Canada’s Digital Tax U-turn Highlights Trump and Carney’s Tariff Negotiation Tactics

After President Trump suspended trade talks with Canada over its controversial digital services tax, Ottawa scrapped it to get back to the negotiating table.

An about-face by Canada amid trade negotiations with the United States was welcomed on Monday by the Trump administration as a victory.

But for the Canadian government, it may have just been a calculated tactical retreat.

On Friday President Trump said he was suspending trade talks because Canada was about to start collecting a tax on big American technology companies, a levy that he has criticized as a “blatant attack.”

On Sunday evening, hours before that tax came into effect, the Canadian government announced it was scrapping it.

Prime Minister Mark Carney of Canada said the decision was meant to allow the resumption of trade talks with the United States.

“In our negotiations on a new economic and security relationship between Canada and the United States, Canada’s new government will always be guided by the overall contribution of any possible agreement to the best interests of Canadian workers and businesses,” he said in a statement.

On Monday morning, talks were back on, but the White House did not miss the opportunity to take a victory lap.

“It’s very simple: Prime Minister Carney and Canada caved to President Trump and the United States of America,” said Karoline Leavitt, the White House press secretary.

“President Trump knows how to negotiate, and he knows he is governing the best country and the best economy,” Ms. Leavitt added.

She said it had been a “mistake” for Canada to have pursued the tax, and called the decision to rescind it “a big victory for our tech companies and our American workers here at home.”

In the United States, digital services taxes imposed by other nations have been disliked by Republicans and Democrats because they are seen as unfairly targeting U.S. giants like Google, Apple and Amazon. The taxes target revenue that businesses earn from online advertising, the sale of user data and other services, even if the firm is headquartered elsewhere.

A number of European nations also have such tax policies in place — Mr. Trump has called them “very nasty.” The European Union is also locked in trade talks over Mr. Trump’s tariffs.

Mr. Carney’s decision to rescind the tax offered a concession Mr. Trump demanded, and Mr. Carney seemed reluctant to defend the levy, even if the move took away part of his negotiating leverage.

Officials familiar with the Canadian government’s thinking about the tax said that scrapping it after Mr. Trump expressed anger at its implementation was a small price to pay for potentially greater gain in resolving the tariff battle. The officials asked not to be identified to discuss private deliberations.

Canada’s 3 percent digital services tax has been in place since last year, but the first payments were only due beginning on Monday. Because the tax is retroactive, American companies were preparing to turn over roughly $2.7 billion to the Canadian government, according to a trade group for large American tech companies.

The tax was also not a Carney government policy, but had been brought in by his predecessor, Justin Trudeau. It has long been listed by the United States as an “irritant” in the trade relationship.

Mr. Trump and Mr. Carney, who spoke on Sunday by phone, agreed to put the tax dispute behind them and restart negotiations with a goal of reaching an agreement by July 21 — a date they’d first set when they met this month in Kananaskis, Alberta, at the Group of 7 summit.

At stake is one of America’s most important trade relationships. Canada is the second largest trading partner to the United States — sometimes the first, depending on the price of oil — and the United States is Canada’s’ top trading partner. The two, together with Mexico, are part of a free-trade agreement that’s now been essentially suspended.

Mr. Trump has imposed a 25 percent tariff on many Canadian exports, and, like other countries, Canada is also subject to a 50 percent tariff on its exports of steel and aluminum.

Ultimately, for Mr. Carney, who has cultivated a positive rapport with Mr. Trump since taking office in April, suspending the digital tax collection was a palatable decision not least because the revenue expected to be raised was modest.

“It’s part of a bigger negotiation,” Mr. Carney told reporters in Ottawa on Monday. “It’s something that we expected in the broader sense that would be part of a final deal.”

Other demands by Mr. Trump may be harder for Mr. Carney to grant. Apart from wanting to annex Canada and make it part of the United States, Mr. Trump has mentioned easing the protection of Canada’s dairy market and financial sector as other concessions he wants as part of their talks.

Those would be deeply disruptive for Canada’s economy and politics, and harder for Mr. Carney to capitulate on.

Tony Romm contributed reporting from Washington.

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