actions will or could be taken. But, trust me, I would just take the ambassador's comments seriously.”
Jonathan Lang, Eurasia Group’s director for trade and supply chains, agrees that the US will feel obliged to respond if Canada proceeds. “I do think the US would have to respond with a tariff regime of some kind if DST were to move forward in Canada, sidestepping the OECD negotiations,” Lang says. “That would be a warning to others.”
Lang, who was director for international economic affairs in Trump’s White House, points out that the former U.S. president threatened France with a wine tariff when French President Emmanuel Macron brought in a similar tax in France. The Americans, under Biden or Trump, don’t want to see countries imposing taxes on U.S. tech companies. “I strongly suspect that the US would have to draw a line in the sand of some kind here,” he adds.
This high-stakes showdown is taking place in the run-up to the 2024 presidential election, in which Trump can be expected to argue that Biden is too soft on foreign competitors.
That is what makes Heyman nervous about the whole thing: “The US in 2024 may have a Trump card, and that changes the dynamic of the poker game entirely.”
OECD logo seen on a smartphone and a computer screen.
Canada flies solo on digital services tax
‘Tis the summer for Trudeau vs. Big Tech. You’ll recall that Ottawa plans to make tech giants pay for linking to Canadian news and that the tech firms, in turn, have begun blocking access to news from the country’s outlets on their platforms.
Now, Canada is pressing ahead with a 3% digital services tax on big tech companies. The Liberals plan for the tax to come into effect on January 1, 2024 – after introducing the measure in the 2021 budget and delaying it by a year. The tax is part of an OECD plan to guarantee a 3% tax across jurisdictions that would discourage tech companies from setting up shop in one country over another to avoid paying taxes. It would also mean tech firms couldn’t bully countries into lowering taxes by threatening to leave for somewhere cheaper. But most of the 140+ countries involved, including the US, are not prepared to launch the measure. At least not yet.
There’s lagging support for it in the US Congress, and with Biden facing reelection, ratification of the tax could be politically costly. Washington has asked the OECD to delay implementation, and the organization has pushed the adoption of this measure to 2024. But Canada says it’s not going to wait. Washington is pushing Ottawa to relent, and both the US and Canadian business communities are warning of the risks of a unilateral move, such as trade retaliation from the US and, potentially, other countries – not to mention threats from tech companies themselves.
But Canadian Finance Minister Chyrstia Freeland, unmoved by the warnings, says the tax is in the national interest and that “Canada’s position is unchanged.” Question is, can the US or OECD get her to change her mind before winter?