Breakdown in Trade Talks Between U.S. and Canada, Explained

Time​ Magazine

6 hours ago

Negotiations between the U.S. and Canada have broken down, with President Donald Trump announcing that he is 'terminating' all trade discussions with his northern neighbor.
'We are hereby terminating ALL discussions on trade with Canada, effective immediately,' Trump said on Friday. 'We will let Canada know the tariff that they will be paying to do business with the United States of America within the next seven-day period.'
Trump's retreat from negotiations follows a long-standing back-and-forth between the two countries on trade, which kickstarted when Trump implemented the application of an additional 25% tariff on imports from Canada in February. ( Energy resources from Canada received a lower 10% tariff.)
With tensions now reaching a high, spurred on by Trump threatening more tariffs on Canada, parties in both countries have voiced concern over where things currently stand.
What led to the breakdown in negotiations of trade between the U.S. and Canada?
Trump called Canada 'a very difficult country to trade with,' blaming the breakdown in progress on Canada's Digital Services Tax [DST], a levy on tech revenues generated from Canadian users, which is set to go into effect on Monday, June 30. Trump called the 3% digital services tax 'a direct and blatant attack' on the U.S.
The Trump Administration has urged Canada to pause or eliminate the tax, which applies to any tech company making more than $15 million from Canadian internet users. In his social media post, Trump said the U.S. had 'just been informed' of the tax. The plan has, in fact, been in place since last year, but the first payments are only due to begin on June 30. The bill works retroactively, so large tech companies such as Apple, Google, and Meta stand to be hit with large payments.
'Here's the irony. To me, this looks like a power play from Canada, because they're making it retroactive… so Trump came along and said, 'No, no more deals—watch and learn,'' argues James Mohs, an associate professor of accounting, finance, and taxation at the University of New Haven. He likens the situation to two 'bullies' fighting each other on the block to see 'who's the biggest.'
A June 11 letter from Republican members of the U.S. Congress urged Trump to pressure Canada into pausing the tax.
'If Canada decides to move forward with this unprecedented, retroactive tax, it will set a terrible precedent that will have long-lasting impacts on global tax and trade practices,' said the 21 members of Congress, further arguing that 90% of what Canada would collect under its Digital Services Tax Act would be from U.S. companies.
Trump's announcement of stalled talks came a week after Canada's Finance Minister François-Philippe Champagne said that they would not delay implementation of the tax, despite mounting pressure.
"This was voted by parliament so we're going ahead with the DST," Champagne told reporters on June 19. "[The Digital Services Tax] is not unique to Canada, by the way. Let's put that into context."
In the Oval Office on Friday, Trump told reporters that the U.S. has "all the cards' in its relationship with Canada. "Economically, we have such power over Canada. I'd rather not use it," he seemingly warned.
Speaking to Fox News' Maria Bartiromo on Friday, for an interview of which the first part aired on Sunday morning, Trump delved into his decision to stop negotiations with Canada, saying the country is 'very nasty to deal with.' He stated that the negotiations would be paused 'until such time as they drop certain taxes,' seemingly referring to the DST.
Trump also once again repeated his belief that 'Canada should be the 51st state.'
Read More: Does Trump Still Plan to Annex Canada and Make It the 51st State?
Meanwhile, U.S. Treasury Secretary Scott Bessent said on Friday that though the Trump Administration knew of the Digital Service Tax, they had hoped that Canadian Prime Minister Mark Carney's new Administration would, 'as a sign of good will,' pause it.
'We think it's badly unfair to do it retroactively,' Bessent said, stating that U.S. Trade Ambassador Jamieson Greer is likely going to open a 301 investigation on the tax, which would allow the U.S. Trade Representative (USTR) to investigate any potential harm on U.S. businesses.
Colin Robertson, a former Canadian diplomat and current fellow at the Canadian Global Affairs Institute, says that Trump has 'thrown a grenade into the negotiations," but hope for a deal is far from lost.
'I look at this as part of the negotiating process. Trump is unpredictable, but my guess is that there are those in the U.S. who would like to see an agreement with Canada,' he says. 'I think that the interests on both sides are such that an agreement is possible and desirable—certainly [from] the Canadian side, but for the American side, also. I think they want to be able to show the rest of the world you can make a deal with your closest neighbor and ally. And if you can't do it with Canada, who can you do it with?'
This is not dissimilar to how Trump does business, as he prioritizes gaining 'as much leverage as he can' before making a deal, Robertson argues.
Mohs agrees, stating that this is all 'a negotiation tool, nothing more, nothing less.'
How has Canada responded?
In a brief exchange with reporters on Friday, Carney addressed questions about the breakdown in talks.
'We will continue to conduct these complex negotiations in the best interest of Canadians," he said, firmly.
The Canadian government also retaliated later on Friday, placing a steel quota on some imports, with a hefty 50% tariff on products that exceed that quota. The measure went into effect immediately, and is set to be reviewed in 30 days.
'This temporary trade measure will help stabilize the Canadian steel market by addressing the risk that steel originally destined for the United States is redirected to Canada,' stated the government's press release on the measure. 'The combination of tariffs imposed by the U.S. on all steel imports and global overcapacity, caused by non-market practices, has led many exporters to seek new markets.'
Robertson sees this move as 'consistent' with what Canada has promised in the past.
'I think that all fits into [how] we had promised we would take action when Trump doubled the tariff from 25% to 50%,' he says, arguing that Canada, as 'the biggest steel exporter to the U.S.,' will likely lift these measures if they can get back to a trade agreement.
At the G7 summit in Kananaskis, Alberta, Canada on June 16, Carney had said that he and Trump were working towards finding a trade deal within 30 days, something Trump had agreed was 'achievable.' But the subsequent blow to their relations puts any deal on shaky ground.
Goldy Hyder, CEO of Business Council of Canada, said that this back-and-forth has only escalated the uncertainty that businesses are struggling with. While change is happening on the geopolitical and economic scale, Hyder pointed out, geography never will change, and these neighboring countries need to find a way out of these stalled negotiations.
'[Canadian] businesses are intertwined not just with the U.S., but also with Mexico. We have smart people, we have a lot of natural resources,' Hyder told Canada's CTV News. 'We've grown an economy that's working and can continue to grow, but it's challenging because business, of course, likes predictability and certainty, and it doesn't have a nationality that it's attached to.'
Sharing a message to the governments of both the U.S. and Canada, Hyder urged: "Let's not get in our own way here."
But some experts remain divided on whether or not Canada should pause the tax in order to appease Trump. Julian Karaguesian, a former adviser to Canada's Ministry of Finance, told CTV that Canada's Prime Minister and Finance Minister had 'different means' to 'delay the implementation' of the tax.
'It leads me to think that this was a tactic by Prime Minister Carney—putting a card on the table because, as President Trump said, [the U.S.] has more cards than we do, but we have some,' Karaguesian argued, pointing to Canada as a major energy producer with reserves of oil and gas.
Karaguesian said Canada, as a 'natural resource superpower,' could, if backed into a corner, utilize this, and also build out other existing trade relationships with India, China, and beyond.
'It's not much at all,' Karaguesian said of the amount of money Canada might gain from the tax, emphasizing that the charge is not a tariff. 'The tax is part of our domestic policy, and every sovereign nation has a right to pursue domestic policies.'
There's mounting tension on both sides, says Mohs, but "when it comes to business, a trade war is not going to work well for either Canada or the U.S.'