Canada's Role in US Trade An Analysis

 The US and Canada have one of the world's greatest bilateral business connections, with a tightly interwoven energy and automotive markets. For the past 30 years, commercial ties between the United States and Canada have been governed by the 1989 U.S.-Canada Free commercial Agreement, the 1994 North American Free Trade Agreement (NAFTA), and the 2020 United States-Mexico-Canada Agreement (USMCA). Congress may assess the impact of current and potential trade disputes and cooperation with Canada during the 2026 review of USMCA. U.S.-Canada Trade Overview Figure 1 shows that Canada is the leading trade partner for the United States in terms of both commodities and services.

In 2023, Canada exported 78% of its commodities to the United States while importing nearly half of them. According to U.S. Bureau of Economic Analysis data from 2022, the United States is the greatest source of foreign direct investment (FDI) by stock in Canada ($438.8 billion), while Canada is the fourth-largest FDI source in the US ($589.3 billion).U.S. and Canadian officials are currently discussing Canadian legislation on digital services, news, and online content, as well as automotive issues and critical mineral cooperation, U.S. dairy market access, and Canada's softwood lumber industry. Digital Services Tax Act.

The Canadian government adopted a measure imposing a 3% digital services tax (DST) on earnings from online marketplaces, advertising, social media



In June 2024, platforms, and user data sales. The DST will be retroactive to January 1, 2022. The Canadian government set June 28, 2024 as the effective date for DST. The US is home to some of the world's major digital service providers, and some Members of Congress have expressed concerns that DSTs disproportionately affect US enterprises (e.g., H.Res. 268). In October 2021, the OECD/G20 Inclusive Framework, comprising the US and Canada, agreed to reform the global tax system and create an international digital tax framework. In July 2023, 138 out of 145 framework members decided to delay implementing DSTs until at least 2025 to allow for more improvement. Canada opposes suspending DST without a specified implementation date. US officials have suggested that more conversations are needed before signing the framework agreement.

Members of Congress have expressed worry about the framework plan's disproportionate impact on US companies, as well as the administration's inability to engage with Congress. Some Members suggest that a worldwide framework could provide more stability for US corporations than individual country-based DST implementations. Congress may pursue legislation to implement the agreement (see CRS In Focus IF11874, International Tax Proposals Addressing Profit Shifting: Pillars 1 and 2). Canadian officials are discussing DST with their US counterparts. The US Trade Representative (USTR) formerly investigated other nations' DSTs under Title III of the Trade Act of 1974 (19 U.S.C. §§2411-2420), also known as "Section 301." The USTR judged the DSTs discriminatory to US companies and halted preparations to retaliate with additional tariffs.Following the announcement of the OECD/G20 Inclusive Framework in October 2021, USTR suspended tariffs and investigations. In reaction to Canada's DST, several Members and business groups in the United States have asked USTR to hold conversations under USMCA and/or initiate a Section 301 investigation. The USTR will assess a Canadian DST using the "same standard" as previously investigated DSTs.

Online News Act. The Online News Act of Canada, which goes into effect on December 19



2023, allows news outlets to negotiate payment terms with digital platforms (such as Google and Meta) for the use of their work. The proposal contains a mandatory arbitration process for news publishers and digital platforms who are unable to reach a financial agreement. The Canadian government claims that the act promotes equitable income sharing between news outlets and digital platforms, including through digital advertising. Some U.S. corporations have reached payment settlements with the Canadian government, while others have removed news content from their platforms in Canada.Members of Congress have sponsored legislation (such as S. 1094) that is similar to the Online News Act. Members have voiced concern that the Online News Act may unfairly target US companies and violate USMCA.
Online Streaming Act. The CRTC requires that Canadian television and radio stations fund and broadcast a certain amount of Canadian material.

Canada's April 2023 Online Streaming Act gives the CRTC the authority to regulate broadcasters on social media (e.g., Facebook) and online streaming services (e.g., Netflix, YouTube). The CRTC intends to develop a new regulatory framework for Canadian content standards by "late 2025".Members of Congress have raised worry about the act's execution and potential discrimination against American businesses and artists. In June 2024, the CRTC proposed rules requiring online streaming firms with annual revenues of CAD $25 million (USD $18 million) or more to promote Canadian content. The CRTC anticipates that the financial obligation will take effect on September 1, 2024.

US industry associations have condemned the plan as unfair to multinational firms. However, some Canadian observers claim that finance standards apply to all businesses in Canada



regardless of nationality. Congress may assess the act's impact on US companies, as well as any issues raised under USMCA.Automotive and essential minerals. The USMCA incorporates North American content guidelines for duty-free car trade, sometimes known as "rules of origin". Mexico and Canada challenged the United States' interpretation of the rules of origin. The United States campaigned for a tighter method to determining North American content, whilst Mexico and Canada advocated for a more liberal interpretation to help North American producers fulfill the standards. In December 2022, a USMCA panel ruled in favor of Mexico and Canada. This decision cannot be disputed. The three countries are working to find a solution.

The three nations may discuss vehicle origin limitations during the USMCA review in 2026.
The Inflation Reduction Act of 2022 (IRA) includes North American standards for EV and battery manufacturing, in addition to the EV tax credit. The EV tax credit requires a percentage of essential minerals to be sourced from the US or its free trade allies, including Canada. U.S. imports crucial mineral inputs for EV batteries primarily from Canada. In March 2023, the US and Canada established an Energy Transformation Task Force and a Joint Action Plan on crucial Minerals Collaboration to encourage an integrated approach to crucial supply chains, such as EVs, batteries, and vital minerals. Canada participates in the U.S.-led Minerals Security Partnership, which promotes collaboration between public and private sectors for vital minerals projects. Congress may monitor the implementation and economic impact of USMCA automobile rules of origin, the IRA EV tax credit, and U.S.-Canada cooperation on crucial supply chains.

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