My review of the Broadcast and Telecommunications Legislative Review Panel report (previous posts include an overview of concerns, news regulation, Guilbeault’s comments, net neutrality, discoverability claims, consumer costs, potential USMCA violations, and a podcast debate with panel chair Janet Yale) continues with an analysis of why the recommendations could cost Canadians millions of dollars in retaliatory tariffs. In fact, while the panel seemingly envisions free money with payments from thousands of Internet sites and services from around the world to pay for Canadian content, broadband funds, and news organizations, the reality is that the proposals could result in the U.S. being entitled to levy massive tariffs against Canadian products ranging from dairy products to steel. In other words, the real costs would ultimately shift to farmers, manufacturing workers, and many others with no connection to the cultural sector.

The serious tariff retaliatory risk stems from the cultural exemption found in the USMCA. The government has emphasized the importance of the exemption, portraying it as a major win for Canadian culture and sovereignty. For example, House Leader Pablo Rodriguez recently told the House of Commons:

The Americans wanted to get rid of this cultural exemption. They wanted to prevent us from being able to financially support and protect our culture, our linguistic duality. Not only did we preserve that right, but we even managed to get it extended to digital media. The Prime Minister drew a line in the sand, sending the Americans a clear message that Canada would not sign without this exemption. No exemption, no agreement.

The cultural exemption can be found at Article 32.6(2). Consistent with government claims, it covers a broad range of sectors with a near-complete exemption for Canada:

This Agreement does not apply to a measure adopted or maintained by Canada with respect to a cultural industry, except as specifically provided in Article 2.4 (Treatment of Customs Duties) or Annex 15-D (Programming Services).

While the government has emphasized the scope of the cultural exemption, it rarely speaks of Article 32.6(4) which comes immediately afterward. That provision was the price of the exemption and it permits the U.S. to levy retaliatory measures of “equivalent commercial effect” where Canada relies upon the exemption:

Notwithstanding any other provision of this Agreement, a Party may take a measure of equivalent commercial effect in response to an action by another Party that would have been inconsistent with this Agreement but for paragraph 2 or 3.

The retaliatory measures provision means that the U.S. is entitled to levy tariffs or other measures that have an equivalent commercial effect in response to Canadian policies that would otherwise violate the USMCA if not for the cultural exemption. Since the provision does not limit the response to the cultural sector, the U.S. can be expected to target sensitive areas of the Canadian economy in order to discourage use of the cultural exemption (this was the U.S. strategy when responding to a French plan to levy a new digital tax, which led to plans to levy US$2.4 billion in tariffs against French goods such as wine, cheese, and handbags).

Should the government adopt the broadcast panel recommendations on content, the U.S. would have a strong case permitting retaliation with measures of equivalent commercial effect. Panel proposals that may violate the new trade agreement include:

• requirements to pay levies to fund Canadian content without full access to same funding mechanisms enjoyed by Canadian firms. Those policies may implicate national treatment requirements, customs duties provisions, and requirements for non-discriminatory treatment of digital products
• regulations that may be viewed as barriers to providing services that appear directly targeted at large U.S. firms (Canadian Heritage Minister Steven Guilbeault has said as much in media interviews). These may violate the non-discrimination of services provisions
• licensing requirements for Internet services that may violate USMCA standards, which sets strict conditions on licensing services
• discoverability requirements that limit the manner that information is conveyed on websites and services. Those rules may violate provisions that prohibit restricting cross-border transfer of information
• regulations and payment requirements on communications services such as WhatsApp and Skype. These requirements may violate USMCA prohibitions on imposing conditions of access and use of public telecommunications networks and services

Canada has already backed away from plans to impose a digital tax on technology companies, recognizing that such a move would likely invite U.S. retaliation. The panel envisions Skype paying for Canadian rural broadband, Reddit contributing to Canadian news organizations, and Netflix diverting millions to Cancon. Canadians would not react favourably if its companies were required to pay for broadband in Montana or news organizations in Alabama. If the government moves ahead with panel recommendations that cost Internet services and sites millions in compliance costs, taxes, and levies, there is every reason to believe the U.S. would use the retaliation provision that Canada agreed to in the USMCA to levy hundreds of millions in tariffs against Canadian products and services.