Trump pulls plug on Canada trade talks—tech tax triggers tariff war threat

What is Canada’s digital services tax and why did it provoke Trump to terminate trade talks?

President Donald Trump announced on June 27, 2025, that he is terminating all trade negotiations with Canada in response to the country’s 3 percent Digital Services Tax (DST), calling it an “egregious” measure targeting U.S. tech companies. The move comes just days before the tax is set to trigger large retroactive payments from American firms operating in Canada, such as Alphabet, Amazon, and Meta.

The Canadian DST, enacted in 2024 and made retroactive to January 1, 2022, is forecast to generate nearly Can$5.9 billion (US$4.2 billion) over five years. Trump’s announcement, made via his Truth Social account, included a warning that Canada would be informed of new U.S. tariff rates within one week.

Industry groups such as the Computer & Communications Industry Association say the tax could lead to billions in liabilities for U.S. platforms, as well as potential job losses. The tax applies to any multinational digital business with global revenues exceeding €750 million and Canadian digital services revenue above Can$20 million.

How does this new trade standoff compare to Trump’s recent progress with China and other partners?

Trump’s decision to escalate trade tensions with Canada contrasts sharply with recent progress made with China. Earlier in June, U.S. and Chinese officials finalized a framework agreement to reduce tit-for-tat tariffs imposed during previous trade disputes. At the center of the China deal is an agreement to resume rare earth exports under tightened licensing protocols, critical for the U.S. electric vehicle and defense industries.

Meanwhile, Canada has been under mounting pressure after Trump’s administration doubled tariffs on Canadian steel and aluminum to 50 percent. In response, Canadian Prime Minister Mark Carney had pledged to raise Ottawa’s own 25 percent counter tariffs on U.S. goods if a trade compromise was not reached within 30 days.

While Trump has framed the DST as a hostile economic act, Canadian officials maintain it is a temporary measure aligned with global efforts to ensure digital companies pay taxes where their services are consumed. Ottawa previously aligned itself with the OECD’s Inclusive Framework, though it pressed ahead with national implementation when the global tax deal stalled.

What are the expected implications for U.S. and Canadian technology firms and cross-border commerce?

The termination of talks throws a wrench into what has historically been one of the world’s closest economic relationships. Bilateral trade between the two countries exceeded US$760 billion in 2024, with Canada being the largest export market for U.S. goods. Disruption in negotiations could ripple through industries including autos, agriculture, e-commerce, and software services.

Technology firms are expected to bear the brunt of the fallout. Analysts estimate U.S. digital companies could owe between US$900 million and US$2.3 billion annually under the DST, depending on their Canadian revenue exposure. There is concern that other nations may follow Canada’s lead if the U.S. does not respond forcefully, a scenario that Trump has cited in calling for a hardline stance.

Wall Street, however, reacted with muted concern. While major indexes dipped briefly on Friday morning, both the S&P 500 and Nasdaq closed at record highs, buoyed by optimism surrounding interest rate cuts and AI sector earnings. Analysts noted that investor focus remains centered on U.S.–China normalization and global growth prospects, rather than Canadian trade disputes.

How are Canadian leaders and institutions responding to the U.S. move to escalate trade conflict?

In his Friday statement, Canadian Prime Minister Mark Carney said Ottawa would continue to “conduct complex negotiations in the best interest of Canadians,” emphasizing the importance of diplomacy and measured responses. He confirmed that he had not spoken directly with President Trump on the day of the announcement.

Finance Minister François‑Philippe Champagne reiterated that the DST remains Canadian policy and that Ottawa stands ready to negotiate its application as part of a broader trade package. Ontario Premier Doug Ford called for a temporary suspension of the DST in return for U.S. tariff relief, a proposal that some Canadian business leaders also echoed.

The Business Council of Canada expressed concern that escalating trade measures would disrupt supply chains and hurt both economies. The group urged both sides to find a pathway to compromise before retaliatory measures take effect.

What legal and institutional mechanisms are now in play on both sides of the border?

U.S. Treasury Secretary Scott Bessent confirmed that the Office of the U.S. Trade Representative, led by Jamieson Greer, will initiate a Section 301 investigation to assess the economic harm caused by Canada’s DST. Section 301 investigations can trigger retaliatory tariffs without congressional approval and have historically been used in trade spats with China and the EU.

There is also speculation that the U.S. could invoke more severe measures, including tax-based retaliations under Section 891 of the Internal Revenue Code, which allows discriminatory taxation against foreign corporations under certain conditions.

On Canada’s side, the DST is authorized under Bill C-59 and was introduced in alignment with broader OECD/G20 digital taxation objectives. While most countries in the OECD paused their DST plans awaiting a final global agreement, Canada chose to proceed independently, citing repeated delays.

This divergence is now at the heart of the U.S. complaint. Washington argues that Ottawa’s tax violates USMCA obligations by unfairly targeting U.S.-based firms. While Canada contends the tax is nondiscriminatory, dispute settlement proceedings under USMCA are expected if no resolution is reached.

What broader trade outlook does this signal for North America and global negotiations?

Trump’s decision to freeze Canada negotiations appears to be part of a broader pivot in U.S. trade strategy. While relations with China are improving, talks with the European Union remain tense. Trump recently remarked at a White House event that the U.S. holds “far more cards” than the EU, reinforcing a theme of transactional trade policy.

According to Treasury Secretary Bessent, the administration is currently focused on 18 trade partners and aims to wrap up as many as 10–12 deals before Labor Day on September 1. Canada’s exclusion from that shortlist suggests that Ottawa may face elevated tariffs and a period of trade uncertainty until a new path forward emerges.

For now, institutional voices in both Washington and Ottawa appear committed to avoiding full-scale escalation. But unless Canada delays DST collection or the U.S. offers an off-ramp on steel tariffs, tensions may rise sharply before the July 9 deadline when new tariffs on non-China nations are scheduled to take effect.

Is this a negotiating tactic or the beginning of long-term trade divergence?

Trump’s decision is being viewed by many institutional observers as a pressure tactic aimed at extracting concessions from allies while locking in favorable terms with rivals like China. Some analysts believe Canada could offer a temporary DST pause to prevent further tariff escalation, particularly in politically sensitive industries like autos and energy.

However, others caution that the risk of longer-term divergence between the U.S. and Canada is growing. If Ottawa refuses to delay DST collection and the U.S. follows through with targeted duties, it may open the door for prolonged disputes that could weaken North America’s integrated supply chain.

With pressure mounting on both sides, the coming week could determine whether this is a tactical flare-up—or the start of a deeper trade rift between two of the world’s closest economic partners.