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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.
Former US President Donald Trump, flanked by Trade Representative Robert Lighthizer, at the White House.
Tariff Man’s main man: How Robert Lighthizer changed US trade policy
Former President Donald Trump delighted in calling himself “Tariff Man.” But Trump’s own Tariff Man was Robert Lighthizer, who led the Office of the US Trade Representative as the president’s top trade negotiator. Lighthizer’s new book, “No Trade Is Free: Changing Course, Taking on China, and Helping America’s Workers,” sets out his black-and-white views on trade, prosecutes his case against China as an existential threat to the US, and recounts his trade battles with foreign counterparts.
My career as a trade negotiator at USTR spanned the Obama, Trump, and Biden administrations. My experience during the Trump years, when Lighthizer was at the helm, can be summarized as: “It was the best of times, it was the worst of times.”
Those years were the best of times because the top priority for Trump was trade policy — it was his obsession. As a result, USTR staff members were extraordinarily busy negotiating deals with China, Mexico, Canada, Japan, and others. For a career federal government official, it was a rare privilege for one’s work to be a top White House priority.
Those years were the worst of times, however, because the Trump administration was hellbent on reversing decades of US trade policy. Trump, for example, promptly withdrew the US from the Trans-Pacific Partnership agreement, something my colleagues at USTR had spent years negotiating. This sudden U-turn meant USTR staff members were tasked with undoing years of trade policy work.
For Lighthizer, trade policy can be boiled down to a couple of words.
“Leverage” is one. His view is that the US has enormous leverage over its trading partners because of their dependency on the US market to sell their goods. He unapologetically believes that the US ought to use that leverage to get what it wants from countries that enjoy huge trade surpluses with the US. Reducing the US’ systemic trade deficits with countries like China and Japan was his — and Trump’s — preoccupation.
In Lighthizer’s view, the best way to use that leverage is by threatening to raise tariffs. Trump did this against China by applying record-high tariffs on billions worth of Chinese imports. And he threatened to slap tariffs on Japanese car imports if Tokyo did not allow more US agricultural products into Japan.
The use of tariffs became such a key part of trade policy for Lighthizer that the US Trade Representative could have been renamed the US Tariff Representative.
Another essential word for Lighthizer is “workers.” When it comes to the purpose of trade policy, his view is crystal clear: Protecting American manufacturing workers is the top priority. Full stop. Lighthizer is a Hamiltonian through-and-through. He quickly dismisses economists, who see the purpose of trade policy to be promoting efficiency. As for the benefits that imports contribute to the US economy — such as greater competition and lower prices — he is similarly scornful.
Lighthizer’s views were decidedly outside the mainstream for decades. Given the strong, pro-free trade consensus in Washington for generations, he was a lone voice in the wilderness decrying the sins of free trade. But then the Trump thunderbolt struck, and he suddenly found himself back in the halls of power.
Although a long-time Republican, Lighthizer’s economic nationalism has always been more in sync with progressive Democrats than free-trade Republicans. That shared view is why he was able to successfully renegotiate the North American Free Trade Agreement. He and many House Democrats were aligned by their mutual disdain of NAFTA, which they saw as a US jobs killer.
Lighthizer teamed up with those Democrats and negotiated new provisions to NAFTA to protect US workers. As a result, the new agreement (renamed as the US-Mexico-Canada Agreement) passed with overwhelming support from House Democrats. The AFL-CIO supported it, even though it had opposed trade agreements for years. But Lighthizer was labor’s ally, ushering in a historic shift.
Across from the White House, the portraits of those who have led USTR line the second-floor walls of the Winder Building, where USTR is located. Of the previous leaders, a sound case can be made that Lighthizer was the most effective in terms of changing the direction of US trade policy, whether one agrees with his vision or not.
Before Lighthizer, the Washington consensus accepted that free trade is good and protectionism is bad. After him, there is now deep skepticism about the benefits of free trade and more willingness to embrace protectionism. That is the most profound shift in US trade policy since World War II. Many Republicans have become Lighthizer’s apostles, and the Biden administration continues Lighthizer’s trade approach.
For Lighthizer, being Trump’s top trade negotiator was the best of times. And the fact that his efforts forged this new consensus on US trade policy means that it still is.
David Boling is Eurasia Group’s Director for Japan & Asian Trade. He worked as Deputy Assistant USTR for Japan from 2015-2022.
Should Biden lift Trump’s China tariffs?
Sometime this month, US President Joe Biden is expected to make up his mind about nixing (some of) the tariffs his predecessor, Donald Trump, slapped on three-quarters of Chinese imports. This was part of a wider trade war against Beijing, which hit back in kind.
Two years ago, then-candidate Biden said he'd remove Trump’s China tariffs if he won the White House but later decided to leave them in place — as he's done with many Trump-era China policies. Now, Biden is taking another look at keeping his campaign promise because, hello, inflation.
Most economists think it’s a no-brainer. "It was a poorly conceived policy right from the start. Those tariffs are essentially paid for by American consumers and businesses and haven't achieved anything in terms of US-China relations," says David Dollar, a senior fellow at the Brookings Institution. "It's time to recognize [the policy] hasn't worked."
Trump scored political points by playing up his anti-China bonafides and telling his base that the tariffs would bring back manufacturing jobs from China. Spoiler: they didn't, and the overall impact of his trade war on the US economy has been ... disastrous.
Indeed, the Tax Foundation estimates that since 2019 the tariffs have imposed nearly $80 billion in new taxes on Americans by making Chinese products more expensive, cut GDP growth by 0.22%, and killed 173,000 full-time jobs. Despite costly subsidies to make up for their losses, US farmers have taken a big hit.
What's more, Dollar says the tariffs have not only done little to damage China's economy; they’ve also encouraged the Chinese to shift their investment toward other countries and away from the US.
But it's a political gamble for Biden. Lifting the tariffs ahead of the November midterms would be a gift for Republicans, who’ll accuse the president of being soft on China, seemingly the only issue the GOP and Democrats can agree on these days.
Also, labor unions, very influential with the Dems, would rather keep the tariffs in place because removing them could lead to more US jobs being outsourced to China. Finally, Trade Representative Katherine Tai has warned that unilaterally lifting tariffs would take away critical US leverage in broader trade negotiations with China.
Still, Biden is desperate to fight inflation, and getting rid of the China tariffs could help. The question is how far the US president is willing to go.
A recent study by the Peterson Institute for International Economics shows that removing the China tariffs might ease inflation by one percentage point. That’s nothing to sneeze at, but it’ll take a bit of time for the effect to kick in.
The thing is, it seems Biden only wants to cut tariffs on some $10 billion worth of Chinese goods — barely 3% of the total. That won’t move the needle on inflation and is hardly worth the political pushback from Republicans and Big Labor.
"That's frankly nothing in the context of US trade or the US economy. [It] won't have any measurable effect," says Dollar. "It seems odd to be considering something that would really just be symbolic" and tantamount to "doing nothing at all."
And what does China have to say about all this? Not much, according to Eurasia Group's senior China analyst Michael Hirson.
"Among China’s foreign policy crowd, there is some degree of amusement that the tariffs have 'backfired' on the US," he explains. "For trade officials and Chinese firms, the possibility of lower tariffs is welcome news," although since the reduction will probably be only symbolic, this topic hasn’t been top of mind for Beijing.
If Biden were to lift all the tariffs, Hirson says China might respond by removing its own retaliatory tariffs, and perhaps offer to buy more American goods. But the Chinese won't do what Biden really wants from them on trade: to get rid of industrial subsidies for state-owned companies, which the US regards as unfair competition.
Would you ditch Trump's tariffs against China? Let us know here.This article comes to you from the Signal newsletter team of GZERO Media, a subsidiary of Eurasia Group that offers balanced, nonpartisan reporting, and analysis of foreign affairs. Subscribe to Signal today.
The future of globalization
Ian Bremmer's Quick Take: Hi everybody, Ian Bremmer here, and a Quick Take to get us kicked off this Monday morning. I thought I'd go a little macro today and talk about the future of globalization, because I hear so many people talking about the last 30 years of being this unprecedented period of goods and services and people and ideas and capital moving faster and faster across borders all over the world. And now, not anymore. Now, it's all about my country first and it's nationalists and it's insourcing and it's decoupling. And so we've hit this tipping point. Or have we? I don't quite buy this narrative that globalization is over. Rather, I think it's not being driven. I think people are angry about it and it's being fought over, but that's very different from saying that spikes are being put into it.
And let me explain what I mean. I do think that the era of globalization, where the United States as a singular country with its allies was driving, actively leading, and driving a system where tariffs were being reduced and institutions were being created to ensure freer and more efficient trade. That was unique. It was something that we experienced in the world, basically from the seventies, picking up momentum through the nineties, with the Chinese particularly getting much, much bigger, with the Soviets then collapsing and most of those economies getting integrated into a more global order.
Right up through the last, say, 10 years, that let's say almost half a century if you look at global human development indicators like expansion of lifespan or reduction of infant mortality or education rates or average income levels, just an unprecedented improvement across the world. And most importantly, if you were an alien looking down on the planet, what you'd see is the emergence of a global middle class. And you'd see immense reduction in human poverty.
Now, the fact that a lot of that within the United States and other countries driving it was also accompanied with policy failures, with a lack of change of institutional reforms inside the countries, with social safety nets that were eroding meant that there was much greater levels of inequality, of outcome and of opportunity inside those countries and a lot of people got angry and angrier with globalization. At the same time, over the last few years, post the 2008 financial crisis, post the pandemic, with increasing impact globally of climate change and now with the Russia-Ukraine war, all of those things are driving much greater instability and inequality, not just in the advanced industrial economies, but in the developing world as well. And that's creating a lot more anger and pushback against the process of globalization.
Where I want to be clear is that's not suddenly making the Americans turn against globalization. Rather, it's making the Americans not sure where they want to go. It means that the United States aren't leading further globalization going forward, and no one really is. So you had 30 to 50 years where the Americans and increasingly everyone on that boat were saying, "Yes, let's push hard to have more and more open markets." And now you have governments all over the world saying, "We're not really sure what we want, where we want to go." That's very different from the idea of deglobalization.
Deglobalization would be the United States stands up and says, "We're going to tear down these institutions. We actually don't want to be as engaged in international trade. We're going to pull out of existing trade agreements." That's not what's happening. Not under Trump, not under Biden. I mean, in fact, you'd say the record is mixed. Trump pulled out of the Trans-Pacific Partnership, but that was a new multilateral trade organization the US would've joined to increase globalization, to increase integration. But actually, the overall record under Trump with the US-Mexico-Canada agreement, with the US-South Korea agreement, with a first phase US-China trade deal, but then no second deal, not full implementation, increased tariffs, on balance, you'd say under four years of Trump, the US globalized a little bit more, but not much more, and certainly wasn't driving or leading globalization anymore.
And you'd say the same thing under Biden. You could point to the Indo-Pacific Economic Framework, which has marginal increase in economic integration on rules and standards. For example, you can talk about "Build Back Better", which isn't really funded, but provides more outreach of the United States towards international investment together with allies around the world, some reduction in tariffs between the United States and Europe. Not yet between the United States and China, though it's fairly likely. Again, the US isn't leading globalization anymore, but it's not unwinding globalization either. And "Make America Great Again", as well as a new foreign policy for the American foreign middle class, which is sort of the Trump headline and the Biden headline. If you say, "Well, what are the takeaways?" The takeaways are not a lot of policy that's actually really moving towards insourcing production. A little bit of a shift away from the promotion of more globalization, and on balance, a little more globalized than before now.
The big hit, of course, in the last two years has been the pandemic, which stopped people from traveling, and which really shut down a lot of international supply chain for a period of time that largely has gone away in most of the world. China's the big exception because of zero-COVID, but even there, they're working hard to try to get through zero-COVID relatively quickly. And I expect they will be mostly there by the end of 2023, because it's such a drag on Chinese growth, but it's a blip. It's a blip from a longer term environment where what we see between the United States, China and the Europeans and the Japanese and the developing world is kind of a bit of a drift.
In the same way that NATO has been adrift over the last 20 years without much of a mission, now we're seeing globalization is drifting. It's not falling apart, but no one's driving the bus. And there is some decoupling that's going on, most notably between the G7 and Russia. So Russian's being forcibly cut off from the advanced industrial economies. And of course, some of that is sticky, like gas between Russia and Europe. And that diversification is taking time and the Russians are threatening to shut it down.
Then you have some decoupling happening at the national security level between the United States and China, but it's limited. It doesn't affect most US-Chinese trade. TikTok. It's what all the young kids are on. That's Chinese, by the way, right? No one's about to shut that down. And other countries around the world don't want a cold war between the US and China, and they're ramping up their investment in exposure to the US and to China. And then you also have some level of growing protectionism in countries around the world saying, "We want more support for our workers," but it's halting, it's stagger step. And it's also in fights inside these countries with business interests and financial interests that want more exposure to global markets.
So the point here is not the end of globalization. The point is that globalization is at drift. The point is that globalization is now being fought over. It's become a political football. And where that's going to go? The answer is, it's messy. It's complicated. Maybe that's not the easy headline answer that people want, but maybe that's why my Quick Takes take 10 minutes as opposed to two.
Anyway, that's it for me at the start of this week. Something to chew over for a few days. Hope everyone's doing well. I'll talk to y'all real soon.
For more of Ian Bremmer's weekly analyses, subscribe to his GZERO World newsletter at ianbremmer.bulletin.comChina's love affair with Australian wine ends in a messy breakup
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