After months of posturing, Canada decided to impose a Digital Services Tax (DST). As a result, the United States is threatening Canada with tariffs, in a similar manner to how it responded to several European nations in 2020. For Canada to ignore these warnings and proceed as planned would harm the relationship it has with its most important trading partner. Sadly, American consumers would have to pay the cost of imposing retaliatory tariffs on Canada.

Canada’s proposal is just the latest in a long line of international DST proposals that the United States is actively fighting. Things came to a head in 2021 when the Organization for Economic Co-operation and Development (OECD) proposed a moratorium on DST legislation while an international tax agreement, known as Pillar I, was phased in. Canada agreed to this plan, with the understanding that in 2023, Pillar I would be enacted. Yet, Pillar I was not enacted in 2023 due to ongoing disagreements, which resulted in an extension to the moratorium.

Canada did not agree to this extension. Canada’s Deputy Prime Minister and Finance Minister, Chrystia Freeland, indicated that the government would move forward with a DST in lieu of a Pillar I agreement. In Washington, there is bipartisan support for retaliating against Canada should it come to that. Senate Finance Committee Chair Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) recently gave US Ambassador Katherine Tai a letter detailing “available trade tools” for retaliation, including tariffs.

While at first glance, Canada’s DST proposal may appear reasonable, given the OECD’s failure to enact Pillar I. The reality is far more complicated. According to Canada’s own parliamentary budget office, revenues from a DST would amount to less than $1 billion annually. Trade with the US alone is equal to around $2.5 billion daily. A retaliatory tariff on Canadian goods could easily cost Canadians far more than any DST would generate in new tax revenue.

The DST, which would apply to companies with at least $793 million in total revenue, could cost companies hundreds of millions of dollars annually as other DST bills have. The tax imposes a three percent toll on revenues from large multinational companies that do business in the country. However, collections on the tax are not set to begin until 2025, retroactively collecting taxes as far back as 2022.

For those directly impacted by the tax, higher operating costs would necessitate making up lost money in other areas. The Canadian Chamber of Commerce has warned that digital firms could very likely need to raise prices on consumers to make up these costs. The American Action Forum concurs with this finding in its examination of various international DST measures.

Worse than the DST, the retaliatory tariffs have the potential to harm consumers since Canada is America’s third-largest supplier of imported goods. A tariff imposes additional costs on those imported goods which are then passed down to domestic consumers. Though the threat of a tariff may save consumers from Canada’s DST, it would ultimately increase the damage done to consumers if ever actually acted on.

American consumers who have for years benefited from cheaper goods north of the border may have to pay more or find less preferable alternatives. Canadian consumers will also lose out, as digital firms are forced to raise prices to offset new costs.

Hopefully, Pillar I will be implemented before 2025, making Canada’s DST a moot rule. Otherwise, the Canadian government will have to explain how such a tax would benefit consumers. American policymakers also need to explain to consumers how imposing tariffs on Canadian goods would not negatively affect their lives. Only time will tell if Canada rescinds its DST, a tax that is sure to have negative downstream consequences for American and Canadian consumers, before collection in 2025.

You can also read this article in the Economic Standard here.

Isaac Schick is with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal