I'm Scott. I'm Bill. I work with Trade Guys. You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm H. Andrew Schwartz and I'm here with Scott Miller and Bill Reitch, the CSIS Trade Guys.
Welcome back to the Trade Guys. This week, Bill and I talk about Canadian taxes on digital services, Speaker Johnson's comments about Republican initiatives on the Trade Front, the Digital Market Act in Europe, all this and more on this week's Trade Guys. Welcome back to the Trade Guys. I'm Evan Brown. I'm a researcher and program coordinator here at CSIS, and I am stepping out from behind the camera, or should I say microphone, to fill in for Andrew and
T-Bo this week. Now, before we dive into this week's topics, Scott, I know you have an exciting announcement about next week's show. Thanks, Evan. Thanks for stepping in this moderator. And welcome back to our audience. We appreciate the week off for Independence Day. We're back at it with the usual range of problems. But in any case, I want to let listeners in the Washington DC area know that July 17th, Bill and I will be appearing in person for a live Trade
Guys episode as part of a conference hosted by the U.S. Pacific Economic Cooperation Council. It's July 17th for a May 32 lunch at the Hotel Washington. If you'd like to attend, registration is still open and it's being managed by the National Center for APEC, which is ncapec.org. If you've got information, you can do a web search, just go directly to ncapec.org and find links to register for the conference. But if you can't make it, please listen in next week.
A regular podcast will be a live episode with the audience at U.S. Pacific Economic Cooperation Council, including questions from the floor, and we'll have a guest with us on the panel, friend of the show, Wendy Cutler. If you're interested in Asia, it'll be fun to week. It'll be a big deal and I just want to emphasize that those of you that can't make it, it'll be broadcast
as a regular podcast more or less at the regular time. So you don't have to show up, but it's an opportunity if you're in town and want to see it done in person. We certainly look forward to that. Hope those of you who are able to come in person, bring your toughest questions for Bill and Scott. No, no, no, don't do that. Bring, bring softballs. Softballs only. Yes, that's right. We don't need hard questions. Fast pitching is beyond our capacity at this point.
Moving into our regular schedule programming, June 28th, the Canadian government implemented a 3% digital service tax that will apply to revenue from companies that provide digital services to Canadian users or sell Canadian user data. It's retroactive back to 2022. And there's also this 5% tax on foreign streaming services. So, trade guys, can you tell us more about what's been going on with our neighbors to the north and what the reaction here in Washington has been?
Those crazy Canadians. It looks to me like a sort of revenue. They're trying to cloak a major money grab in the cloak of their cultural exceptions. Canada is concerned enough about its culture, what they would probably characterize as a malign influence of American culture, that they protect it in any way they can, including subsidizing Canadian artists, subsidizing production for television and radio and all sorts of media.
So, this has gone on for a long time. It's part of the charm of being a Canadian as you get to pay for your entertainment, your own government. But in any case, many of the agreements with Canada, trade agreements with Canada, do protect certain cultural activities and funding. This though looks out of line. It calls this a cultural carve out. It's a very aggressive tax policy in that it is a tax on revenue and not income. However, it was generally a lot larger than income.
And it is a tax that is retroactive. And while you can argue about what the rules themselves say, whether this is simply a Canadian version of by America or something like that, on a de facto basis, it's obviously discriminatory. So, I think there's a legitimate challenge to it. And I would note that it's not unusual to have trade disputes with Canada. I went back to the first ever use of Section 301 after it was created to deal with unfair trade practices in 1974 trade act, eggs from Canada.
So, along history of trade disputes, we also have a very longstanding tax treaty that entered into force in 1985. And this looks nothing like something of policy that would be consistent with that 40-something-year-old tax treaty. So, in any case, we'll find ways to deal with it. I'm surprised we haven't already found a way to throw some hard inside pitching toward the Canadians. We'll see about that. But it is a very aggressive move, particularly with the retroactive nature of it.
And the fact that most of the companies that are exposed to this are American firms. This is depressing on several different levels. There are actually two taxes. Scott's been talking about the 3% tax on digital service providers. And this is depressing because it's out in front of what the OECD is trying to do, which is trying to work out a multilateral agreement on taxation in the digital space, which is referred to as pillar one of the OECD tax activities.
pillar two relates to the 15% minimum corporate tax, which I think we've discussed previously. There have been a number of other countries that have suggested or have proposed taxes like the Canadian tax. US has been aggressive in trying to persuade those countries not to adopt them and to wait for the OECD to conclude its work and for everybody to sign up so that we're all on the same page and implementing the same rules the same way. Threaten retaliation in a number of cases.
And most countries, even some that have actually passed a law, have backed down and agreed to postpone pending the publication of pillar one and the OECD process, which by the way was supposed to conclude the latest deadline of many was the end of June. So a couple of weeks ago, the deadline passed and there is still no pillar one out there, the Canadians have lost patience.
I mean, they didn't even wait for the deadline, but they've lost patience, which is unfortunate, because this is a system that works much better if we've got everybody doing the same thing and being on the same page. The US has reacted rather forcefully in the past, in this situation. We'll see if they do the same with respect to Canada. I suspect that they will because there's precedent and because Scott pointed out a lot of the victims here are going to be US companies.
The stakes are fairly high for us. But I also want to say a word about the other tax that Canada is going to impose, which is a 5% tax on streaming services. And tax may not be quite the right word because it's really a fee where the revenue will go to support the creation of Canadian content and indigenous and minority-based Canadian content on Canadian media. This is a long, long story. And then I'm not going to tell you all of it, but it goes back a very long way.
Cultural appropriation, I guess, has been a Canadian fear for a long time. And this gives me a chance to trot out my all-time favorite newspaper headline, which is from the Toronto Star, when we were negotiating the US Canada Free Trade Agreement in the 80s, which was the precursor to NAFTA. And this is not exactly culture, but at one point Toronto Star published a headline, full page, that said, free trade called Threat to Daycare.
And I haven't in my office, have anybody stops by, I'll show it to you. This took me a while to understand what the threat to daycare was from a free trade. Canadian concern that a free trade agreement might force them to accept changes in the way they do things that would be unacceptable. And my then boss, Senator Hines, and I went to Ottawa to meet with Canadian legislators about the agreement that was under negotiation at the time. And we got an earful of this.
They were concerned that basically the US culture was going to bury them. That Canadian culture would not be able to withstand the onslaught of American content. Our reaction at the time was that was their problem and not our problem, which is still partly by reaction. It is deeply felt in Canada, and it's deeply felt to the point that there is a bit of a carve out in the USMCA agreement on culture, where Canada is allowed to deviate from the rules and impose cultural restrictions.
The footnote is that if they do that, US and Mexico are allowed to respond with retaliatory measures. So it's not a free ride, but it is a ride. One of the debates that's going on between us and Canada, and also within Canada, as it happens, is whether the specific tactics that we're talking about violate Canada's USMCA obligation. And it turns out there are people on both sides of that question. The interesting thing is there are Canadians on both sides of that question, which is good news.
Canadian government's position, of course, is that nothing they do violate their obligations. And they've got academic treatises to prove it. But there are people on the other side who say, no, no, this does in fact, because of various regulatory differences, in fact, it is a violation of USMCA, where that takes you, going back to what I just said, is it simply opens the door to US retaliation. That would not be good, because that is trade reducing in both directions.
But it may come to that, because it's obviously a deeply felt thing on the part of multiple Canadian governments of all their major parties. And so I suspect this is not a dispute that's going to be solved easily. Bill and I have a fondness for Canada. I spent three years in my business career there. My youngest daughter was born in Canada. Bill's mother was Canadian. We do have a fondness for Canada. Normally, they want to abuse their citizens with bad entertainment.
That's their right. They can do that. But look, it's hard to live in Canada. You get the highest wireless costs because of the way they regulate wireless cost. No discount carriers. I mean, Cumbat has all the business and mobile phone costs are fortunate. But that aside, I do have a suggestion for the US if come to something like loggerheads and we want to need some counter-available retaliation.
I harken back to the last winter Olympics, where the US versus Canada hockey match, the bet was loser gets Bieber. So Justin Bieber had to reside in the losing nation, which is rapidly the United States. So we won't have getting Bieber because we lost the game. But I do note that the National Hockey League, which is North American League, has 30 teams, seven of which are Canadian. The NHL has $6.4 billion of gross receipts. So you want to tax American platform companies?
Tax every away game in the United States by one of those seven Canadian teams that 100% of gross receipts. And we'll see you in trade court. It's a terrible idea, but I would say I would not make fun of all Canadian content. The brief plug here, there is a wonderful TV show called Murdoch Mysteries, which I recommend to listeners. It's a murder mystery. It's not a procedural. It's a who-done-us. You find out who-done-it every week. So every week is a separate episode.
And it all takes place in Toronto around the turn of the 20th century. It actually is now, and it's, I don't know, at least it's 16 through 17th season. And the show follows along historically. So it began in the 1880s or 90s. And it's now up to 1909 or something like that. And you see the invention of the automobile and very, very heavy things come in. Fascinating show, all Canadians. And I recommend it.
Sure. I'm a huge fan of, was a huge fan of Gordon Lightfoot, one of the most inspiring musicians, popular or full musicians. Have you want to characterize it? A great talent and true Canadian. And Donald Sutherland, the late lemon. Donald Sutherland. So moving on to a land with no claim to Justin Bieber. Let's talk about recent developments out of Europe on the digital competition front.
So we've now seen the first two complaints related to the EU Digital Markets Act or DMA, which hit Apple and Meta last month. Can you all remind our listeners how the DMA targets the so-called gatekeepers and talk about how this framework is being applied to both Meta and Apple? I'll make an attempt. We kind of predicted this because we've done rants about the DMA, the Digital Markets Act, and the Digital Services Act, which is not today's topic. We've done rants about them in the past.
Those of you that go to this show, share website, have seen that we've written 14 papers on the subject now, and have developed a digital policy tracker. The track's digital trade policies in approximately 30 countries in addition to the EU. And fatigued, we just published a commentary yesterday. Extracts a lot of the data from the Digital Policy Tracker, the comment on other countries that are adopting DMA-like solutions. But the rants in the past were all prospective.
They were all about, here's this thing they passed, here's what could happen. We have now moved into the implementation phase. The surprise of nobody, the guidelines have been published. Companies are publishing their implementation plans. And as I said to the surprise of nobody, the commission is finding them wanting. The early victims here are Apple and Meta. In general, what the DMA is trying to do is focus, first of all, on gatekeepers, include the obvious American companies.
And they've added bite-dance, and actually booking.com, which is European companies. It was the one that was added a few months ago. But most of the companies, Apple, Google, Meta, Amazon, are American companies. And what they're trying to do is focus on five areas that are problematic for the regulators.
The first one is self-preferencing, which is where one of the gatekeepers basically, when it's providing search engine information, banks and indexes its own services, and its own products at the top of the list, rather than similar services that are provided by third parties. The second one is tying, where gatekeepers attempt to either require or incentivize users to use one or more of the gatekeepers' other products.
The third one is making it more difficult for end users to uninstall software applications that are on the gatekeepers' operating system. Or another one is enabling them to install and use third-party software apps and app stores using their inner operating system.
And the last one relates to interlinking data, which prohibits gatekeepers without user consent from combining personal data from the core platform service, with personal data from other platform services or from other services that the gatekeeper provides, which, of course, they want to do for purposes of targeting advertisement. Those are the no-nose. Apple has been found non-compliant because of the restrictions that it's imposed on people who want to use its app store.
And we could spend the rest of the podcast talking about details, and I won't. But basically what Apple wants to do is try to find a way within the limits of the DMA to continue to force its users to use the Apple app store and to obtain its apps from that store and not from third parties.
The regulars in particular have focused on what Apple refers to as core technology fee, which is 50 euro cents, or which is right now about 54 US cents, that Apple is now charging app developers every time their apps are downloaded and installed from outside Apple's app store. So it's an incentive design to get you back within the app store, do it that way. This is an ongoing negotiation.
And I think experts will tell you to follow this stuff closely is that a lot of this has to do is genuinely related to the five items I talked about earlier. But kind of all of this a lot of this is about money. Apple is charging a fee. And there are a lot of people that don't want to charge the fee or in some cases the argument is just over the size of the fee. The size of the fee were a lot smaller than the problem wouldn't exactly go away, but it would receive.
And this is unsettled Apple claims it is made changes recently that comply with the DMA. I suspect the DMA the commission is not going to agree with that. This will probably end up in the European Court of Justice, you know, two years from now. And we'll see what happens in the meantime, you can expect the commission to dial up the panic by assessing at some points of large fine.
And that's what will be litigated. The other designated victim in the short run is meta for a slightly different reason meta responded to the argument that it's new system of allowing meta users to have at Facebook if they pay for it monthly subscription or alternatively they can use the traditional model with ads.
And it's free. And commission argues that that's not DMA compliant because quote it forces users to consent to the combination of their personal data and fails to provide them a less personalized but equivalent version of meta social network.
This is going to also play out over a long period of time. These are both preliminary decisions, the meta decisions, not expect until next May. I would expect a meta response that will be judged inadequate, a huge fine assessed and then it ends up in the European Court of Justice. So this is going to have a long, long history. There are going to be other companies that get wrapped into this is going to go on for quite a long time. Exactly. It's gotten I predicted.
Yeah, I think you're right to build it. We were to hold on for a rather bumpy ride. Now some of this at its heart relates to basically a cultural difference between the United States and Europe that shows up in a way. The Europeans versus Americans think about the digital economy in the US. It's commerce in Europe. It's culture and justice can see how they have the different governments organized themselves.
I remember hosting a panel. We had basically a European regulator who was from their ministry of civil rights, essentially, justice ministry. And we had a deputy assistant secretary of commerce who was his negotiating counterparty. And they just were from different worlds. And so imagine if the United States assigned regulation of the digital platforms to the civil rights division of the Department of Justice.
That's basically what Europe has done. For instance, going ad free has a cost to it. I think Americans figured out some time ago that anything on the internet that's free, you're the product.
And if you don't want to be the product, there's probably going to be a charge. But that's not that's not the way Europe looks at it. They're not comfortable with that. And so now does it cause errors? Yes, there are probably errors both ways. The one that I watched the closest here is how the how the various regulatory bodies deal with network effects.
Network effects are one of the reasons that make platforms both successful as a business model and useful to its users. The fact that you could reach so many people is is excellent for the firms themselves like meta. They have the huge, huge users basis, but it's also very useful for the users. Many respects, not all but many. And it's easy to see this as big as bad, which I think is the European starting point, but it may or may not be.
But something to watch. Final point I'd make is if you're in a global company, a lot of innovation is adapting to regulation, managing around it, trying to find ways to deliver what the consumer wants and still stay within the bounds that are created by the regulatory regime.
One time worked on the ordinary dishwasher category, the brand was cascade, that was the brand manager of and we were facing regulation for some of the ingredient phosphate and bleach were part of the ingredients in the original cascade. And when they were first regulated in laundry detergents, but it took a look at auto dish brands and said, well, this is just a trivial amount. They made an exception. We didn't have to change the formula.
And some years went by and the people who relate dishwasher detergents stopped doing math and wanted an absolute elimination of these ingredients. And so for a while, the product got a lot of complaints because it just did clean very well. But what it led to was commercial innovation. And so cascades doing very well now with these power packs, which is a different chemistry delivered in a different way.
And it's back to its market leadership and it solves both the requirements of the regulators and the consumer interest in getting really clean dishes and doesn't really get credited or seen as innovation. But it takes a lot of effort. Then there's real there's real creation that goes on there every company in the global marketplace does it. I don't use all procter and gamble products. We got to have a talk about that bill. Well, I don't use depends depends, for example, at least not yet.
But we do use cascaded home. And I can tell you it does clean the dishes. It's a successful product. I think the only further comment I'd make is that it does illustrate, as Scott said, the different worlds in which the regulators operate.
And we've talked about this before. The European approach tends to be prescriptive and ex ante. They're ordering Apple and matter. Here is how you have to do it. The US approach, when there is one, as we've also talked about in digital trade, we don't really have coherent policy yet.
But when there is one, it tends to be e-scriptive and ex post. Here's the goal. Get there any way you can. If you miss the goal or prosecute you. From my point of view, that difference, which is really deep and philosophical, not just practical, is one of the reasons why the EU and the United States have been able to agree on very little for the last 40 years in the trade area.
It's just a deep divide. And one would think that mutual recognition would do the job. They recognize our standards. We recognize their standards. And we just go on about our business. But we can't even seem to get there. This is going to be another example. This will be litigated.
It'll be interesting to see what the European Court of Justice does. Also be interested to see what the United States Congress ultimately does in the same space. Because at some point, they're going to be, I think, forced to regulate. Because if they don't, the EU model is going to be the default.
If you're an international business, if you are proctering gamble, it's efficient for you to make your dishwasher detergent to one formula, do that way worldwide. If the Europeans come in and say you have to do it this way, I think it's only a matter of time before that's the way they pre-NG is going to do it for the whole world. We lose the regulatory advantage. Europe gains it.
Let's move on to our final topic, which were some remarks that Speaker Mike Johnson made at the Hudson Institute caused a bit of a stir here in DC, particularly in trade circles. Can you all tell us more about Speaker Johnson's proposals in particular, those aimed at combating China's growing trade footprint?
Well, I didn't catch the whole speech, but the trade aspects that he did talk about were the Minimists. He mentioned shipbuilding. He mentioned outbound investment as part of a China counter strategy. My response to this, well, first, it's a lot of sticks and not many carrots. Second, it feels like small ball to me.
These are not gigantic issues. They're not settled in any ways. It comes to Minimists. Yes, you can point to certain companies who use it a lot, but whether or not its abuse is clearly subject to debate and unproven. The shipbuilding concern, probably as much US policy as China's subsidies. In the meantime, we have allies who are actually quite proficient at shipbuilding and we have access to the finest without building a mere.
So a lot of policy work to be done. Find out what it would take to make the US competitor in shipbuilding. Likewise, outbound investment has been a topic we talked on the program before. At scale, it's reasonably disturbing given the need for investment in the US economy. It's not clear what exactly is accomplished by it.
In any case, I was disappointed that I would hope the Speaker of the House would, as Bill might have put it, would want to run faster than China instead of just look for ways to trip them. I do think the US economy is capable of much greater innovation and has the potential to grow faster than it is. That would position that might unite the Speaker's caucus. But we'll see what comes of it.
One of the provisions actually is a run faster. I thought it was very intriguing because of other things that have happened in the area. And that's the shipbuilding provision. There's been a controversy about shipbuilding been going on for years, but it's bubbled up recently. It's got alluded to it, which is the demise of American shipbuilding.
The initial sort of knee-jerk response from members of Congress that hadn't really thought about it as well. First of all, the Chinese, once again, are up to no good. It's retaliate. The particular proposal that caught my eye was, let's tax every Chinese ship when it lands in the United States, which of course doesn't have a lot to do with shipbuilding. And it also doesn't have much to do with the problem because to the... It actually sounds Canadian.
It also kind of misses the point, because I think we've talked about before. If you want to look at when our industry started to go downhill, it was because of the Koreans, more than it was because of the Chinese. I mean, the Chinese are not good guys in this scenario, but they're not the original bad guys. That's all been dropped. And what Johnson is talking about basically are subsidies to US shipbuilding yards.
One can argue the merits of subsidies to that industry, but I have to say that is a running faster strategy. How do we make our guys more competitive? Nobody, he didn't say, I'm rejecting the stupid protectionist ideas that my colleagues have proposed. But in fact, that's what he's doing. He is rejecting the stupid protectionist ideas that his colleagues have proposed. And that at least is a small step forward.
A lot of the rest of it is not new. Minimumist Bill, it looks like it will be the same one that the Ways and Means Committee reported in April. And we've already talked about that. We had a session on Uffelpob a few weeks ago. There's a mystery about the Outbound Investment Version because he said we're going to have one, which is all well and good.
It turns out though, of course, that there's two. And they compete. There is the one that was reported by the House Foreign Affairs Committee, which tends to focus on... Specific sectors where it's a little bit like the administration's proposal that let's focus on specific sectors where we don't want our companies to invest in China.
And then there's the House Financial Services Committee proposal that takes what is referred to as a sanctions approach, which focuses not on specific sectors of concern, but on specific Chinese companies of concern, where it says we don't want Americans invested in those companies. Entity sort of less. Two different approaches. Johnson did not make clear which one he's picking. I mean, I suppose you could do both.
But they're not really compatible. So it'll be interesting to watch and see when this bill emerges, which version of that will show up, along with what else might be in it that he didn't mention. And then also, you know, what's going to happen to it? It's a little bit late in a congressional year, you know, a couple of weeks they go on holiday, then they're back briefly in September and maybe a week or so and October for cleanup.
And then they're off to the election. This looks to me like an issue that if it's going to happen, it's going to get across the finish line. It won't be until the end of the year in the lame duck session. But I would also say it could have a shot because these are issues that senators have discussed as well. I don't think the Senate would pass the identical House bill. They rarely do. But I think there's a bit of support in the Senate for tackling the same subjects. That's true.
Yeah. So I think that this is one that you ought to watch as it makes us win through the system. Okay. Well, that concludes this week's episode of the trade guys. It's been a pleasure. Thank you. And we'll see you all. We hope at the PECC NCAP in person event hotel Washington on July 17th. Obviously, they'd be very happy if you came for the whole morning. I think our segment is roughly in the 1045 or 11 o'clock to new niche range.
To our listeners, if you have a question for the trade guys, write us at trade guys at CSIS.org. That's trade guys at CSIS.org. We'll read some of your emails and have the trade guys react to it. You've been listening to the trade guys, a CSIS podcast.